In India’s capital market, trading and investing are increasingly becoming electronic-driven, thereby simplifying the processes for investors. Critical to this architecture is a demat account, which provides for an electronic opening for investors. Trading activity depends upon brokers, and therefore, investors at times find themselves in a situation wishing to move from one broker to another. For this instance, knowledge regarding how demat account portability works is very necessary. Knowing demat account definition, how to open the demat account, and how to shift one’s holdings between brokers will enable investors to take decisions mindful of costs and delays.
Demat Account Meaning
A demat account meaning is an account that enables an investor to hold an account in shares and securities in an electronic format instead of in physical certificates. It acts just like a bank account, except that instead of cash, it holds investments such as shares, bonds, mutual fund units, and exchange-traded funds. The account is maintained with a depository participant usually linked to either of the two major depositories existing in India.
The major advantage of a demat account is that it removes the risk involved with physical certificates: loss, forgery, and wear and tear. They also ease settlement cycles, thus providing quicker transfers of securities.
Demat Account Opening
Before setting foot in the market, an investor needs to complete the demat account opening procedure. This will involve picking a depository participant and completion of identity and address proofs, signing agreements, and either online or personal verification. Upon approval, the account is linked to the investor’s trading account, through which online investment transactions in listed securities are carried out.
Typically, opening a dematerialized account is more or less a one-time task; however, the broker or participant may change due to price, service quality, or extra features at a later date. This is where portability comes in.
Why do investors switch their brokers?
Investors switch brokers due to a number of reasons. These include fee differences, user-friendliness of the platform, and quality of customer service. Other reasons are consolidation of multiple accounts under one participant to enable easy handling. Regardless of the reason, portability ensures that holdings remain intact while only the operational association changes.
The Portability Process
Demat account portability does not mean that the same account number is just going to walk to the new broker. The investor now has to open a new demat account with the broker of his choice and then transfer securities from the old account into the new one.
There are two basic methods through which such transfer may occur:
Intra-Depository Transfer: Should the old and new accounts both exist under the same depository, the securities can be transacted through an intra-depository transfer slip. It is quite fast since the transfer takes place within the same system.
Inter-Depository Transfer: If the two accounts do belong to different depositories, the transfer will require an inter-depository instruction. This will require more processes and will take a bit-longer time.
In either case, the investors need to provide correct information about certain details like International Securities Identification Numbers (ISINs) of holdings and target account number. Any incorrect detail will mean a delay in processing.
Costs and Hidden Costs
While portability guarantees the investor will retain their holdings, there are fees to consider. Most often, each transfer instruction incurs charges levied by the depository participant. Also, in the event that the client will choose to close the old demat account, account closure fees may apply.
While these costs may not necessarily be highlighted to an investor at the time of opening the demat account, they have a long-term effect on the efficiency level of an account, especially if there are many transfers done along the way. An investor should consider if the advantages of transferring outweigh the operational expenses.
Tax and Reporting
From the tax viewpoint, portability doesn’t constitute a taxable event, as the owner continues holding the same securities. While the taxation angle isn’t very complicated, investors need to have a good record of the transfers so that their calculations of capital gain or losses do not come under scrutiny. If records are missing, some complex issues regarding tax filing may arise.
How to Switch, Heartily Suggested
Some helpful tips when the investors are thinking of switching brokers include:
Assure that all personal particulars tally across both accounts (PAN, bank A/C).
Ensure that the old broker has no dues pending with him.
Keep a written document regarding transfer instructions for future reference.
Decide if transferring will require keeping the old demat account open until everything has been transferred, after which it can be closed.
Conclusion
It is essential to be clear with the understanding of demat account portability concepts that include demat account meaning, demat account opening procedure, and operational works with regard to moving holdings. While an investor cannot literally transfer the account itself, one can open fresh denoting the new broker and transfer securities over structured instructions. Cost-timelines-best practice awareness will ensure that an investor’s broker switch does not come in the way of investment objectives. In the long run, a proper orientation towards portability allows the investor to put himself in sync with changing financial preferences without relinquishing control of portfolios.
