A Demat account is a vital financial tool in the age of digitalisation. It stores certificates of various securities in digital formats and increases overall safety. If you are wondering whether this account is mandatory, we are here to help. In this article, we will cover whether you need a demat account for stocks.
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Do You Need A Demat Account?
The answer is yes, you need to open a demat account. The reason is the guidelines of the Ministry of Corporate Affairs. Before the 27th of October 2023, public limited companies needed to issue shares only in dematerialised form, while private limited companies were allowed to issue shares in physical form. But now, both public and private companies have to take the route of dematerialisation. Stockbrokers also don’t allow you to buy stocks without a Demat account.
The cutoff date for complying with this rule is the 30th of September, 2024. If a company or the shareholders fail to comply, they will face the following consequences.
- The company won’t be able to allot or issue securities
- The shareholder won’t be permitted to subscribe to any IPO, purchase securities, or transfer existing holdings
- A penalty will be levied on the company and the officer involved in non-compliance. The penalty is Rs 10,000 + Rs 1,000/day until the violation continues, with a total maximum capping of Rs 2,00,000. For officers, this penalty is capped at Rs 50,000
Reasons to Open a Demat Account
Some common reasons to have a Demat account:
Eliminates Physical Certificate
A Demat account digitizes securities. It makes physical certificates obsolete. It securely stores shares electronically, eliminating risks like loss, forgery, or damage associated with paper certificates. This shift to electronic records also streamlines transactions, ensuring quick, efficient, and error-free trading.
Corporate Benefits
Corporate benefits refer to the advantages shareholders receive from a company. It includes dividends, rights, bonus shares, and interest payments. A Demat account streamlines the distribution of these benefits by directly crediting them to the investor’s account. The account ensures entitlements are automatically updated.
Resolved Odd Lot Issues
This digital format resolves the issue of odd lots. You can now trade any number of shares, even a single one, without matching the fixed lot sizes required in the past. This flexibility has streamlined the trading process and made it more accessible and efficient for investors.
Loan Facility
Demat account offers a loan facility by allowing you to pledge your securities as collateral to secure loans from banks. This feature is particularly suitable for those needing quick funds access without selling their investments. However, the type of securities in your holdings plays a role in loan approval. If you have a portfolio of debt securities where returns are not market-linked and the time left to maturity is far.
Freezing Accounts
The freezing facility allows you to suspend transactions temporarily. This feature helps prevent unauthorized debits or credits. To activate, you must specify the period and the particular securities to be frozen. Remember, it is voluntary, distinct from regulatory freezes imposed for inactivity or non-compliance.
Nomination Facility
The nomination facility in this account allows you to appoint nominees who can claim the securities in the event of your demise. This ensures a smooth transition of assets and avoids legal hassles. You can nominate up to three persons, either singly or jointly.
Conclusion
Opening a demat account practically becomes necessary due to regulatory requirements and stockbroker policies. The deadline for share dematerialisation further emphasizes the importance of compliance. If you are looking to open a demat, opt for Dhan.