Are your demat charges high? Check how to reduce them

Answering a query on CNBC-TV18 on whether it is feasible to have demat account even for small holdings, he says Securities and Exchange Board of India (SEBI) in order facilitate investors have introduced Basic Services Demat Account (BSDA). Wherein for all holdings under Rs 50,000 has no annual maintenance charges which otherwise a normal demat account would be charging

Also read: How you can invest in intl economies being in India

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Investors generally end up paying between 2-3 percent on an investment of let us say Rs 50,000 annually, as charges for their Demat Accounts. A small investor may not even be using many of these services like derivatives, forex trading etc. Is there any way for investors to not pay these charges or the frills attached?

A: It has become almost mandatory for a person to have a demat account just like a bank account. Besides holding equities a person can now hold mutual fund units, bonds, debentures, National Savings Certificates (NSC), all of them in demat form.

We have already seen a proposal which has been mooted with Insurance Regulatory and Development Authority (IRDA) saying that insurance policies are also going to be offered in electronic form. For example taking the Rajiv Gandhi Equity Saving Scheme, one of the mandatory conditions to avail the tax benefits is that you should have a demat account.

While we are quite comfortable with the fact that owning a demat account is a very beneficial thing. However if you look at it from a retail investor's point of view, the fact that you pointed out is that if an investor has invested about Rs 20,000-50,000, he lands up paying an annual maintenance charge of about Rs 350 which can go up to Rs 750 as well.

So if you look at it as a percentage of the investment, if a person has invested about Rs 15,000 it works out to be almost 2-3 percent of his investment amount. This is a big deterrent for retail and small investors to open a demat account.

Sebi in August 2012, in order to encourage individuals to open demat accounts has introduced BSDA. It is in the same lines of a no-frills bank account.

To give you some finer cost related points of the BSDA. If a demat account has the value of securities, all the holdings in the demat account is less than Rs 50,000, then there is no annual maintenance charges (AMC) to be charged to that investor. So if he has a demat account with an holding of only Rs 20,000 in the form of stocks or any other investments, there will not be any AMC charged on that demat account.

If the value exceeds Rs 50,000 and goes up to Rs 2,00,000, then the charges are capped at Rs 100 per annum. Once the value of investments go above Rs 2,00,000, then you have to pay the charges as they are levied by the Depositary Participant (DP).

Interesting part is that existing demat account holders need not go and apply and open a new demat account under the BSDA. All they need to do is go to the DP and inform them that the value of their securities is less than Rs 50,000 or less than Rs 200,000 as the case maybe and they should be given the benefits of the preferential rates.

However, practically we have seen that many DPs are denying this facility. They are asking the investors to close this account and go elsewhere which is not right. In such a case you can inform Sebi about this.

Nevertheless, I would suggest that every investor should open a demat account immediately, even if he does not intend to invest immediately into any stock. Since it is a nil maintenance, you should have a demat account immediately.

Q: What you are saying is do they charge this annually, 2-3 percent? I guess many people have their accounts with banks and perhaps don't check that these things are deducted but is this an annual charge 2-3 percent so if you have 2 lakh worth of shares, which perhaps rose to 2 lakh even without your knowledge then even in a dormant account, where transactions have not been done or maybe few and far between, you will have to cough up some Rs 4,000-5,000 every year?

A: No, what happens is that there is a fixed charge of Rs 350 or Rs 750 per annum is levied into the account. This is an annual maintenance charge to the AMC. When the Reliance Power initial public offering (IPO) was going on, we had seen so many people opening demat accounts only to apply in that IPO. Many of them are still holding the shares which are worth about Rs 3,000-4,000 and they continue to pay Rs 350 to Rs 750 per annum holding only Reliance Power shares of Rs 3,000. So the cost is very high. It is almost 10 percent of the holding of your stock. So this is what Sebi wanted to help retail investors with.