Dematerialisation of Shares – Meaning, Process & Benefits

 The online platform has revolutionised the way we live. Whether it is transacting, connecting with a loved one, getting updated about the happenings in the world, everything can be done online. When it comes to investments, the online platform provides ease and convenience.

Investment in shares and share trading is a prevalent activity undertaken by many investors. They invest their money in the stock of a company with a view to earn profits when the stock value rises. When shares are purchased, share certificates are issued in physical form containing the details of the investor and the investor. However, these physical share certificates are inconvenient, and so the concept of dematerialisation has been introduced. Do you know what it is?

What is dematerialisation?

Dematerialisation of shares means converting physical shares and securities into an electronic format. The dematerialised shares and securities are, then, held in a demat account which acts as a storage for such shares. Dematerialised securities can then be freely traded on the stock exchange from the demat account.

How does dematerialisation work?

For the dematerialisation of securities, you need to open a demat account with a depository participant. A depository is tasked with holding shares and securities in a dematerialised format. As such, the depository appoints agents, called, Depository Participants, who act on behalf of the depository and provide services to investors. There are two licensed depositories in India which are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services (India) Limited).

Need for dematerialisation of shares

Dematerialisation of securities was needed because it became difficult for depository participants to manage the increasing volume of paperwork in the form of share certificates. Not only were there chances of errors and mishaps on the part of the depository participant, but physical certificates were also becoming difficult to be updated. Converting such certificates into electronic format frees up space and makes it easy for depository participants to track and update their investor's stockholding.

Benefits of dematerialisation for investors

As an investor, you can get the following benefits from dematerialisation –

• You don’t have to handle the physical safekeeping of share certificates. Since your investments are converted in electronic format, you can easily store them without the risk of theft, loss or damage
• You can access your online demat account and manage your investments from anywhere and at anytime
• The charges associated with the demat account are low. Depository participants change holding charges which are minimal and you don't have to pay any stamp duty on dematerialised securities
• Since no paperwork is required to be done, the transaction time is considerably reduced

Given these benefits, dematerialisation proves advantageous. Nowadays, the practice of holding physical securities has become almost obsolete and buying through a demat account has become the prevailing norm for investors.

How to convert physical shares to demat?

To convert physical shares to demat, the following steps should be followed –

• You should open a demat account with a depository participant. A depository participant can be a bank, financial institution or a stockbroker who is registered as a depository participant with the two licensed depositories of India
• You would then have to avail a Dematerialisation Request Form (DRF) from the depository participant and fill the form
• Submit the form along with your share certificates. The share certificates should be defaced by writing ‘Surrendered for Dematerialisation’ written across them.
• The depository participant would, then, forward the dematerialisation request to the company whose share certificates have been surrendered for dematerialisation. The request should also be sent to Registrar and Transfer (R & T) agents along with the company
• The company and the R & T agents would approve the request for dematerialisation if everything is found in order. The share certificates would also be destroyed. This approval would then be forwarded to the depository participant
• The depository would confirm the dematerialisation of shares and inform the depository participant of the same
• Once the approval and confirmation is complete, the shares would be electronically listed in the demat account of the investor

Buying securities in a dematerialised form

If you are looking to buy stock in a dematerialized form, here the simple steps that you can take for the same –

• Choose your broker for buying the securities and pay the broker the Fair Market Value of the securities that you want to buy
• The payment would be forwarded by the broker to the clearing corporation. This would be done on the pay-in day
• The clearing corporation would, then, credit the securities to the broker’s clearing account on the pay-out day
• The broker would then inform the depository participant to debit its clearing account and transfer the shares to the credit of your demat account
• The depository would also send a confirmation to your depository participant for the dematerialisation of shares in your account. The dematerialised shares would then be reflected in your demat account
• You would have to give ‘Receipt Instructions’ to your depository participant for availing the credit of shares in your demat account. This is needed if you hadn’t already placed a Standing Instruction for your depository participant when you opened your demat account.

Similarly, for sale of dematerialised shares, the process is opposite.

Trading in stocks in a dematerialised format is simple, quick and convenient. It has also become the practice of the current market. So, if you want to buy or sell securities, open a demat account and start trading in dematerialised securities. Should you have any doubts, get in touch with the team at IndiaNivesh who will look into your requirement and lead you towards a quick resolution. 

 

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

Ref: https://www.indianivesh.in/kb-blog/dematerialisation-of-shares