You must have heard of the Demat Account if you are a part of the Indian stock market or you have been considering to join the same. It is one of the two vital resources that you need to have for successful trading. But have you ever wondered how it started and evolved as a useful tool of the stock market? Yes, the journey of Demat Accounts started with a meek beginning and has come to a successful and well-established point. It has been 24 years that these accounts have been in existence and have served millions of investors across the country. Here is everything you need to know about the progression of Demat Accounts in India.
It started with one major depository that is the NSDL (National Securities Depository Limited) and spread like a chain process across the country with the help of CDSL (Central Depository Services Limited). Today, there are over 528 Depository Participants under the regulation of these two. If you are yet to open your first account, you can try the IIFL Demat Account to enjoy the services of one of the oldest stockbroking services in the country. Yes, the company started right before Demat Accounts came to existence.
Factors Leading To The Demand For Demat Accounts
Most of the traders keep wondering how the idea of Demat Accounts came into existence and what inclined the respected authorities to use the concept of dematerialisation. Well, many factors and practical incidents that led to this step. You will be amazed to know the scenario of stock trading in the early 90s.
After the successful establishment of the NSE (National Stock Exchange) in 1992, the NSDL was brought into operations to look after the functioning of the market.
The response to the stock market was pleasing enough as transactions occurred every day while the prices kept soaring.
However, the market rush led to the pressure of stock exchanges to make sure that the buyers received their physical share certificates on time while the sellers received their money.
To make things easier, the exchanges would dispatch the truckload of shareholdings once a fortnight. But things did not seem to work out as the postal corporations could not take the load all at once!
This headache grew when the cases of forged and fake share certificates came in the limelight. Foreign investors stepped back from investing in the Indian markets as the companies, market players and brokers were found guilty of the act.
The market tension kept growing as brokers started using “street name” to buy or sell shares until someone discovered the truth. Legal authorities were approached only to realise that the chain is leading to a dead-end!
All this chaos discouraged the new and aspiring investors from entering the stock trading market as they feared risking their savings by investing it.
After considering all these issues, growing conflicts and mismanagement, the NSDL proposed the concept of the Demat Account right after its establishment. The process of dematerialisation was used to bring a digital mechanism that can bring transparency in the stock trading process.
In 1996, NSDL took the initiative to introduce the Demat Accounts to the existing investors and inculcate the necessary steps to channelise the resources in the right direction. It was not an easy task, as the existing traders were not comfortable with digital devices. One after the other, the NSDL with the help of the NSE started preaching the usage of these accounts by storing the shareholding certificates.
It was not an easy task, and soon after, the CDSL (Central Depository Services Limited) joined the league and became the second major depository in the country to offer Demat Accounts.
The journey to making Demat Accounts common to all was not a convenient one as there were many challenges on its way.
The first challenge was to convince the companies and share providers to allow the storage and curation of the share certificates in the electronic/Demat form.
The second challenge was making a chain of Depository Participants who will connect the NSDL with the numerous investors across the country. In this case, the challenge was to rope in the commercial banks and reliable financial entities to render the Demat services to the investors.
This step was necessary since the retail investors ceased to believe in most of the brokerage firms because of their past experiences. Therefore, the NSDL needed a reliable face to sell the idea of Demat Accounts to the people.
The third and most difficult challenge was to convince the traders to dematerialise their shareholdings and store them in their respective accounts. To NSDL’s surprise, the response was a positive one!
Although investors were happy to welcome this changed way of stock trading, the liquidity problem caused trouble. Dematerialisation led to a decrease in the available liquid shares in the market. This incident induced the SEBI (Stocks and Exchange Board of India) to step into the market and bring a conclusive regulation. Thus, SEBI announced that traders could hold their share in any form they wanted, but for selling them, they had to be in the Demat form.
Traditional investors had to go through the newspaper every day to check the stock market.
The present picture is impressive, successful and welcoming as the NSDL recently announced the family of two crore Demat Accounts. The depositories registered over 1 million new Demat Accounts in the first two quarters of 2020. Therefore, you can understand the impact that the NSDL and CDSL have brought in the market over the past two decades. All you have to do is find your preferred DP at your service!
The voyage of Demat Accounts starting from the time when people were not much gadget-friendly to today’s world of technology has been tremendous. The credit goes to the campaigns and promotions held by both the major depositories along with the Depository Participants who connect the investors with them. You should be thankful and happy that you are in a state to utilise the most of this amazing service for stock trading!