INVESTOPAPERWhat Is Demat?
Demat is the act of archiving the physical (paper) share certificates in an electronic system. It is the process of dematerializing the physical share certificates. Dematerialization of share certificates is neccessary to secure and manage the paperwork in circulation in the stock market. The launch of Demat has helped speed up share trading in Nepal. The dematerialization of shares has saved the investors from the problems of carrying, tearing, spoiling and losing their share certificates.
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What Is Demat Account?
The demat account is the electronic account opened by the beneficiary through the depository participants (DP) with the central depository company. A demat account is just like a bank account. Demat account holds the shares in the electronic form. Each beneficiary has a unique account number where s/he deposits the securities. After the depository participant(DP) enters all the details of the beneficiary in the system to open a demat account, CDSC provides a separate 16-digit demat number arising from the system. Investors should mention this number in all future share transactions.
What Does Beneficiary Mean?
Beneficiary is a person who has opened a demat account to deposit securities in CDSC through a depository participants (DP) and has securities that can be deposited electronically in the account.
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Demat Account In Nepal
The dematerialization of shares in Nepal started gradually after the formal inauguration of CDS and Clearing on Chaitra 17, 2067. To open a demat account in Nepal, one can go to the company which has got permission from the Securities Board of Nepal (SEBON) for Depository Participant (DP) service.
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Currently, stock brokers, banks and financial institutions, merchant bankers, transfer representatives and other organizations have been operating such services with the permission of the board. You have to go to a company that suits you and open a demat account. This requires a photocopy of citizenship and two passport size photos.
Previously purchased shares were available as physical (paper) certificates. Since that provision has been removed, it is now electronically credited to the demat account. When opening a demat account, the company gives a checkbook like a bank. When selling shares, the check should be written. In case of purchase, the shares are credited to the investor’s demat account.
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Is Demat Account Mandatory In Nepal?
Demat account is mandatory for all types of share transactions in Nepal. The investor should dematerialize the paper share certificates s/he possesses. Only then are they eligible for trading in the stock market. Nepal Stock Exchange only trades the demat shares with the objective of making the share market systematic, transparent, safe and modern by minimizing various hassles while trading in physical (paper) shares.
After the implementation of this provision, the shares in the primary issue are available in demat form. The shares you receive are credited directly to your demat account. Therefore, demat account is required while applying for the Initial Public Offering (IPO) of the companies. If you want to invest in shares, you have to open such an account.
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How To Open A Demat Account In Nepal?
You can open a demat account through depository banks and financial institutions, merchant banks and broker companies with permission from the Securities and Exchange Board to act as depository participants (DP). The process of opening a demat account in CDSC is similar to the process of opening an account in a bank.
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The following steps show the process of opening a demat account in Nepal:
Step 1: The investor should submit various documents to open a demat account similar to the documents required to open a bank account.
Step 2: The DP enters information about the investor into the system of CDSC after the beneficiary submits the required documents.
Step 3: CDSC verifies the entry from DP and provides the verification letter to the beneficiary.
Step 4: After the verification, CDSC opens the demat account of the beneficiary.
Step 5: After opening a demat account, the DP provides the beneficiary or investor a 16-digit demat account number and a check book.
Step 6: After opening a demat account, the shares held or purchased are deposited in this account. Just like money is deposited in a bank account, shares are deposited in a demat account.
The investor should provide the demat account to the broker company while buying and selling shares. After purchasing the shares, the shares are credited to the demat account. When you sell the shares, you should write the check and provide it to the broker company.The sold shares are then debited from the demat account.
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What Documents are Required to Open a Demat Account?
Anyone with or without a portfolio of share can open the demat account. In order to open such account, the beneficiary (investor) has to provide a photocopy of citizenship along with three generations of details. Demat account of one member of family will not be valid for all other members. Each member has to open a separate demat account for share trading.
In the case of a minor, the guardian should submit a photograph of the minor, a photocopy of the birth certificate and a photocopy of the guardian’s citizenship.
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How Much Does It Cost To Open a Demat Account?
It costs Rs. 50 to open a demat account and Rs. 100 as annual operating charge of the account. Therefore, initially, the cost of opening the demat account amounts to Rs 150. You have to renew the account every year by paying Rs. 100.
In order to deposit the shares (securities) in the demat account, the investor who has the physical share certificate should first take the shares s/he has and fill in the details of the shares of each company. Then s/he should submit a dematerialization form given by the depository member (DP). The share registrar of the respective company verifies the form. It receives the physical shares and deposits those share electronically into the beneficiary demat account,
How Many Demat Accounts One Can Open?
One person can open up to two demat accounts. A new investor who is considering entering the stock market in this way may come only by opening a demat at the beginning. Demat account is mandatory to buy and sell shares in primary market and secondary market. Trading of shares is not possible without a demat account.
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Benefits of Demat Account
Demat Account has several benefits such as:
1. The process of clearing the share transactions becomes faster.
2. The listed company can directly credit the bonus shares given to the shareholders to their demat account. Likewise, it can distribute the cash dividend directly into the shareholder’s bank account.
3. Demat has made it possible to apply for public offering online from mobile and computer.
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4. When a company issuing ordinary shares distributes shares in the demat account, the cost and time required to print the share certificate will be saved.
5. Immediate transfer of securities and money without any hassle during the share transaction.
6. Quick distribution of shares through public issue.
7. Easy portfolio management and mortgage of shares.
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Loan On Shares In Demat
Banks and financial institutions (BFIs) will provide loans to invest in stocks by keeping shares in demat as the collateral. At present, BFIs in Nepal are giving loans in two ways: by pledging shares and on the guarantee of a broker (without pledging shares).
For a loan obtained by pledging shares, the investor has to pledge a share certificate (currently a certified document of shares in a demat account). The same interest rate is not applicable on loans provided by banks and financial institutions for the purchase of shares. Investors who do regular banking, have a regular source of income, and have shares in a good (blue chip) company get loans at some cheaper interest rates.
Other investors have to pay a higher interest rate. When investing in shares, the bank needs documents such as photocopy of citizenship, collateral shares, verification of shares in demat account through DP company and other documents required by the bank.
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