Dematerialization of Shares

“Dematerialization of Shares” is a common process in securities market. Various regulators have explained Dematerialisation (Demat) in various ways.

SEBI in its FAQ has mentioned:

Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited into the BO’s account with his DP.

NSDL has stated in its FAQ

Dematerialization is the process by which physical certificates of securities are converted into securities in electronic form by way of credit in investor’s demat account held with a DP. Dematerialization is change in form of holding, it does not result into change of ownership.

In nutshell it can be said that Demat is a process whereby physical securities are converted in electronic form which remains in the name of shareholder in their account.

To understand better the process of demat, it is necessary to understand some terminology as given below:

Depository

A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities.

It acts just like banks, as bank keeps our money in one account, and we avail facility of Debit and Credit similarly depository keep the securities in demat form.

At present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI.

Depository Participant

As per SEBI FAQ, A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services.

Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as DP. Banking services can be availed through a branch whereas depository services can be availed through a DP.

Some of the popular Depository Participant in India are: Zerodha, Angel Broking , Edelweiss, SMC Global etc.

Registrar & Transfer Agent (RTA)

Registrar and Transfer Agents are entities registered with the Securities and Exchange Board of India (‘ SEBI’) under the Securities and Exchange Board of India (Registrars to an issue and Share Transfer Agents) Regulations, 1993 and are engaged in providing various ‘Registrar & Transfer Agent ( RTA) related Services’.

Some of the famous RTA areKarvy, Alankit, Skyline etc.

What are the advantages of Dematerialization?

Stakeholders are now keeping their securities in demat form and if they have any physical holding they are converting them into Demat. This happens because demat offers a lot of benefits when compared to holding securities in physical holding. Some of which are mentioned below:

  • Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc.;
  • Reduction in paperwork involved in transfer of securities;
  • A safe and convenient way to hold securities;
  • Immediate transfer of securities;
  • Reduction in transaction cost;
  • Change in address recorded with DP gets registered electronically with all companies in which investor holds securities, eliminating the need to correspond with each of them separately;
  • Automatic credit of shares in demat account, arising out of split / consolidation / merger etc;
  • No odd lot problem, even one share can be traded;

What is the process of Demat or Dematerialization Process or process of Dematerlization of Securities?

To avail the services of a depository an investor is required to open a Beneficial Owner (BO) account with a Depository Participant (DP) of any depository.

  1. A BO who wishes to dematerialize securities held by him in physical form has to submit duly filled and signed demat request form (DRF) or Dematerialzation request form to his DP.
  2. A separate DRF should be filled up for free securities and lock-in securities.
  3. DP will verify the details and setup demat request in the system. The DP will then deface and mutilate the certificate and send the same along with the DRF to Issuer/ RTA.
  4. On confirmation by the Issuer/ RTA, the BO’s account will be credited with the number of securities dematerialized.

Below given is a pictorial representation as available at NSDL FAQ

Key Points

  1. After dematerialization, physical certificates may be retained / destroyed by the Issuer / RTA.
  2. As per SEBI’s guidelines, DP is required to process the demat request received by it within 7 days. Further, issuer company / its RTA may take up to 15 days to process the demat request received by them. Considering the time required for transmission of documents from DP to issuer company / RTA, dematerialization will normally take about 30 days.
  3. Not all the share certificates can be dematerialized. For dematerialization, following conditions should be met with –
    • You can dematerialize only those share certificates that are already registered in your name in records of issuing company / its RTA
    • The Issuer company should have joined NSDL and obtained an ISIN for those shares
    • Shares should be free from any lien or charge or encumbrance.
  4. You can dematerialize your tax-free bonds even when they are under lock-in. The process of demat is similar to that applicable to demat of shares. You need to submit duly filled in and signed DRF to your DP along with bond certificates. DP will forward the request to concerned issuer / its RTA and upon confirmation, credit will be received in your demat account.

Source: NSDL FAQ/CDSL FAQ/SEBI FAQ

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