Why Stock Brokers Hate Basic Services Demat Accounts?

By - IndianMoney.com Research Team     31 March 2016

Your friends boast of the money they make in the stock market. They seem to have everything. Latest smart phones and laptops, designer clothes and pretty much everything they want. The secret of their success…. The money they make in the stock market. You too want to have all the toys of the rich. You too want to invest in the stock market. To invest in the stock market you need a demat account. Demat account is like a bank account, where you can store the stocks you buy, in an electronic format. You have made your decision. You will invest in a demat account. This is when a good friend of yours suggests that if you want to purchase stocks, then invest through a basic services demat account. You wonder….what is this basic services demat account?

What is a basic services demat account?

A basic services demat account is popularly called a BSDA. If you avail the services of a BSDA, you would get limited services (lesser services than a regular demat account). However you would get the benefit of a lower annual maintenance fee. The maintenance fee for an ordinary demat account is between INR 600 to INR 1000. If you avail the services of a BSDA, you have to pay zero annual maintenance fees, if the value of stocks (securities) in your BSDA is below INR 50,000. You will have to pay a maintenance fee of INR 100, if the value of stocks (securities) in your BSDA, is between INR 50,000 to INR 2 Lakhs. If the value of holdings (stocks) in your demat account exceeds INR 2 Lakhs, you will have to pay a maintenance fee, same as an ordinary demat account. BSDA gives you almost all the facilities of a normal demat account, except you get only 2 account statements every billing cycle.

Why stock brokers hate basic services demat accounts?

Stock brokers are urging SEBI not to allow a rule, where a demat account which has a holding of less than INR 2 Lakhs, will be automatically converted to a basic services demat account (BSDA). A basic services demat account, is also called a no frills demat account. In the year 2012, SEBI had asked stock brokers to give an option to their clients, to convert their demat account to a basic services demat account, if the holding in the client account (value of stocks in the demat account) was less than INR 2 Lakhs.

However stock brokers are worried if all eligible demat accounts are converted to basic services demat account (BSDA), they would lose their earnings (broker commissions), which they get on the annual maintenance fee you pay. (% of annual maintenance fee you pay, goes towards stock broker commissions). Stock brokers argue that demat account opening is a competitive business. They must get some profit out of this, in the form of commissions on the annual maintenance fee.

Why banks are fighting against basic services demat accounts?

If you invest in a basic services demat account with a bank, you can easily transfer money and buy stocks. You can also easily sell these stocks when you want and collect your money. This is called ease of use.

Banks believe that they are providing you, sophisticated services and not basic services. Banks believe that a demat account needs to called a basic demat account, based not on the value of stocks held in it, but on the services provided on it. Banks offer you sophisticated services and collect no maintenance fee or very less maintenance fee for their services, just because the value of stocks you hold is less than INR 2 Lakhs.

No wonder banks are aggrieved….

Remember: If banks and stock brokers are angry with the basic services demat account, they will not tell you about it. Why would banks and stock brokers cut their own feet? You need to be prepared with the questions.

Under : Capital Markets