Today most investors in India virtually take demat accounts and dematerialized trading in shares for granted. But that was not the case a little over 2 decades ago. Before demat was launched by NSDL in 1997, investors had to deal in physical shares. That means physical certificates had to be physically moved from one place to another and had to be sent for transfer etc. What are the advantages of a demat account and how demat account stock market mutual relationship works? Above all, what is the importance of a demat account in the current market scheme. Broadly there are 10 ways in which demat has made Indian markets safer.
How demat has made Indian markets safer
1. Demat does away with cumbersome physical certificates. This was the big challenge in the physical trading era. There was the risk of bad delivery, attaching transfer forms, risks of signature mismatch, having a complete team to handle physical certificates etc. Demat does away with all that.
2. Transfer of shares is a lot easier. Demat transfer is a literal breeze. You issue a debit instruction slip and the shares are debited to your demat account. When you buy shares, the shares are automatically credited to your demat account. The entire process of transfer and ownership happens in less than 2 days.
3. Demat settlement has crunched settlement times in markets. India could afford to move into T+2 rolling settlements purely because of demat. Today close to 100% of all trades are settled in demat mode. This has made the movement of physical certificates redundant making the entire process smooth and error-free.
4. Demat has eliminated duplicate certificates and fake certificates. We have seen in case of large companies like Reliance Industries, there was large number of duplicate certificates floating around in the market in the early-1990s. It was hard to tell the difference and many investors ended up with such duplicate certificates. In demat, it is almost impossible to have duplicate certificates due to the strong audit trail
5. Demat has avoided risk of signature mismatch and share mutilation. This was the big risk for share buyers in the old days. They would send the certificates to the registrar along with the transfer deed and then realize that the transfer got rejected due to signature mismatch. Alternatively, the certificate would get mutilated in transit and hence get rejected. This delayed the transfer process substantially. Demat has overcome that!
6. Online demat has enabled seamless trading and banking. Thanks to demat, it is now possible to have trading, demat and banking as one seamless chain. With 2 days, the entire activity process is completed including credits to your bank account and to your demat account. This automatically makes the process a lot safer and sounder.
7. Demat has facilitated development of derivatives market. This is something a lot of investors do not really appreciate. The derivatives market actually took off with cash-futures arbitrage. This would not have been possible if there was uncertainty of delivery, as was the case with physical delivery. Under demat; the entire system is so certain that one can effectively hedge their cash positions using futures and options.
8. Risk of loss in transit and misplacing is done away with. This used to a common problem in the physical certificate days. Investors would keep the share certificates in their locker and entirely forget about. Quite often, in cases of HUFs, the Karta would have access to all these certificates and the event of his death; others would not even know anything about these certificates. The bigger risk was loss in transit, which was common when these certificates were sent through post. A loss would mean going through the complete police FIR route to get fresh certificates issued.
9. A single demat account can hold multiple asset classes. Your demat account not only holds your shares but also other asset classes like bonds, ETFs, RBI gold bonds, mutual funds etc. These investments are all identified through unique ISIN numbers and it is possible to get a comprehensive and central view of all your holdings. You do not have to worry about multiple folders and multiple lockers to maintain all your investments. Everything is right there at a single place.
10. Shares are with depositories and there is an audit trail. This is a major advantage of demat. When you open a demat account with your depository participant (DP), the shares are actually held by the national depository; NSDL or CDSL. Since both are institution sponsored bodies, your ownership is absolutely safe. Every transaction in each and every ISIN has a full audit trail and the risks are reduced to almost nil.
To cut a long story short, demat has not only made the market a lot simpler and safer but also catalyzed the development of the F&O market. Thanks to demat, investors are able to monetize the value of their investments faster and a lot more efficiently. That is surely a blessing in disguise!
Also read: Understandfing all about Freezing and Closing your Demat Account