One of the few areas where one can invest and grow their money is by investing in securities. Technology along with digitalisation has greatly transformed how everyone works and lives. Money-making activities have changed vastly, stock exchanges have evolved, and stock trading has advanced from physical share certificates and hard copy ledgers to dematerialised or Demat accounts. Investors open Demat accounts when they are registering with the investment broker or sub-broker. Such accounts are preferred for trading, buying and selling stocks, and they enable us to do electronic settlements. Demat accounts have a nomination feature as well. As per the Securities and Exchange Board of India (SEBI) laws, mostly every shareholder should have this account to trade in stocks. Without having a legitimate Demat account, one cannot trade in stocks.
In this blog, Fintra will highlight the vital details related to Demat accounts, its nomination feature, and how to add a nominee to a Demat account. The topics we'll cover are as follows:
Describing in simple terms, Demat or Dematerialization refers to the system of holding or keeping physical shares and securities in electronic forms. Demat accounts are necessary for holding shares and to make the process of trading even easier. Without such an account or trading account, investors can neither purchase, sell nor hold shares.
One of the key features of understanding the stock market and the art and science of investing is by first grasping the concept of dematerialisation.
Since the establishment of the Bombay Stock Exchange (BSE) in 1875, traders used to holler out the stock's prices they desired to buy and sell. The funds would then be exchanged through physical receipts known as certificates. This process resulted in heavy paperwork, which took lots of time, and this lengthy paper-based process also would delay the settlements as both buyers and sellers had to deliver the certificates to begin the transfer process. In an attempt to counter this and to take the advantage of electronic trading, in 1996 the process of dematerialisation of shares was initiated. Physical certificates were now getting converted into securities of equivalent numbers in electronic form and directly were credited to the investor’s Demat accounts. This can be considered as the advent of the Demat way of trading.
Dematerialisation has several benefits which are not known to all, and some of these benefits are explained below:
As described above, Demat accounts hold all the investor's shares and investments in an electronic or dematerialised form. These accounts even hold the government securities, mutual funds, bonds, shares, and Exchange Traded Funds (ETFs). Thus, it is vital to understand a few bodies and procedures to comprehend the complete functioning of a Demat account. The functioning of a Demat account is explained below:
When a Demat account holder passes away, it tends to become tormenting for its heirs to claim the ownership of the securities owned by the deceased person. For this reason, it is essential to have a nominee to the account. Registering a nomination can at times eliminate the requirement for documents such as a will, a succession certificate for the transmission certificates, etc.
In fact, in the presence of a nominee, even the transmission of shares turns out to be a lot easier. The nominees don't need to go to the court or collect a No Objection Certificate and affidavits from the courts. However, if a nominee hasn't been selected, then there are chances that the family members may not receive the shares or funds. In fact, as per the reports from RBI, there are many incidents where unclaimed deposits are still lying in the banks because these accounts belong to those who either have not claimed the funds or the account holder has deceased or haven't filed nomination details.
If a single Demat account holder passes away, leaving a nominee, then the process of share transmission gets simple. The nominee just has to submit a duly filled transmission form along with the certified copy of the deceased person’s death certificate that a Gazetted Officer has attested.
Although it's not mandatory to add a nominee to the Demat account, it's advisable to do so. As per the laws in India, an account beneficiary can have maximum three nominees attached to the same Demat account. If there's a single nominee, then all the securities get transferred to his/her account. In case there are multiple nominees, the beneficiary of the account decides if the securities in his/her account have to be distributed on a pro-rata basis. It can even assign a fixed percentage to the individual nominee, and even specifically assign securities to individual nominees. Do note that nominees can be added, amended, or removed anytime by the beneficiary. Adding a nominee is very simple, one just has to add their names in the account opening form submitted to the individual's chosen broker. Even later on, nominees can be added, amended, and/or deleted by simply submitting an Annexure 1A form to the broker.
One can open a Demat account even though it doesn't have any shares and there is no minimum balance required. The steps involved in opening a Demat account is to choose a DP, fill out the account opening form, and submit the documents. Do bear in mind that it's a compulsory requirement to have a PAN Card or Aadhaar Card for opening a Demat account. The rest of the steps have been explained below:
To know how to close a Demat account, please click here.
Through the dematerialisation of securities, investors can now safely store shares and securities in their Demat accounts. If one has to imagine, the process is just like having funds in a bank account, though no physical piece of paper. Just as opening a bank account requires a nominee, it is essential to assign a Demat account nominee and relish the benefits of having such an account.