Demat account is the account that should be started by an investor to buy or sell shares in the stock market. The investor should start the demat account with a depository participant who is recognized by SEBI.
Now, to understand demat account, we have to understand dematerialization, depository and depository participant.
What is dematerialization?
One of the most impactful reform measures in the stock market was the introduction of dematerialization. Simply put, dematerialization is the practice of keeping and delivering share certificates to investors in electronic forms rather than in the physical form like a documented printed paper.
It is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited into the owner’s account with his depository participant.
Who is a depository and who is depository participant?
For the introduction of dematerialization, there should be an institution or organization who should keep the share certificates in electronic forms. That institution is called depository.
A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities. At present, there are two depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI.
The depositories don’t directly interact with the customers who purchases and sells shares. Rather, they provide their services like keeping of share certificates in electronic forms through another set of institutions called depository participants (DP).
A Depository Participant (DP) is an agent of the depository. It is through this agent that the depository interfaces with the investor and provides depository services. Depository participant functions are provided by diverse institutions recognised by the SEBI.
Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as DP.
In India, a Depository Participant (DP) is described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act.
What is a demat account?
The investor – a buyer or seller of shares, to do his business, should start an account with a depository. This account is known as demat account. The depository may be a stock broker or a bank etc as we mentioned earlier. The demat account is thus opened by the investor while registering with an investment broker (or sub-broker). The demat account number is quoted for all transactions to enable electronic settlements of trades to take place. So a demat account is a must for trading and investing.
To start an account in demat mode, the investor need to indicate the name of the depository and also of the depository participant with whom the investor has depository account in the application.
NSDL and CDSL give the list of registered DPs.
A broker is separate from a DP. Similarly, he is a member of the stock exchange, who buys and sells shares on his behalf and on behalf of his clients. A DP will just give the investor an account to hold those shares.
Materials required for opening a Demat account
Following are the materials required to start a demat account.
- Passport size photographs
- Proof of residence (POR) - Any one of Photo Ration Card with DOB / Photo Driving License with DOB / Passport copy / Electricity bill / Telephone bill
- Proof of identity (POI) - Any one of Passport copy / Photo Driving License with DOB / Voters ID Card / PAN Card / Photo Ration Card with DOB
- PAN card
Actually, the above mentioned procedure is the one we require to start investing in shares. Or in other words, the demat account is the gate way for an investor into the stock market.