Innovations in banking and insurance Dematerialization service

Presented by:

Jyothsna ail (01) Jinal joshi (16) Pallavi venkatesh (32)

Assigned by: Mrs. Arthi kalyanaraman.

Vision of Banks in India

The banking scenario in India has already gained all the momentum, with the domestic and international banks gathering pace. The focus of all banks in India has shifted their approach to 'cost', determined by revenue minus profit. This means that all the resources should be used efficiently to better the productivity and ensure a win-win situation. To survive in the long run, it is essential to focus on cost saving. Previously, banks focused on the 'revenue' model which is equal to cost plus profit. Post the banking reforms, banks shifted their approach to the 'profit' model, which meant that banks aimed at higher profit maximization.

Focus of banks in India

The banking industry is slated for growth in future with a more qualitative rather than quantitative approach. The total assets of all scheduled commercial banks by endMarch 2010 is projected to touch Rs 40,90,000 crore. This is going to comprise around 65% of GDP at current market prices as compared to 67% in 2002-03. The bank's assets are estimated to grow at an annual

composite rate of growth of 13.4% during the rest of the decade as against 16.7% between 1994-95 and 2002-03. Barring the asset side, on the liability perspective, there will be huge additions to the capital base and reserves. People will rely more on borrowed funds, pace of deposit growth slowing down side by side. However, advances and investments would not see a healthy growth rate.

Future challenges of Banks in India

The Indian banks are hopeful of becoming a global brand as they are the major source of financial sector revenue and profit growth. The financial services penetration in India continues to be healthy, thus the banking industry is also not far behind. As a result of this, the profit for the Indian banking industry will surely surge ahead. The profit pool of the Indian banking industry is probable to augment from US$ 4.8 billion in 2005 to US$ 20 billion in 2010 and further to US$ 40 billion by 2015. This growth and expansion pace would be driven by the chunk of middle class population. The increase in the number of

private banks, the domestic credit market of India is estimated to grow from US$ 0.4 trillion in 2004 to US$ 23 trillion by 2050. Third largest banking hub of the globe by 2040 - is that vision too far away?

Definition
Demat account is a safe and convenient means of holding securities just like a bank account is for funds. Today, practically 99.9% settlement (of shares) takes place on demat mode only. Thus, it is advisable to have a Beneficiary exchanges. Owner (BO) account to trade at the

Meaning of Dematerialization
Dematerialization is a process by which physical certificates of an investor are converted into electronic form and credited to the account of the depository participant. Dematted securities do not have any certificate numbers or distinctive numbers and are dealt only in quantity, i.e., the securities are replaceable. Investors can dematerialize only those certificates that are already registered in their names and are in the list of

securities admitted for dematerialization. These are: shares, scripts, stocks, bonds, debentures, stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securities debt, money market instruments and unlisted securities, underlying sharing of American Depository Receipts and Global Depository Receipts issued to non-resident holders. Dematerialization is the process of converting physical holdings into electronic form with the depository wherein the share certificates are shredded and corresponding entry of the number of shares is done in the opened with the depository. The securities held in dematerialized form are fungible; that is, they do not bear any notable feature like distinctive number, folio number or certificate number. Once shares get dematerialized, they lose their identity in terms of share certificate distinctive numbers and folio numbers.

Object Of Demat System

India has adopted this system in which book entry is done electronically. It is the system where no paper is involved. Physical form is extinguished and shares or securities are held in electronic mode. Before the introduction of the depository system by the Depository Act, 1996, the process of sale, purchase and transfer of shares was a huge problem and the safety perspective was zero.

Demat Options
Banks score over others Around 200 depository participants (DPs) offer the demat account facility. A comparison of the fees charged by different DPs is detailed below. But there are three distinct advantages of having a demat account with a bank quick processing, accessibility and online transaction. Generally, banks credit your demat account with shares in case of purchase, or credit your savings accounts with the proceeds of a sale on the third day. Banks are also advantageous because of the number of branches they have. Some banks give the option of opening a demat

account in any branch, while others restrict themselves to a select set of branches. Some private banks also provide online access to the demat account. So, you can check on your holdings, transactions and status of requests through the net banking facility. A broker who acts as a DP may not be able to provide these services.

