anand on September 23rd, 2008

Having got used to the simplicity of brokerage accounts in the US, it took me some time to get a handle on how the brokerage accounts are structured and setup in India. Once you ‘get’ it, its not complicated – just painfully fragmented. However, there is typically no simple description that helps you ‘get’ it – so you’ve to play 20 questions and reverse engineer an understanding that works. Here’s what I have learned:

To invest and trade in stocks, you need :

  • A bank account – this holds your cash and will be required to make payments on trades or receive the proceeds from a sale.
  • A Demat account: Essentially, a repository for the shares you own – demat accounts enable you to trade stocks without taking physical delivery of the paper certificates. This is standard practice in the US and most parts of the word – your broker holds the shares in a street name and your account statements shows the number of shares you own. In India, these repositories are delinked (and separate from your broker’s instituition).
  • A brokerage account or a trading account: Typically, you would sign up with a broker. Some allow online trading but otherwise, instructions are provided over the phone. Typical commissions vary between 0.5% to 1% of the trade. Note, the money will need to be made available to the broker prior to the deadline for settlement (2 days or so).

The hassle with this arrangement is that you have to synchronize across these accounts yourself. For instance, to buy a certain company’s shares, you call your broker, provide the instructions, obtain confirmation, write a check (cheque), deliver the check and ensure that it clears in time for settlement. Too much human involvement.

A newer set of banking products (often called 3-in-1 accounts) from banks like HDFC try to synchronize across these 3 types of accounts somewhat seamlessly. In a 3-in-1 arrangement, the bank has a regular bank account, a demat account and a trading account all linked together. On completion of a trade, funds are moved from the bank account to fulfill the trade and the shares are deposited into the demat account. This, I feel, is the best approach for anyone who needs to operate these accounts remotely or is just hassled with the manual intervention of the regular trades.

To invest in mutual funds, there are two approaches.

  • Fill in paper forms and submit to the mutual fund company directly (and receive individual statements from each fund company, often from each fund)
  • Create a mutual fund trading account (a relatively new concept) that is linked to your savings account where trades occur and mutual fund shares are held.


2 Responses to “Investments in India: Making Sense of The Accounts”

  1. Thanks for this information. I often wonder how all this process works in India, as I am so spoiled by the convenience of online trading here in US. Though it seems progress is being made it still sounds like a lot of hassle. Day trading seems almost impossible!! I would love to hear more of your thoughts on this.

  2. Mahipal,

    By and large, I think a lot of the conveniences are being made available in India. For instance, I pay all my bills online in India and can access all my bank accounts via text message (SMS) or online – something I had not anticipated and it’s a pleasant surprise.

    Typically, I would consider the 3-in-1 accounts (i.e. linked trading, cash and demat accounts). Other brokers may also be able to link accounts to enable remote management. You may look at HDFC Securities or ICICI Direct as couple of options.

    However, there may be restrictions on NRIs and trading online (or through regular brokers). Only certain NRIs (Non-resident Indians) can trade online (basically, NRIs from the middle east). I know – it does not make logical sense but thats what I understand it to be!

    For others (e.g US based NRIs), the trading is done through something called portfolio investment scheme (some information is available at HDFCbank’s portfolio investment, ICICIbank’s NRI FAQ and Reserve Bank of India’s exchange control manual.

    You may need to talk to the banks directly to get some additional insight.

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