To transact in the Indian stock market, investors need to have demat accounts. So you’ve probably heard of them. But do you know what they really are and how the depositories that run them charge you? If you don’t understand the charges on demat accounts, this is where the answers are.
What is a demat account? A quick refresher
Demat accounts are those that depositories maintain to let traders operate in India. Depositories like the National Securities Depository Ltd. or the Central Depository Ltd., store, in electronic form, the securities you invest in. The electronic or “dematerialized” nature of these records is what gives this account its name.
The depositories also authorize financial service providers—like banks and brokerage firms—to function as depository participants (DPs) that provide demat services to investors.
The depositories do all of this for a charge, of course.
Understanding the charges on demat accounts
Demat accounts come with a variety of charges. It helps to be clear bout them before you begin investing.
Types of charges on demat accounts
These charges vary according to the type of demat account. The charges are as follows:
1. Account-opening charges are a one-time fee. The amount varies from DP to DP.
2. Annual maintenance charges apply to demat accounts every year.
3. Custodian fees are payment for the holding of the securities in the account in accordance with the correct value.
4. Transaction charges apply to each buy/sell transaction. Generally, this is charged on a percentage basis on the rupee value of the transaction.
5. Debit transaction charges on a percentage basis apply each time a security is debited.
6. Dematerialization charges cover the conversion of physical securities into demat form.
7. Rematerialization charges cover the conversion of demat securities to physical form.
8. Pledge creation and closure charges show up when the security is pledged or a pledge is closed.
How to calculate the charges on demat accounts
The charges vary from DP to DP. So make sure you examine the detailed fee schedule. Some fees may vary according to the volume of transactions.
How to compare the charges across different depository participants
1. Identify the DPs: These could be the banks, brokerage houses, etc., in your area. It should not be hard to identify them.
2. Collect and compile their fee schedules: Create an excel sheet listing the various charges in the rows and the names of the DPs in the columns.
3. Compare the charges: Some DPs may charge lower rates for some services, but their fee may be higher for other services. Do a bit of research to get a fair idea as to which of these DPs will suit you.
4. Read the fine print: There may be some hidden charges in the fine print. Read the document carefully.
5. Quality of service: Online reviews and views of existing customers of these DPs can be helpful sometimes. Don’t base your choice entirely on them, but it only helps to get a second opinion.
Common charges on demat accounts
The following are some of the charges that usually apply to demat accounts.
1. Account opening charges
These are one-time charges that DPs levy for the opening of an account. This fee varies from DP to DP and customer to customer. They range between zero and a few hundred rupees.
2. Annual maintenance charges
These are charges that apply on a yearly basis. The DP uses it to maintain the demat account. These, too, can vary from DP to DP and customer to customer.
3. Transaction charges
These are fees DPs levy for facilitating any transactions. Some DPs charge according to the number of transactions, others only for debit entries, while still others charge on a monthly basis.
4. Pledge and lending charges
These charges apply each time you pledge securities from your account as collateral. Some DPs charge a flat rate for this service, while some charge on a percentage basis. These charges also apply to pledge releases.
Further, there may be lending charges if you lend securities. The charges are similar to pledge transactions. But please be aware that SEBI does not regulate the charges for these types of transactions. DPs can charge rates according to their own discretion. Check with the DPs before authorizing such transactions.
Avoiding or minimizing the charges on demat accounts
Since charges vary from DP to DP, there is scope for avoiding or minimizing charges.
Strategies for reducing or avoiding the charges on demat account
A few strategies to reduce charges are as follows.
- Select the DP whose charges are reasonable. Compare the charges of other DPs.
- You may not require many of the premium services that DPs have to offer.
- Try persuading your DP to lower the rates. Having a good relationship with your DP coupled with a good track record helps.
- Every transaction will cost you, so it will be prudent to invest in the long term unless absolutely essential to do otherwise.
- Consolidate your holdings in one demat account. Having multiple demat accounts necessitates multiple charges.
- Sometimes, you may be charged for services not required by you, so keep an eye out for such issues.
Negotiating with the depository participants for lower charges
Negotiating with DPs is possible. But you need to be strategic about it. The following could help.
1. Knowing what other DPs are charging could help you leverage your negotiation.
2. Be specific while stating what charges you want to be reduced.
3. If you have been a frequent operator, bring this to the DP’s notice. They may not want to lose your business.
How to choose the right Depository Participants
While choosing a DP, asking yourself the following questions can be of great help.
1. How good is their reputation? How good are the reviews?
2. Will they offer you the services you require?
3. Are their charges competitive?
4. How good is the team, and how responsive are they?
5. Can you access their services from anywhere?
6. How tight are their security measures to protect your investments?
The role of technology in minimizing charges on demat accounts
Finally, you could resort to some technological solutions to the problem of high charges. Your options are as follows.
1. Opening an online account.
2. Use online transactions.
3. Automated processing.
4. Integration with other financial platforms.
We hope this brief explainer has helped you understand the various kinds of charges applicable to demat accounts. While minimizing these charges is always a possibility, remember to factor them in.
What types of charges can be applicable?
Using Polygon can involve charges like gas fees for transactions on Ethereum when interacting with the Polygon network, and fees for using specific services within Polygon’s ecosystem. Check the specific actions you’re undertaking to understand the associated charges.
Are there charges for transferring securities?
Yes, transferring securities can involve charges, such as broker commissions, transaction fees, and regulatory charges. These costs vary based on the securities, broker, and transaction type. Always consider these charges when trading securities.
Are there charges for converting physical shares to demat form?
Yes, converting physical shares to demat form typically incurs charges. These charges include dematerialization fees, stamp duty, and other administrative costs. Contact your depository participant or broker for specific details about charges for converting physical shares to demat form.
How are transaction charges calculated?
Transaction charges are typically calculated based on a percentage of the transaction value or a fixed fee per transaction. The exact calculation method varies depending on the financial institution, broker, or platform you’re using for the transaction. Check with your provider for specific details on how transaction charges are calculated.