In 1996 dematerialization was introduced in the Indian financial market and the Securities and Exchange Board of India (SEBI) mandated the companies to only share the dematerialized form to mitigate the risks associated with share trading in physical share certificates.
India adopted the dematerialization System successfully. Ever since the introduction of dematerialization, the possession of physical share certificates has rapidly declined.
What is Dematerialization?
Dematerialization is the process of converting physical shares certificates of a company into electronic format. An investor who is interested to dematerialize his shares needs to open a dematerialization account with Depository Participant. The investor submits his physical shares and gets his physical shares into electronic shares in his Demat account.
Storage of Dematerialised Shares – Depository
The depository is the body that is responsible for storing and maintaining investors’ securities in dematerialized or electronic format. In India, there are two depositories i.e., NSDL and CDSL.
Who is a Depository Participant?
Depository Participant (DP) is the market intermediary through which investors can avail of the depository services. They are the ones responsible for storing and maintaining the securities. Depository Participant provides financial services and includes organizations like banks, brokers, custodians, and financial institutions.
Advantages of Dematerialization of Shares
Dealing in the Dematerialization of shares format is beneficial for everyone involved in the shares like the investors, brokers, and companies alike. Its most important advantage is it reduces the risk of holding shares in a physical format which can often get misplaced.
- Enhance the safety
First of all, the dematerialization of shares ensures the prevention form damage, mutilation, loss, or theft involved with the physical shares. In electronic shares, one can safely store all the shares in only one single dematerialized account and it can be accessed anytime from anywhere in the world.
- Advanced security
Electronic shares also prevent duplication, forgery, fraud, etc. which one could have faced easily while dealing with physical share certificates.
- Instant Transfer
Transferring shares from one person to another can easily be done through electronic shares. Thus, while transferring shares with physical share certificates take days but with cartelized shares trans, action is done almost instantly.
- Cost efficient
It reduces cost because it doesn’t involve any new papers and issues. Efficiency and timelines of the issue are also maintained as there is no need to go to the notary, or broker for taking a delivery or submitting the share certificate.
- High Liquidity
Liquidity is very high in the case of dematerialization of shares as the whole process online is automated and easy to process. All the benefits of corporate action like bonuses, stock split, rights, etc are managed through the depository leading to the elimination of transit losses.
- High interest
Interest on loans against the dematerialization of shares is less compared to physical shares. Investors save stamp duty while transferring shares in electoral shares and one needs to pay less brokerage in case of Demat shares
Process of Dematerialization of Shares
Present day most of the trading in shares is done in dematerialization format and it’s mandatory to transfer shares in electron shares. One cannot deal in paper-form shares now, so one needs to dematerialize them first. The process of dematerialization of shares is quite simple and easy to process.
- Then one needs to open a Demat account with a depository with the help of a depository participant.
- To dematerialize physical or paper shares, investors need to fill Demat Request Form (DRF) and submit the same along with the physical shares. DRF is available with the DP and you simply need to raise a request for Demat conversion with the DP.
- The documents required to submit along with the form are:
a. Income proof
b. Address proof
c. Identity proof
d. Active bank account details
e. Passport-sized photography
- If one has shares of multiple companies, then a filled DRF is needed to submit for each company along with all the relevant certificates.
- The signing of an agreement and document is also needed for the verification. An agreement containing the charges to be incurred, rules and regulations, terms and conditions, etc.
- After the successful submission of DRF, DF will scrutinize the form and verify it.
- Once the DP is satisfied with the request one will receive a Dematerialization Request number (DRN) as an acknowledgment
- The DP then forwards the request to the registrar and shares the Transfer Agent RTA of the company.
- At last, once the RTA of the company accepts the dematerialization request, the dematerialization of the physical share is done and is converted to the electronic mode and subsequently loses its value.
- The now dematerialized shares are credited to your Demat account, which one can subsequently either sell or transfer to other accounts.
- Holdings of those who have not yet been admitted for dematerialization by NSDL cannot be dematerialized.
- Shareholdings in street names cannot be dematerialized.
- The combination of names of holders as printed on the physical certificate should be dame with the names initiation the dematerializes request.
- For holdings of locked-in for different reasons need to fill separate dematerialization requests.
- Separate dematerialization requests have to be filled for fully paid-up and partly paid-up holdings.
- Separate dematerialization requests will have to be filled for holdings in the different ISINs of a company.
In the above explanation, dematerialization of shares is uncomplicated and requires very few steps for the transfer of physical shares to Dematerialization of shares. It also makes the entire process of share trading easy which was previously quite cumbersome. It has ushered the Indian Market into a new era of electronic share trading and has contributed immensely towards the growth and popularity of share trading amongst the public because now risk-free, cheap, and less time-consuming.
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