Demat account
Also written Dematerialised account
An account with a depository participant of NSDL or CDSL that holds your shares and other securities in electronic form. Since April 1, 2019, shares must be in demat form to be transferred.
In plain language
A demat account is to shares what a bank account is to money.
Your bank account holds rupees as entries in a computer, not as notes in a vault. A demat account holds your shares, bonds and mutual fund units as electronic entries, not as paper certificates.
You cannot open it with the depository directly. You open it with a Depository Participant (DP), which works like a branch of the depository, much as a bank branch serves the bank.
When you buy shares, they arrive here. When you sell, they leave from here. When a company allots you shares in an IPO, they are credited here.
How it works
From both booklets:
- To invest in equity shares you need three accounts: a savings bank account, a trading account with a SEBI-registered broker, and a demat account with a SEBI-registered DP. Together they are called a "3-in-1" account.
- India has two SEBI-registered depositories: NSDL and CDSL. You can open a demat account with a DP of either.
- KYC is required, and is a one-time process valid across intermediaries.
- From April 1, 2019, securities can be transferred only if they are held in demat form. This does not apply when shares are transmitted to legal heirs by inheritance or succession.
- Annual Maintenance Charges (AMC) are collected by the DP depending on the value of holdings. A Basic Services Demat Account has nil or low AMC for small holdings.
- Nomination is not mandatory but advisable, and multiple nominations are allowed in a demat account.
- For margin, securities are pledged from your demat account through SPEED-e (NSDL) or Easiest (CDSL).
- A Consolidated Account Statement (CAS) shows your month's transactions across mutual funds and demat holdings; update your PAN with your DP to receive it.
- Never sign a blank Delivery Instruction Slip.
A worked example
Amounts are illustrative.
Geeta, a bank clerk in Guwahati, inherits 300 physical share certificates of a listed company from her father, worth about Rs 1,80,000, and holds some shares of her own bought online.
- Her own shares: bought through her broker and credited to her demat account after the settlement pay-out. Each month her CAS shows them next to her mutual fund units.
- Her father's certificates: she wants to sell them. Since April 1, 2019 a transfer needs the shares in demat form, so she asks her DP to dematerialise them. The rule on demat-only transfer does not stop transmission to a legal heir; it stops a sale of paper shares.
- Nomination: after the paperwork she went through, she adds her husband and daughter as nominees. Multiple nominations are allowed in a demat account.
A year later a DIS book arrives from her DP. She keeps it locked away and never signs a slip in advance, because a signed blank slip lets shares leave her account.
Why NISM asks about it
Chapter 5 (Investment in Securities Market) sets out the three accounts, NSDL and CDSL, BSDA and AMC, margin pledges, and the Do's and Don'ts. Chapter 7 covers nomination. The securities-market booklet adds the April 1, 2019 demat-only transfer rule, the "3-in-1" account and CAS. Expect: the two depositories, who you open the account with (a DP), and whether nomination is mandatory (no).
Common exam traps
- You open a demat account with a DP, not directly with NSDL or CDSL.
- A demat account holds securities; a trading account places orders. Both are needed to buy shares, plus a bank account.
- Demat-only transfer from April 1, 2019 does not apply to transmission to legal heirs.
- Nomination: not mandatory, advisable; multiple nominees allowed.
- AMC is charged by the DP, not the broker or the exchange.
- "Investors have a choice" of holding physical or demat, the booklet says. What is barred is transferring physical shares.
Check yourself
1.An investor holds equity worth ₹45,000 in a Basic Services Demat Account. What annual maintenance charge applies, and how does BSDA differ from BSBDA?
- a)₹100, and BSDA is another name for BSBDA
- b)Nil, because equity holdings up to ₹50,000 attract no AMC — and BSDA is a demat account with a DP, while BSBDA is a bank savings account
- c)Regular demat charges, since BSDA has no concession for equity
- d)Nil, and both BSDA and BSBDA are held with a Depository Participant
Show the answer
Answer: (b) Nil, because equity holdings up to ₹50,000 attract no AMC — and BSDA is a demat account with a DP, while BSBDA is a bank savings account
The booklet's slab table sets AMC at NIL for equity holdings up to ₹50,000 (or debt holdings up to ₹1,00,000), a maximum of ₹100 for equity between ₹50,001 and ₹2,00,000, and charges as applicable to regular demat accounts above ₹2,00,000. Note the asymmetry candidates miss — the first equity threshold is ₹50,000 while the first debt threshold is ₹1,00,000. The BSDA exists because "SEBI with a view to achieve WIDER FINANCIAL INCLUSION... In order to REDUCE THE COST of maintaining securities in demat accounts for RETAIL INDIVIDUAL INVESTORS", and its other benefits are free periodic transaction and holding statements, two free physical statements per billing cycle and at least two Delivery Instruction Slips at account opening. The acronym trap is deliberate: BSDA holds securities with a Depository Participant; BSBDA from Chapter 4 holds money at a bank.
