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All about basic service demat accounts for small investors

31 May 2023

Today, a demat account is a must if you want to buy or sell equities. Of course you can trade in futures and options without a demat account as they are cash settled products anyways. However, if you want to invest in equities either through IPOs or through the secondary market then you need a demat account. In fact, you can hold not just equities but also other assets like bonds, gold bonds and even mutual funds in your demat account. The benefits that a demat account gives you are plenty, such as the obvious feature of holding a large number of securities in a single place. Nonetheless, when you open any Demat account with a depository participant (DP) which could be your bank or any good brokerage, there may be certain fees involved and you should be aware of these before you go ahead. 

As an investor, you can open a demat account with any registered depository participant (DP). More often than not, your broker will also be a DP; and it is always better to have the trading account and the demat account at the same place to facilitate seamless and hassle-free debits and credits to your demat account. One of the many advantages of a demat account is the facilitation of seamless transactions as your demat account is linked with other accounts, like your bank account and a trading account. Nonetheless, although many brokerages may advertise “free” Demat account opening processes, you may have to incur certain charges later on as you progress with different transactions. Due to this reason, there are still some investors who would rather hold shares in their physical formats. Nevertheless, if you want to transact with shares, you have to have a demat account, holding shares and facilitating transactions electronically. The big concern for a lot of small investors has been the costs associated with demat. However, depending on your use and the amount of capital you wish to invest in your securities, you can opt for a basic service demat account which may not have the hefty charges of a regular demat account. Therefore, you should first do your homework and find out about the t costs associated with demat accounts and work out what suits your requirements. 

Costs associated with demat account

In a typical demat account there are a variety of charges that you will incur. Firstly, most DPs will charge you an account opening charge. Of course, there are some brokers who will waive this cost but more often than not there will be an account opening cost for you. Secondly, you will be debited an account maintenance charge (AMC) to your account on an annual basis. Normally, as your number of transactions increase, these AMC charges will come down. Thirdly, when you open an online trading account, you will have to give a power of attorney to your DP to debit your demat account based on your instructions in the online trading account. This requires a stamp paper agreement to be executed and that cost has to be borne by the account holder. Fourthly, there is a charge on each debit from your demat account. In the case of most brokers it is a fixed fee per debit. Lastly, there will be miscellaneous charges like physical statement request charges, physical transaction statement request charges and penal charges when your DIS is not honoured etc. All these charges when put together can add up to quite a bit.

For a small investor with very limited activity in the stock markets, this cost actually becomes prohibitive. That is where the idea of a Basic Service Demat account (BSDA demat account) comes up.

How a Basic Services Demat account can address this cost issue

The idea of a Basic Services Demat Account (BSDA) was implemented by SEBI to reduce the cost load on small investors and also to spread the equity cult and encourage more retail investors to participate in the equity markets. Here are a few basic facts that you need to know about BSDA..

A BSDA provides limited services at a reduced cost and is only open to retail investors. There is a value limit for the BSDA and your total value of holdings cannot be more than Rs.2 lakh at any point of time to qualify for a BSDA. The condition is that you can have only 1 BSDA account across all the DPs put together.

The limit of Rs.2 lakh value is the key criterion. These values will be assessed on a daily basis on all trading days, based on the closing stock price or the closing NAV of the mutual fund as the case may be. If the market value exceeds Rs.2 lakh, then the DP is entitled to bill you the charges at the normal rate applicable to other demat account holders.

An important point to remember here is that a BSDA (basic service demat account) demat account can only be held in the name of an individual in his / her individual name. Joint holdings is not permitted in case of BSDA accounts, nor is holding demat accounts in the name of Hindu Undivided Family (HUF) permitted in case of a BSDA account.

The AMC charges in case of BSDA are substantially lower than in a regular demat account. This is because the holdings have a monetary limit and are not that large. For example, in case of custody value less than Rs.50,000/- the BSDA will not charge any AMC. If the custody value is between Rs.50,000/- and Rs.2,00,000/- then the DP can charge you Rs.100 as AMC for the demat account.

In terms of services, the BSDA account holder will be entitled to get the transaction statement and holding statement by email. However, physical statement requests may be charged by the DP. Irrespective of the assets under custody, SEBI has now made it mandatory for the DP to send out an SMS alert when the demat account is debited for ensuring investor security.

Remember, no transaction statement or holding statement will be provided by the DP to the BSDA account holder in case there are no transactions in a quarter or if the DP holding balance is zero.

The process of converting your demat account is quite simple. If your custody value is likely to be consistently lower than the threshold of Rs.2 lakhs, you can write to the DP to shift your account into a BSDA account. From the next billing cycle, the change will be implemented.

The advantage of BSDA is that it enables you to participate in the equity markets without worrying about the prohibitive demats cost. For small investors, it is surely a step forward! However, you should know that if your investments increase, concerning their financial value, your BSDA account will automatically have the status of a regular demat account. 

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