Dematerialization is the process of converting your physical shares and securities into digital or electronic form. The primary agenda is to smoothen the process of buying, selling, transferring and holding shares and making it cost-effective and foolproof. All your securities are stored in an electronic form instead of physical certificates.
Two depositories called Central Depository Services India Limited (CDSL), and National Securities Depository Limited (NSDL) is registered with the Securities and Exchange Board of India, also known as SEBI.
Why is Dematerialization Needed?
Handling of paperwork related to shares in the physical format often led to errors and unforeseen mishaps in the past.
Tracking records and share documents concerning transfer and upkeep transactions was difficult.
The authorities in charge of updating these documents could not keep up with the increasing volume of share papers, which, if left unchecked, could cripple the financial base of the Indian share market and associated businesses.
Process of Dematerialization
For Company
If the company wants to dematerialize its physical shares, it has to follow certain procedures laid down by depositories like NSDL and CDSL. The general steps involved in the process are as follows:
- Step1: Beneficiary Owner (BO) has to open a Demat account with a Depository participant (DP) and obtain an account number.
- Step 2: BO needs to fill in a Demat Request Form (DRF) and submit the same with the physical certificate/s to the depository participants for dematerialization. For each ISIN, a separate DRF has to be used. If the BO has free and lock-in shares of the same ISIN, a separate Demat request must be set up for free shares and lock-in shares.
- Step3: DP would verify that the DRF has been filled correctly.
- Step 4: DP would set up a Demat request on the CDSL or NSDL system and send the same to the Company and the Registrar and Transfer Agent.
- Step 5: Issuer/ Registrar and Transfer Agent (RTA) would verify the certificates' genuineness and confirm the request.
- Step 6: Once the request has been successfully made, DP would deface and mutilate the physical certificates, generate a Demat Request Number (DRN) and send an electronic communication to the depository and courier the DRF and the share certificate to the company by courier.
- Step 7: On receiving confirmation, the depository will credit an equivalent number of securities in the Demat account of the BO maintained with CDSL or NSDL.
- Step 8: The depository will electronically download the details of the Demat request and communicate the same to the electronic registry maintained by the Registrar of Companies.
- A shareholder who wants to dematerialize his shares needs to open a Demat account with Depository Participant (DP), and surrender his physical shares.
- If a shareholder who wants to transfer shares to the Demat account of another can transfer by issuing appropriate instructions to the concerned depository participant through Delivery Instruction Slip (DIS) which will be issued by the DP. The delivery instruction slip is a book similar to a cheque book and an investor is supposed to handle it with the same care as a cheque book.
- If an investor wants to transfer securities through the stock exchange, he/she has to instruct the DP to transfer shares from his Demat account to the brokers' pool account.
- In case he wants to transfer shares to any other buyer's Demat account, i.e., an off-market transaction, he will have to instruct his DP to transfer to the concerned buyer's Demat account. Similarly, securities can be transferred to the buyer's Demat account by the seller's instruction (transferor) to his concerned DP. The seller is supposed to mention the investor's Demat account number in the DIS.
- It is important to note that RTA has to confirm from the company before approving the transfer. Company approval is necessary and then only RTA shall register a transfer in the Demat mode.
Advantages of Demat
Dealing in Demat format is beneficial for investors, brokers and companies alike. It reduces the risk of holding shares in physical format from an investor's perspective. It's healthy for brokers as it reduces the risk of delayed settlement and enhances profit because of increased participation.
From
the share issuing company's perspective, issuance in Demat format reduces the
cost of the new issue as papers are not involved. In addition, the efficiency
and timeliness of the issue is also maintained while companies deal in Demat
format.
There
are a lot of other benefits, but let's focus on benefits with respect to a
common investor and the same are listed below.
• Demat format reduces the risk of bad deliveries
• Time and money is saved as you are not dealing in paper now. You need not go to the notary, broker for taking delivery or submitting the share certificate
• Liquidity is very high in the case of Demat format as the whole process is automated.
• All the benefits of corporate action like bonus, stock split, rights etc. are managed through the depository leading to the elimination of transit losses
• Interest on loan against Demat shares are less as compared to physical shares
• Investors save stamp duty while transferring shares in Demat format.
• One needs to pay less brokerage in case of Demat shares
FAQ's
How long it takes to dematerialize the shares?
Dematerialization will ordinarily take around 30 days. On the off chance, if the process takes more than 30 days, you must contact your DP. If he can't support you, at that point you can send your complaint to the individual Investor complaint cell of NSDL or CDSL.
Can multiple accounts be opened?
YES, A trader can open more than one account in a similar name with a similar DP and furthermore with various DPs. For all these accounts, the financial specialist needs to carefully consent to KYC standards, including Proof of Identity, Proof of Address necessities stipulated by SEBI, and give PAN number. In addition, the trader needs to show his PAN card at the hour of opening of Demat account.
Do I need to maintain any minimum balance of securities in my account with DP?
No. The depository has not directed any minimum balance. You can have zero balance in your account.
Can an investor close his one Demat account and transfer all securities to a different account with another DP?
Yes. The investor can submit an account closure request to his DP in the given form. Further, the DP will transfer all the securities lying in the account, as per the instruction, and close the Demat account.
Can I convert my electronically held Demat shares back into physical form?
Yes, you can convert your Demat holdings into physical form. You need to submit a Rematerialsation Request Form (RRF) through your DP in the same manner as Dematerialization. Upon receipt of such a request from the DP, the R&TA of the company will issue share certificates to you. However, before transferring such shares, the same will have to be dematerialized as per the process.
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Posted by Pooja
Team Taxaj