What is a demat account and top 3 demat accounts in India?

In this article, we will explain what is Demat account (often misspelled as dmat account, demate account or d mat account), how to open a Demat account and best demat accounts available in India. 

What is Demat Account

When stocks are bought in capital market(also known as stock market or secondary market), the buyer receives stock ownership certificate as proof of purchase. The ownership certificate makes buyer eligible for shareholder rights like dividend paid by company, voting rights during the annual meeting etc.

Until 1996, stock ownership certificates were in paper format. Hence, when an investor bought stocks he would receive a printed stock ownership certificate at his address. Similarly, when someone sold stocks, the seller would send actual paper stock certificate back to registrar via his/her stock broker. Paper-based stock ownership certificates were difficult to handle, had a delivery risk(of being lost in the mail) and were vulnerable to damage(or being stolen). In order to solve these issues, India adopted Demat System(Dematerialization) for electronic storing of stock certificates by the depositary act of 1996.

In Demat System(the stocks owned by individuals) are stored in electronic format in central security depositories under your account. When someone sells stocks, they are electronically removed from sellers Demat account and moved into buyers demat account. Each Demat account has a unique identification number. The unique identification number is used to identify which Demat account should be credited/debited based on transaction executed in the stock market.

In the depositary based Demat system, there are three primary entities:

(1) Central Security Depositories(also known as Depository)

A depository is an organization which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form. Currently, we have two depositories in India and both are registered with SEBI.

  • NSDL – National Securities Depository Limited (NSDL) was founded on 8 November 1996 as the first electronic securities depository in India with national coverage. NSDL is promoted by NSE (National Stock Exchange) along with few major banks like Axis, State Bank of India, HDFC Bank and Citibank India (etc). As of Feb-2016, NSDL had 1.45 crore Demat accounts registered. DP ID for NSDL accounts of 8 characters and normally the first two characters are “IN”. 
  • CDSL – Central Depository Services Limited (CDSL), is India’s second securities depository service. CSDL is promoted by BSE( Bombay stock exchange) along with few banks like ICICI, Bank of India, Union Bank of India and Standard Charted Bank(etc).As of Feb-2016, CDSL had 1.06 crore Demat accounts registered. DP ID for CDSL accounts of 8 characters and all 8 characters are numerical.

(2) Depositary Participant  (also known as DP)

A Depository Participant (DP) is an agent of the Depository. These agents are appointed by depository upon receiving approval of SEBI. According to SEBI regulations, three categories of entities i.e. Banks, Financial Institutions and Members of Stock Exchanges [brokers] registered with SEBI can become DPs. Also, it’s worth noting that SEBI approved DP’s support both NSDL and CDSL. For example, SBI Securities can open Demat account of it’s customers in either NSDL or CDSL.

(3) Customers

When an end customer (like you and me) wish to start investing in stock market, we would contact Depositary participants like ICICI Securities, Angel Broking, ShareKhan or Zerodha etc for opening a Demat account and these companies would open our Demat account in either NSDL or CDSL based on their respective tie-ups.

The picture below outlines, how the stock brokers act as an intermediary between End customers and Central Security Depositories.

Demat Account India
Demat Account India

How to open a Demat Account

Now that we have a good understanding of Demat account, let us discuss how can you open a Demat account in India:

  • Identify Depositary Participant

As discussed earlier (Depositary Participant) is the agent between you and the stock market, hence it’s important to select a partner who charges low brokerage charge, has a good reputation and offers great customer service. We have done extensive research on brokers and come up with the top three stock brokers in India. 

Broker TypeSuitable if youBrokerage ChargedAccount Opening Link
3 in 1 Stock BrokerNeed a complete end to end solution for investing (including online IPO's and much more ). HighOpen Trading Account with Kotak Mahindra Bank
Full Service BrokerNeed stocks tips and cutting edge trading software.MediumOpen Trading Account with Angel Broking
Discount Brokersare comfortable in using smartphones and computer.
You can do self analysis of stocks.
LowOpen Trading Account with Zerodha

We would recommend that you open your trading account with any of these companies.

If you have questions or need feedback about a different DP,  please leave your question in the comment section & our team will respond as soon as possible. 

  • Completing the documentation

The DP will provide you the account opening documents in SEBI approved format. You will need to read fill & sign the form and give it for further processing. The DP will submit the form to either NSDL or CDSL to open your account.

  • Account Opening Confirmation & Investing

Once Trading and Demat account are open, the customer receives a confirmation about account opening via SMS or/and email. S

The So going forward, when you execute a buy trade in the stock market, all your purchases/investments in securities will be credited to this account. If you sell your securities, your Demat account will be debited.

Important points about Demat accounts:

  • A customer can have multiple Demat accounts with the same depository partner.  So, a customer can open multiple trading accounts with ICICI Bank and link different bank accounts to different Demat accounts. (one for salary account, one for personal bank account etc)
  • You can have multiple Demat accounts with different depositary partners ( for example, you have one trading account with Zerodha and one investing account with Kotak Securities).
  • Demat account fee is decided by Depositary Participant and is fixed for customers.
  • Nomination smoothens the process of transmission of your securities(stocks and other investments) to your heirs(in the case of your death). By availing nomination for your demat account, all your investments in that account is covered under that nomination and hence we would strongly recommend that you have a nominee in your demat account.

Conclusion

We have discussed in details about various aspects of Demat account like steps to open a demat account, best demat accounts in India and much.

What are your thoughts about our article? Please share your feedback in the comments section. Also, if you have any questions – do let us know via the comments section and we will respond.