Demat Account-History and Overview
- Post-liberalisation of the Indian economy in 1991, the Indian Government established SEBI as the regulator for the securities markets in 1992. SEBI began to bring about reforms in the securities market. One of such major reforms carried out by SEBI was the Dematerialisation of securities.
- Dematerialisation is converting the physical share certificates into electronic book entries similar to what we have in bank accounts. Some of the significant issues faced by investors with physical share certificates were the risk of bad deliveries, massive paperwork, loss and theft of share certificates, delay in transit etc. With the help of Dematerialisation, these problems have become a thing of the past.
- The Parliament of India passed the Depositories Act in the year 1996. With the enactment of the Depositories Act, the process of Dematerialisation received a solid backing of the law. National Securities Depository Limited (NSDL) led the Dematerialisation of securities, which pioneered Dematerialisation in India. Subsequently, Central Depository Services (India) Limited (CDSL) was established, and it became the second Depository to be recognised and licensed by SEBI.
- As per Depositories Act, 1996, the Depository is the registered owner of the shares in the company’s records, and it holds the shares in its fiduciary capacity for the shareholder.
- Further, Depositories have appointed various intermediaries known as Depository Participants to provide the service of opening and maintaining Demat accounts for the investors.
- A Demat account holds the securities in a dematerialised form. The physical share certificates are replaced by book entries in the electronic form as mentioned above.
What is a Demat account?
- Very much like your bank account where you deposit your money; a Demat account holds all the investments you make in shares, government securities, exchange-traded funds, bonds and mutual funds in one place.
- When we purchase securities, they appear as credits in our Demat account, and when we sell securities from the Demat account, they appear as debits in the Demat account.
- The dematerialised securities are held on our behalf by the Depositories. However, the interface for you to operate the dematerialised securities is always a Depository Participant (DP).
- The Depository Participant is an agent of the Depository through which we maintain and operate our Demat account. The Depository Participant will intermediate between the Depository and us. This service is similar to a branch service of a bank that provides banking services. Just as banking services are availed through a branch, the depository services are availed through a Depository Participant.
- To open an online Demat account, you have to approach a Depository Participant with the necessary documentation. The Depository Participant will carry out your Know Your Client KYC procedure and open a Demat account for you. You can use this Demat account to hold securities in a dematerialised form and transfer and receive securities in case of purchase and sale.
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