2.An investor buys shares on a Monday and checks her demat account the same evening, finding nothing. What has happened?
- a)The trade has failed and must be placed again
- b)Nothing is wrong — under T+2 rolling settlement the trade settles on Wednesday, and the broker must credit the client within 24 hours of the pay-out
- c)The broker has misappropriated the shares
- d)Shares are credited only after one month
Show the answer
Answer: (b) Nothing is wrong — under T+2 rolling settlement the trade settles on Wednesday, and the broker must credit the client within 24 hours of the pay-out
Settlement runs on a cycle, not instantaneously. T is the trade day — Monday. The pay-in day is when "the BROKERS shall make payment of funds... or delivery of securities... TO THE STOCK EXCHANGE", and the pay-out day is when "the STOCK EXCHANGE makes payment of funds... or delivery of securities... TO THE BROKER." The booklet's cycle is "T+2 ROLLING SETTLEMENT basis w.e.f. April 01, 2003... trades executed on a Monday are typically settled on the following Wednesday." Then "the exchanges have to ensure that the pay-out of funds and securities to the clients is done by the broker WITHIN 24 HOURS OF THE PAY-OUT." What she should have received the same day is the contract note — "evidence of trade... a legal document" — which the do's list says to insist on within 24 hours. (In practice Indian exchanges have moved to T+1 since January 2023, with optional T+0 for some scrips; for this examination answer T+2 as the booklet states.)
3.Which accounts does an investor need in order to invest in equity shares?
- a)Only a demat account with a depository
- b)A savings account with a commercial bank, a trading account with a SEBI registered stock broker, and a demat account with a SEBI recognized Depository Participant
- c)A trading account and a current account
- d)A demat account opened directly with NSDL or CDSL
Show the answer
Answer: (b) A savings account with a commercial bank, a trading account with a SEBI registered stock broker, and a demat account with a SEBI recognized Depository Participant
The chapter lists three: "Savings Account – Saving bank account with a commercial bank; Trading Account - Trading account with a SEBI REGISTERED STOCK BROKER of a recognized stock exchange to buy or sell securities on the Stock Exchange; Demat Account - Demat account with a SEBI RECOGNIZED DEPOSITORY PARTICIPANT (DP) of Depository for holding securities in dematerialized/electronic form." Think of the savings account as the purse, the trading account as the shop that transacts for you, and the demat account as the bag you carry the shares home in — a bag alone buys nothing. Option (d) confuses two layers: "NATIONAL SECURITIES DEPOSITORY LTD. (NSDL) and CENTRAL DEPOSITORY SERVICES (INDIA) LTD. (CDSL) are two SEBI registered DEPOSITORIES in India", but the account is opened with a depository participant of one of them, not with the depository itself.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- DematerialisationConverting securities held as physical certificates into book-entry holdings: the certificates are defaced, mutilated and surrendered to the issuer, and an equivalent quantity is credited to the holder's demat account.
- Consolidated Account StatementA single statement showing an investor's transactions and holdings across every scheme of every mutual fund in India, linked by PAN and issued monthly where there has been a transaction.
- NominationThe account holder's written direction naming who receives the securities on death — up to ten nominees for a demat account, with percentages that must total 100, mandatory for single holdings.
- Basic Services Demat AccountA low-cost demat account for a small investor who holds only one demat account and whose holdings stay within Rs 2 lakh of debt and Rs 2 lakh of non-debt securities — its annual charge can be nil.
- Annual Maintenance ChargesThe yearly fee a depository participant charges to keep your demat account running, linked to the value of your holdings. In a Basic Services Demat Account it can be nil for small holdings.
- Depository participantThe SEBI-registered agent through whom an investor reaches a depository — NSDL and CDSL cannot open investor accounts themselves, so every demat account is opened and operated through a DP.
- Trading accountThe account you open with a SEBI-registered stock broker to buy and sell securities on a stock exchange. You get a Unique Client Code, a contract note within 24 hours of each trade, and alerts.
- Resident Foreign Currency (RFC) accountA bank account a returning NRI may open to hold foreign currency, transferring in balances from an NRE or FCNR(B) account and continuing to receive foreign-currency income from investments held abroad.
- Dematerialised unitsAIF unit capital held in electronic form with a depository: every scheme must now issue units in demat only, each carrying its own ISIN against which the NAV is uploaded.
- Know Your CustomerThe identity and address check every investor must clear before a bank, broker or depository participant will open an account — mandatory under the Prevention of Money Laundering Act, 2002.
- FIFO methodThe rule that securities sold from a demat account are deemed to be those that entered the account first — which fixes both their period of holding and their cost of acquisition for capital gains.
- T+2 rolling settlementThe settlement cycle the booklets teach: trades on day T are settled two working days later, so a Monday trade settles on Wednesday. India has since moved to T+1.
- General power of attorneyA power of attorney that lets the agent do anything the principal could do. The booklets warn never to give one to your stock broker or depository participant; give a specific one instead.