Demat, bank accounts have contrasting functions
Finance Minister Nirmala Sitharaman recently appreciated the trust shown by the country’s retail investors in the equity market. She said that the Indian retail investors have played a key role, especially during the last two years, as they stood up and became shock absorbers, unlike foreign portfolio investors or FPIs.
Thanking the Indian retail investors, she pointed out that while on an average four lakh new demat accounts opened every month in 2019-20, it tripled to 12 lakh per month in 2020-21 and has further increased to around 26 lakh per month in 2021-22.
The number of demat accounts being opened shows the interest of retail investors in market-linked investment options. However, some of the finer points of dematerialization of securities have not been clearly understood by the investors. Recently, a note in the letters to the editor section of a newspaper suggested that demat accounts should be allowed to be converted from single account to joint account as permitted in bank accounts.
In India, trading used to take place by transferring securities in the form of physical certificates. However, in 1996, the Securities and Exchange Board of India (SEBI) introduced demat accounts in the country, and it revolutionised investing by making it a digital process.
A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units, etc.) of investors in electronic form at their request through a registered Depository Participant (DP). It also provides services related to transactions in securities. A DP is an agent of the depository through which it interfaces with the investor and provides depository services.
It is true that there are some similarities between bank accounts and demat accounts. SEBI has made a comparison between the two on the following lines. Bank holds funds in an account, and allows transfers between accounts on the instruction of the account holder, facilitates transfer without having to handle money and facilitates safe keeping of money. But DP holds securities in an account, transfers them between accounts on the instruction of the (beneficial owner) account holder, facilitates transfer of ownership without having to handle securities and also ensures their safe keeping.
But one must understand that the similarities stop here and the bank accounts are in some way similar to demat accounts and they are not identical. When someone deposits money into bank accounts, the funds become part of the general pool of the deposits of the bank and they make use of the funds for lending operations. Banks pay interest on deposits. These are not applicable for demat accounts. Depository maintains a securities account and actually the securities are with the companies which have issued them.
Banks allow different types of operation in joint accounts. It can either be in the name of ‘Survivor’, ‘Former’ or ‘Survivor’, and joint operation when the account is in the name of two persons. If it is an account with more than two persons, the operative clauses can be ‘Anyone or Survivor’, ‘First named person or Survivor/s’, ‘All jointly to operate’, ‘Any two or three to operate’, etc. There can be various operative possibilities. These are possible because the account holders are primarily dealing with the bank only and the dealings are as per the contract between the bank and the customer.
However, in case of demat accounts, as there is no such relationship between the account holder and the depository, such operations cannot be permitted. A single demat account cannot be converted as a joint account or vice versa.
(The author is a former banker.)