A demat account is a must if you want to trade in equities. Before we jump in to the facts behind the opening of the account, what is a demat account? A demat account is the equity equivalent of a bank account. Just as you hold cash in your bank account, you hold shares and other securities in your demat account. You demat account is not just about holding shares but you can also hold government bonds, gold bonds, index ETFs, gold ETFs, closed ended funds and even open ended funds. Have you ever wondered what factors to consider before opening your demat? Does it really matter or can you just open a demat account with any DP. In fact, there is a 5 point checklist that you should run through before opening the demat account…
1. Are the demat account and trading account with the same company?
At the outset, there is no compulsion to have your demat and trading account in the same place. You can have a different DP and broker, the choice is entirely yours. Normally, brokers will open your trading-cum-demat account in one go, so that is the reason why demat and trading account are with the same broker. What if your broker does not have a DP license? Then you must ensure that once you sell shares with your broker, you need to submit the debit instruction slip (DIS) to your broker on time. If you don’t submit the DIS on time then it can result in auction of shares and lead to losses. When your broker and DP are the same, this entire process becomes simpler and seamless. In fact, you can opt for online demat and trading and give your broker a power of attorney to debit the demat account in the event of sale and credit the demat account in the event of purchase. While there are no hard and fast rules, in the interest of convenience it is better to have your trading account and demat account with the same broker.
2. Does the DP offer a robust technology platform?
You may wonder how important is technology when it comes to a demat account. Nowadays, most brokers offer you access to your trading account and demat account through a single platform. Ensure that the DP has a robust technology platform because it will ensure that your entire demat process goes through in a smooth way. It is ideal if your DP’s online platform allows you to download a variety of reports and analytics online. It makes your task much simpler.
3. Demat has a cost; so don’t ignore the cost factor…
SEBI has made account opening free and barred any charges on demat credits. But that still leaves a number of costs that do get debited to your demat account. The biggest cost is the annual maintenance charge (AMC) that is billed to you each year. This is normally based on the value of shares in custody. In addition, each time you sell shares and the shares get debited to your demat account, the DP debits your account with a fixed fee. DPs also charge if you ask for physical statement, duplicate statement or statement of holdings / transactions for proof purposes. When you send shares for demat or for remat, then there is a cost per certificate / folio that is billed to you as charges. If your debit instruction slip (DIS) gets rejected or if your demat request form (DRF) gets rejected there are penal charges. There is also a cost for executing power of attorney and if you are paying by direct debit then ensure that your account is adequately funded. Your total demat cost is the sum total of all these charges.
4. Is the banking, broking and demat totally seamless?
Banking, broking and demat can be fully seamless if your broker is a bank too. But that is not so important. If your broking and custody is seamless and if you load funds via NEFT, RTGS, and UPI or via payment gateway, then you are good to go. Remember, many brokers charge you a nominal sum to use the payment gateway, so ideally prefer to use the NEFT / RTGS / UPI method for transferring funds which is free of charge. The more seamless these 3 activities are, the less you have to worry about administrative issues.
5. Focus on quality support services and customer feedback
A DP must also be judged based on how they provide ancillary services and the nature of customer feedback. Also check the nature of the DP’s interface with the regulator. You can check that out on the website of SEBI. Service quality includes; how long it takes to get your physical shares dematerialized, how promptly corporate actions get credited and how efficiently the DP deals with issues like pledge, lien, and customer complaints? All these add up to a good service experience.
While customer forums and feedback forums have their limitations, there is normally no smoke without fire. Too many complaints show lack of seriousness and absence of passion for service quality. Be wary of having a demat account with a DP having too many service level issues. Check the SEBI website for pending regulatory investigations against the DP. Scan the social media and discussion forums for any negative feedback about their DP services. While you do not need to take all such negative feedback at face value, it is better to avoid a DP with too many such hygiene issues. Rather err on the side of caution!