Bank Account

Account

Vs

Demat

Bank Account Vs Demat Account (*AQB - Average Quarterly Balance) S. No. 1.

Basis Of Differentiation

Bank Account

Demat Account

Form of Holdings/Deposits

Funds Safekeeping of money Transfer of money

Securities Safekeeping of shares Transfer of shares

2. Used for 3. Facilitates

(without actually handling (without actually handling money) 4. Where to open Requirement of PAN Number Interest accrual on holdings A bank of choice shares) A DP of choice (can be a bank) Mandatory (effective from April 01, 2006)

5.

Not Mandatory

Interest income is subject No interest accruals on to the applicable rate of interest AQB* maintenance is specified for certain bank No such requirement accounts Available Not available securities held in demat account

6.

7.

Minimum balance requirement Either or Survivor facility

8. S. No.

BASIS OF SIMILARITY

PARTICULARS Both are very safe and convenient means of holding deposits/securities No legal barrier on the number of bank or demat accounts that can be opened Funds/securities are transferred only at the instruction of the account holder

1. Security and Convenience

2. Number of accounts Transfer of deposits (funds or securities)

3.

4.

Physical transfer of money/securities

Physical transfer of money/securities is not involved Available

5. Nomination Facility

Fees Involved
There are four major charges usually levied on a demat account: Account opening fee, annual maintenance fee, custodian fee and transaction fee. All the charges vary from DP to DP. Account-opening fee

Depending on the DP, there may or may not be an opening account fee. Private Banks, such as HDFC Bank and UTI Bank, do not have one. However, players such as ICICI Bank, Globe Capital, Karvy Consultants and the State Bank of India to do so. But most players levy this when you re-open a demat account, though the Stock Holding Corporation offers a lifetime account opening fee, which allows you to hold on to your demat account over a long period. This fee is refundable.

Annual maintenance fee This is also known as folio maintenance charges, and is generally levied in advance. Custodian fee This fee is charged monthly and depends on the number of securities (international securities identification numbers ISIN) held in the account. It generally ranges between Rs 0.5 to Rs 1 per ISIN per month. DPs will not charge custody fee for ISIN on which the companies have paid one-time custody charges to the depository.

 Transaction fee The transaction fee is charged for crediting/debiting securities to and from the account on a monthly basis. While some DPs, such as SBI, charge a flat fee per transaction, HDFC Bank and ICICI Bank peg the fee to the transaction value, subject to a minimum amount. The fee also differs based on the kind of transaction (buying or selling). Some DPs charge only for debiting the securities while others charge for both. The DPs also charge if your instruction to buy/sell fails or is rejected. In addition, service tax is also charged by the DPs. In addition to the other fees, the DP also charges a fee for converting the shares from the physical to the electronic form or vice-versa. This fee varies for both demat and remat requests. For demat, some DPs charge a flat fee per request in addition to the variable fee per certificate, while others charge only the variable fee. For instance, Stock Holding Corporation charges Rs 25 as the request fee and Rs 3 per certificate as the variable fee. However, SBI charges only the variable

fee, which is Rs 3 per certificate. Remat requests also have charges akin to that of demat. However, variable charges for remat are generally higher than demat. Some of the additional features (usually offered by banks) are as follows. Some DPs offer a frequent trader account, where they charge frequent traders at lower rates than the standard charges. Demat account holders are generally required to pay the DP an advance fee for each account which will be adjusted against the various service charges. The account holder needs to raise the balance when it falls below a certain amount prescribed by the DP. However, if you also hold a savings account with the DP you can provide a debit authorization to the DP for paying this charge. Finally, once you choose your DP, it will be prudent to keep all your accounts with that DP, so that tracking your capital gains liability is easier. This is because, for calculating capital gains tax, the period of holding will be determined by the DP and different DPs follow different methods. For instance, ICICI Bank uses the first in first out (FIFO) method to compute the period of holding. The proof of the cost of acquisition will be the contract note.

The computation of capital gains is done accountwise.

