How Demat Accounts Transformed Share Trading in India

Read Time:6 Minute, 34 Second

Did you know that the journey of the Indian stock market began with East India Company’s transaction of loan securities? The details of the process can be traced back to the late 18^th century. In the next 50 years the stock market made significant progress. By the end of 1830s, Bombay (Mumbai) had already seen the rise of trading in stocks of cotton presses and banks. Wars have not been particularly kind to share markets, but the American Civil War was an exception in case of the Indian share trade. When the Civil War broke out in 1861, the share trade flourished across colonized India. The market had at least 250 brokers playing critical role in the rise of the share values and facilitation of daily trading. In 1875 The Native Share and Stockbrokers Association came into existence. It later transformed into the Bombay Stock Exchange or the BSE as we know it today. Premchand Roychand is considered the pioneer in the establishment of the stock exchange.

What did the Indian share market look like in the primordial times?

In the early days of share trading, the brokers called out the prices of shares for the investors. Upon the completion of a trade, they exchanged the share certificates for money. As you can understand, it was an incredibly chaotic process. We cannot imagine respected brokers and investors hawking shares by calling out the buying or selling prices. Moreover, it also involved intensive paperwork to keep a record of the company shares bought and sold, the traders, the buyers and sellers. Converting the transactions into representative documents became more than difficult after a point as the number of investors, public companies and brokers grew over the years. Storage of share certificates and management of the applications became a serious challenge even for the best of the best traders. During this time, there was a compulsory gap of 3 months (minimum) between the application date and the listing of relevant shares.

Why was a completely electronic system necessary by the late 20^th century?

In the late 20^th century, the NSDL came into being. It followed the genesis of electronic trading at the National Stock Exchange. Once the electronic trading became the popular way to trade, it made the discovery of share prices easy as pie. The trading volumes went soaring as the market drew record number of investors in 1998. However, there was still a snag in the system. Although the transactions happened every day, the trades were cleared once in 14 days. Clearing the shares for the buyers and the money for the sellers was a persistent headache for the stock exchanges.

In the mean time, several companies had exacerbated the issue for forged shares and fake certificates. That drove several foreign investors away from the Indian share markets. Several companies forged share certificates, just as the other market entities and brokers did. It was heresy and several renowned companies were part of it. It happened because forging physical certificates is very easy. Each one has distinctive numbers and all the forgers had to do was doctor them. These companies would borrow money from lenders against a bunch of certificates with distinct numbers. Then, they would go back and print another bunch with identical numbers and sell it in the market. They could do so confidently since they assumed that the original certificates were with the lenders, safe and secure, and the share holders would rarely verify the number or register their ownership.

These certificates would change hands until one investor wanted to register them in their name. When these certificates were found to be fake, the brokers bore the brunt. More often than not, the seller of a forged certificate was long lost in the sea of traders and investors. Finding them was next to impossible. The broker would have to replace these shares with others of equal value or return the money. It led several novice brokers in the 90s to bankruptcy. As a result, all the brokers in the market became wary of new clients. They started accepting clients through direct referrals and recommendations only. The market was turning into a closed system and new investors had to wait around for one recommendation for getting a reliable broker. The value of shares was suffering due to the disinterest of brokers to take in new clients at that time and due to the inability of potential investors to enter the trade.

What is dematerialization and a DEMAT account?

That was before 1996. After the creation of NSDL that year, the core team had to make a critical decision. They could either go with immobilization, or they could choose dematerialization. Immobilization is inherent of stock exchanges in the US. It is the process of placing documents like share certificates that bear the evidence of ownership in the central securities depository. It reduces the movement of physical securities and it enables physical entry transfers. Dematerialization or DEMAT is the process that moves the transactions away from paper certificates altogether. It is the process that embraces electronic book keeping.

After the dematerialization, the marketplace became amicable for the new investors, who could manage their shares, bonds and investments through their DEMAT accounts. The NSDL is India’s largest depository system right now. Next, the Central Depository Services (India) Ltd. came into existence in 1999. Right now, you can open DEMAT accounts at any nationalized bank or a private bank. According to the Securities Exchange Board of India, all investors and market players should have aDEMAT account. Now, all you have to do is get the best demat account in Indiaand start trading. It is actually as simple as it sounds. Demat transformed share trading from a battle scene to an art form!

Here are a few important features about an DEMAT account you need to know –

You can open a DEMAT account with a joint holder or by yourself.
For the DEMAT account minor, you (father or mother) can be the guardian till he or she becomes an adult.

You can open a DEMAT account for a trust that is registered under the following Acts –
Public Trust Act 1860; or
Societies Registration Act; or
Any Public Trust Act

Once cannot open DEMAT accounts in the name of a Hindu Undivided family.
Any investor can open one or multiple DEMAT accounts as long as he or she complies with the KYC regulations.

How has dematerialization helped the Indian investors?

Here’s how DEMAT accounts have changed the way India trades –

It has reduced the rates of fraud, and theft significantly. There are no physical certificates and that ensures the security of the electronic certificates in the clouds or systems.
You can now transfer stocks and shares with the click of a button. The transactions are not only secure, they are almost instant. There is no more holding time or waiting time!

The rise of dematerialization has eliminated the Stamp Duty on the transfer of securities.

Now, it is indeed possible to sell one share. You can sell one, two or two hundred shares from the comfort of your home as long as you have a DEMAT account.
According to the SEBI, you can add nominees to your DEMAT account. It is true for joint holder accounts as well. In the event that you don’t have nominees, you have to give a signed declaration.
You don’t have to worry about creating separate accounts for bonds, and non-convertible debentures. You can operate most instruments from a single DEMAT account.

Dematerialization has benefited investors, brokers and companies alike. India has witnessed a record rise in the number of demat account openings in the last financial year. As of March 31, 2018, close to 3.76 million fresh accounts were opened. That easily outnumbers the 3 million mark set by investors in the 2007-08 period.