Have you decided to buy shares this year? Or at least decided that you want a part of an Initial Public Offering (IPO), which you think promises to be big. If yes, this is what you need to do.

What is a Demat account?

Demat is an abbreviation used for dematerialization. It is a process by which physical certificates are converted into electronic ones. Similar to monetary deposits in a bank account, demat is an account that holds all the shares in electronic or dematerialized form. A demat is for shares what a bank account is for money.

Handling physical share certificates can be costly for both the company as well as for the investor. The paper based system gave rise to a number of problems such as duplication of shares, fake signatures, signature mismatches, transfer problems and risk of loss. Because of such hassles involved in paper transactions, the trading of securities becomes slow, and subsequently the whole capital market becomes inefficient.

With demat all these problems are eliminated. Once the trade is approved, securities are automatically credited to the buyer’s account. This makes it easier for investors to hold their securities, and keep track of their investment with cost benefits.

The difference between a depository and a depository participant

A depository is a place where the stocks of investors are held in electronic form. The depository has agents who are called depository participants (DPs). Think of it like a bank. The head office where all the technology is housed and details of all accounts are stored is like the depository. And the DPs are the branches that cater to individuals.

There is only one depository in Nepal - Central Depository System (CDS and Clearing Ltd.) and so far there are over a 100 DPs.

How it started?

Dematerialization was first introduced in the U.S. in 1973. A close look at the progress of dematerialization across countries shows non-uniformity. Some countries, such as U.K., Hong Kong, Singapore and India have made very quick strides. But other including, the U.S., Japan, South Korea have been taking considerably longtime to achieve full rate dematerialization.

The stock trading in India has a long history, starting from 1875 with the establishment of the Bombay Stock Exchange with an open outcry floor trading exchange. With the advancement in technology and increasing problems from paper-based trading system, dematerialization was embraced in 1996 with the enactment of the Depositories Act, 1996, which paved the way for the establishment of National Securities Depository Limited (NSDL), the first depository in India.

Demat account can be opened at any institution with DP license from CDS and Clearing Limited.

In Nepal, Nepal Stock Exchange (NEPSE) trading started with an “Open Out-Cry” system. It means transactions of securities are conducted on the open auction principle on the trading floor. The market makers quote their bid and offer price on their own board before the floor starts. Once the bid and offer price match, contracts between buying and selling brokers or between brokers and market makers are concluded on the floor. This process involved a great deal of paperwork. Even the settlements of trade agreements took time because of the need to deliver share certificates.

Therefore, in response to changing demand, NEPSE introduced fully automated screen based trading from August 24, 2007, called the ‘NEPSE Automated Trading System (NATS), which adopts the principle of an order driven market. The increasing involvement of Nepalese in the capital market made the need for addressing problems associated with paper trading a top notch priority. Hence, with an objective of creating a healthy and efficient investment environment, demat was introduced in Nepal on August 17, 2015 by CDS and Clearing Ltd. (CDSC).

How to open a demat account?
Demat account can be opened at any institution with DP license from CDS and Clearing Limited.

Documents you need:
For individuals:
A photocopy of your citizenship along with a recent passport-size photograph.

For Companies:
Two copies of PAN, a copy of Registration Certificate, BOD minute with signature authority, and MOA/AOA are required.  It generally takes one to three days to open a demat account.

What’s the next step?

  • The physical shares of a client then needs to be deposited in the demat account along with the completed Demat Request form. The Demat Request forms with details of shares need to have verified signature.
  • The details about shares are entered into a system which generates a unique code called DRN (Demat Request Number), which is the number that would represent the client’s shareholdings on RTS.
  • This process of generating DRN usually takes up to 15 days, after which the physical share certificates are dematerialized and you can trade your shares at NEPSE.
  • Debit Instruction Slip (DIS) is issued by the Depository Participant (DP) after opening a demat account.
  • After dematerialization, every purchase of stock is automatically credited to your demat account. However, to execute the sell order of any dematerialized share, you have to issue a DIS cheque and present it to the broker. With DIS cheque, the broker executes your sell order and the seller’s demat account will be debited.
  • What will be the cost involved?
  • The current account opening fee is Rs.50, annual account maintenance fee is Rs. 100, and per transaction fee is Rs. 25.