Opening a Demat Account

To start dealing in securities in electronic form, one needs to open a demat account with a DP of his choice. An investor already having shares in physical form should ensure that he gets the account opened in the same set of names as appearing on the share certificate; otherwise a new account can be opened in any desired pattern by the investor. Getting started Choose a DP

Fill up an account opening form provided by DP, and sign an agreement with DP in a standard format prescribed by the depository.

 DP provides the investor with a copy of the agreement and schedule of charges for his future reference. DP opens the account and provides the investor with a unique account number, also known as Beneficiary Owner Identification Number (BO ID).

Documents to be attached Passport size photographs Proof of residence (POR) - Any one of Photo Ration Card with DOB / Photo Driving License with DOB / Passport copy / Electricity bill / Telephone bill Proof of identity (POI) - Any one of Passport copy / Photo Driving License with DOB / Voters ID Card / PAN Card / Photo Ration Card with DOB PAN card

DEMATERIALISATION Process
An investor having securities in physical form must get them dematerialized, if he intends to sell them. This requires the investor to fill a Demat Request Form (DRF) which is available with every DP and submit the same along with the physical certificates. Every security has an ISIN (International Securities Identification Number). If there is more than one security than the equal number of DRFs has to be filled in. The whole process goes on in the following manner:

Rematerialisation
The process of getting the securities in an electronic form, converted back into the physical form is known as Rematerialisation. An investor can rematerialize his shares by filling in a Remat Request Form (RRF). The whole process goes on as follows:

Note:
1.

Depository - An organization that facilitates holding of securities in the electronic form and enables DPs to provide services to investors relating to transaction in securities. There are two depositories in India, namely NSDL and CDSL. As per a SEBI

guideline, the minimum net worth stipulated for a depository is Rs.100 crore. 2. NSDL/CDSL - The securities are held in depository accounts, like the funds are held in bank accounts. There are two depositories in India namely NSDL and CDSL. NSDL (National Securities Depository limited) was established in August 1996 and is the first depository in India. CDSL (Central Depository Securities Limited) is the other depository and was established in 1999. 3. DP (Depository Participant) - A Depository Participant can be a financial organization like banks, brokers, financial institutions, custodians, etc., acting as an agent of the Depository to make its services available to the investors. There are a total of 538 DPs registered with SEBI, as on March 31, 2006 and each DP is assigned a unique identification number known as DP-ID.

Transfer DPs

of

Shares

between

To transfer shares, we need to fill the Depository Instruction Slip Book (DIS). Firstly we need to check, whether both Demat account's Depository Participant is same or not (CDSL or NSDL) If both of them are different, then we need an INTER Depository Slip (Inter DIS). If they are same, then we need INTRA Depository Slip (Intra DIS). 1. For example: If we have one Demat account with CDSL and other Demat account with NSDL, then we need an Inter DIS. 2. Generally, brokers issue Intra DIS, so do check with broker. 3. Once we identify the correct DIS, fill the relevant information like 4. scrip name INE number quantity in words and figures
5.

And submit that DIS for the transfer to the broker with signatures. The transferor broker shall accept that DIS in duplicate and acknowledge receipt of DIS on duplicate copy.

6. Do try to submit that DIS when market is on. Accordingly, date of submission of DIS and date of execution of DIS can be same or a difference of one day is also acceptable.

7. For transfer, you shall also pay the broker some charges.
8.

Remember: DIS is almost like a cheque book. Accordingly, it can be misused if issued blank.

Benefits Of Demat Account

A safe and convenient way of holding securities (equity and debt instruments both). Transactions involving physical securities are costlier than those involving dematerialised securities (just like the transactions through a bank teller are costlier than ATM transactions). Therefore, charges applicable to an investor are lesser for each transaction. Securities can be transferred at an instruction immediately. Increased liquidity, as securities can be sold at any time during the trading hours (between 9:55 AM to 3:30 PM on all working days), and payment can be received in a very short period of time. No stamp duty charges. Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical certificates, are eliminated.

 Pledging of securities in a short period of time. Reduced paper work and transaction cost. Odd-lot shares can also be traded (can be even 1 share). Nomination facility available. Any change in address or bank account details can be electronically intimated to all companies in which investor holds any securities, without having to inform each of them separately. Securities are transferred by the DP itself, so no need to correspond with the companies. Shares arising out of bonus, split, consolidation, merger etc. are automatically credited into the demat account of the investor. Shares allotted in public issues are directly credited into demat account of the applicants in quick time.

