SEBI, brokers and demat accounts

In simple terms

When you buy a share through an app, three kinds of organisation are involved behind the scenes, in addition to the stock exchange.

• The regulator, SEBI, sets and enforces the rules that everyone in the market must follow.
• Your broker takes your order and sends it to the exchange.
• A depository keeps the official record that you own the shares, in your demat account.

Each has a clear job, and knowing them helps you understand where your money and shares actually are at any moment.

SEBI, the market regulator

The Securities and Exchange Board of India (SEBI) is the regulator of the securities market, set up by Parliament under the SEBI Act. Its purpose, in the words of the Act, is to protect the interests of investors in securities, to promote the development of the securities market, and to regulate it.

In practice SEBI:

• writes regulations for companies, exchanges, brokers, mutual funds, investment advisers and others;
• registers market intermediaries, so you can check whether a broker or adviser is allowed to operate;
• investigates and penalises fraud, insider trading and market manipulation;
• runs investor education and a complaint system for investors.

What SEBI does not do is just as important. It does not tell you which shares to buy, it does not guarantee that any company or investment will do well, and it does not compensate you for ordinary market losses.

Your broker

A stockbroker is a firm that is a member of a stock exchange and is registered with SEBI. Only members can send orders to the exchange, so individuals trade through a broker. The broker gives you a trading account: the account you use, usually through an app or website, to place buy and sell orders.

Brokers earn money through brokerage fees on your trades and other charges. Some charge a fixed amount per order, others a percentage of the trade value. They also handle the money flowing between your bank account and the exchange.

Depositories and demat accounts

Shares used to exist as paper certificates. Today they are held electronically. A depository is the institution that holds these electronic records. India has two: National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).

You do not deal with the depository directly. You open a demat account (short for dematerialised account) through a depository participant (DP), which is often the same company as your broker. The demat account works like a bank account for shares: it shows how many shares of each company you hold, and shares are credited to it when you buy and debited when you sell.

Shares of listed companies can be transferred only in demat form. Holding old paper certificates is not banned, but they must be converted to demat before they can be sold or transferred.

Because your shares are recorded at the depository in your own demat account, they are held separately from the broker's own assets. Your broker can execute trades on your instructions, but the record of ownership sits with the depository.

The three accounts you need

To open these accounts you go through KYC ("know your customer") checks, which verify your identity with documents such as your PAN and address proof. KYC is a legal requirement designed to stop fraud and money laundering.

Why it matters

Knowing who does what tells you where to look when something goes wrong. If an order was executed wrongly, that is a broker issue. If shares are missing from your demat account, the depository records and your DP are where to check. If you suspect fraud or misconduct, SEBI's complaint system and registers are available to you.

It also protects you. Genuine brokers and advisers are registered and can be checked. Shares bought through them land in a demat account in your name, which you can see in statements from the depository. Anyone asking you to send money to a personal account, or to trade through their account, is operating outside this system.

Limitations

This lesson simplifies a system with many more participants, including clearing corporations, registrars and transfer agents, and custodians for large investors. Registration and rules also do not make an intermediary perfect: registered firms can still make errors or behave badly, which is why complaint and enforcement systems exist.

Rules about accounts, KYC and charges change over time. The facts marked above were checked on the date shown; confirm current rules on SEBI's and the depositories' websites.

Common mistakes

• "SEBI guarantees my investment." SEBI regulates conduct. It does not protect you from a share price falling.
• "My shares are kept by my broker." They are recorded in your demat account at a depository. Check your depository statements, not only the broker's app.
• "Anyone with a good track record can manage my money." Managing money or giving paid advice requires the right SEBI registration. Results shown on social media are not a licence.
• "I need a demat account only to sell." You need it to receive shares when you buy, too.

Try it yourself

If you already have a demat account, find the most recent statement sent by NSDL or CDSL (often called a consolidated account statement) and compare the holdings it lists with what your broker's app shows. They should match.

If you do not have one yet, visit the websites of NSDL and CDSL and find the list of depository participants. Note that many familiar brokers and banks appear on these lists. You do not need to open an account to learn from this.