The

disadvantages

of demat

account:
Trading in securities may become uncontrolled in case of dematerialized securities. It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors. The role of key market players in case of dematerialized securities, such as stock-brokers, needs to

be supervised as they have the capability of manipulating the market. 1. Multiple regulatory frameworks have to be confirmed

to, including the Depositories Act, Regulations and the various Bye Laws of various depositories. Additionally, agreements are entered at various levels in the process of dematerialization. These may cause anxiety to the investor desirous of simplicity in terms of transactions in dematerialized securities. 2. However, the advantages of dematerialization

outweigh its disadvantages and the changes ushered in by SEBI and the Central Government in terms of compulsory dematerialization of securities is important for developing the securities market to a degree of advancement. Freely traded securities are an essential component of such an advanced market and dematerialization addresses such issues and is a step towards the advancement of the market.

METHODS OFDATA COLLECTION

In the project work Primary data secondary data (both) sources of data has been used. We took survey of 13 respondents residing in various areas regarding the demat service popularity and expectation of the consumer from the online trading service provider. The details about the respondents and their individual views are stated in the sample questionnaire sheets. Primary data collection: In dealing with real life problem it is often found that data at hand are inadequate, and hence, it becomes necessary to collect data that is appropriate. There are several ways of collecting the appropriate data which differ considerably in context of money costs, time and other resources at the disposal of the researcher. Primary data can be collected either through experiment or through survey. The data collection for this study was done in the following manner: Through questionnaire:- Information to find out the investment potential and goal was found out through questionnaire.

Secondary sources of data: In the secondary sources of data is used. (Internet)

Analysis of the survey conducted

1.In which of the financial instrument do you invest? Mutual fund Bond Shares Derivative. Interpretation:

This shows that although the mutual funds market is on the rise yet, the most favoured investment continues to be in the Share Market. So, with a more transparent system, investment in the Stock Market can definitely be increased.

2.Are you aware of online share trading? Yes No Interpretation:

With the increase in cyber education, awareness towards online share trading increased by leaps and bounds.

the has

3.

Which Brokerage Company or bank service you use?

Interpretation:

Majority of the respondents prefer angel broking service and there is also demand for local broking companies.

4.What are the services offered in your demat account? Interpretation: Some of the common services offered by the customers Demat account are: Online trading SMS on each transaction Up to date information regarding the status of the account Providing with monthly statement.

Quotation of the share prices.

5.Is the brokerage rate high low or affordable? High Low

 Affordable Interpretation:

Majority of the respondents feel that their service provider provide them with affordable brokerage charges.

6.Are you provided with the necessary advice by the current service provider? Yes No

Interpretation:

This shows that the respondents are provided with efficient and on time services and are really satisfied with it.

7.

What are your suggestions for the improvement in the demat service offered by your service provider?

Interpretation: Some of the most common suggestions given by the customers are: They should provide proper guidance to their customers about demat.

They should provide offers and facilities to their customers to increase their attractiveness about demat.

Brokerage rate should remain the same or be reduced.

LIMITATION of sample survey.

The study is limited to the different schemes available under the Demat account of respondents The lack of information sources for the analysis part. Geographical locations. Extreme variability in MARKET.

Conclusion:
From a long-term perspective, demat in India is of considerable significance. Not only has the general trading environment improved and quickened, volumes too have perked up, even in the demat segment. With demat taking off, there is now scope for an improvement in the quality of investor services. As a consequence of dematerialization, the Indian market is also well prepared for web-based trading though the quality of telecom infrastructure and inadequacies in the banking system-stock exchange linkages may cause delays. Notably, with regard to the thrust towards paperless trading, the Indian market managed in three years what took even the US much longer. With a high degree of dematerialization a reality, the stage is set for rolling settlements and web-based trading. Once these are in place, the Indian market will have moved closer to the standards in advanced markets, such as the US. And paperless trading may well be the catalyst for such a rapid advancement.

Reference
www.businessmapsofindia.com www.hinduonet.com www.appuonline.com www.legalserviceindai.com www.wapedia.com sharemarketbasics.com