Imagine a world where you still have to carry loads of share certificates and physically travel long distances just to sell them off. That is exactly how life before the dematerialization of shares looked like.
But what exactly is dematerialization?
Dematerialization refers to converting your physical securities like shares and bonds into digital form. You store them digitally in a separate account called a Demat account, which allows you to make your transactions electronically.
Interestingly, the total number of dematerialized (Demat) accounts is recorded to be over 16 crores as of May 2024. This evidently indicates the growing inclination towards digital management of shares among people.
Let’s look deeper into how dematerialization came into the picture and what it has to offer!
While you may be aware of the exact dematerialization meaning, it is also integral to zoom out and understand how this concept originated in the first place.
Thanks to the post-liberalisation landscape of India and growing reliance on technology, SEBI (Securities and Exchange Board of India) put into action the Depositories Act in 1996. This introduced traders to the concept of dematerialisation of shares and how they could now control their securities from anywhere.
To top it all, the electronic exchange, NSE, also came into being around this time. This further got the anonymous electronic trading system into place, boosting the scope of the dematerialization of shares.
The Companies (Amendment) Act, 2000, further made it necessary for companies to release IPOs in dematerialised form only if the total amount was Rs. 10 crores or more. Opening a Demat account and getting into the online system became the preferred next step, leading to the rise of dematerialization.
|
Feature |
Physical Shares |
Dematerialized Shares |
|
Form |
Paper certificates |
Electronic records |
|
Risk of Loss/Theft |
High risk of being lost, stolen, or damaged |
Minimal risk as they are stored electronically |
|
Transfer Process |
Time-consuming, requires physical transfer deeds and stamp duty |
Quick and seamless through electronic instructions |
|
Fraud Prevention |
Prone to forgery and duplication |
Reduced risk due to secure electronic systems |
|
Cost |
Higher costs due to stamp duty, handling, and storage |
Lower costs, though includes DP charges and annual fees |
|
Convenience |
Inconvenient due to physical handling and paperwork |
Highly convenient with online access and management |
|
Accessibility |
Limited to physical location |
Accessible from anywhere with internet access |
|
Liquidity |
Less liquid, harder to sell quickly |
High liquidity, easy and quick transactions |
A depository holds all the electronic securities like mutual funds, bonds, and government securities of a shareholder. These securities are taken care of by a depository participant (DP) who acts as a service provider for the depository. They offer dedicated depository services to traders and investors, making it easier for them to hold shares in their Demat account.
CDSL (Central Depository Services (India) Ltd.) and NSDL (National Securities Depository Ltd.) are the only two depositories operating in India. Both of these are registered with SEBI and are responsible for managing all electronic securities.
Must Read: What are the Documents Required for Opening a Demat Account?
While dematerialization requires you to make a one-time effort and open your Demat account, its benefits are immense. Below are some of the most notable benefits of dematerialization:
The seamless trading of shares via Demat accounts has made it convenient for investors to better manage their transactions. They can easily monitor their trades and keep better track of the transaction history.
You can include your nominees to look after your account in your absence. This person can handle your account on your behalf and enjoy equivalent access to services.
If you have bonds and securities, you can keep them as collateral for getting a loan at lower interest rates. This is yet another advantage of opting for dematerialization.
The entitlements are directly credited to the investor’s demat account. Thus, it becomes paperless work, decreasing the transaction costs.
It allows you to send instructions to your depository participant electronically. This enables swift processing for actions like receiving bonus shares, dividends, interest payments, stock splits, and refunds. Thus, it boosts market liquidity.
You can easily transfer your shares now by signing a DIS (Delivery Instruction Slip). With dematerialization, you no longer have to make manual entries to initiate share transfers.
After knowing what dematerialization is and the benefits it offers, let’s understand the exact process of dematerialization.
The dematerialization process starts with the opening of a Demat account. Contact any Depository Participant (DP) like banks, brokerage firms, or any NSDL/ CDSL registered financial institution.
Take a ‘Dematerialization Request Form’ (DRF) from your DP and submit it with the physical certificates of your shares. Don’t forget to mention ‘Surrendered for Dematerialization’ on your share certificate.
DP processes the request by submitting the documents to the company, registrars, and transfer agents.
Following approval, the depository receives confirmation that the shares have been dematerialized, and physical certificates are destroyed.
The depository confirms the request with the DP.
The number of shares is credited electronically to the investor’s demat account.
The dematerialization of shares has come a long way. Additionally, the concept is still keeping up with the changing times. With the advancement of technology, one can further make the entire dematerialization process seamless. Below are the most prominent future trends in dematerialization that we must look forward to!
Technological advancements will result in advanced security for your shares and bonds, reducing the risk of cyber theft.
The integration of shared dematerialization with blockchain will lead to more transparency, security, and efficiency.
The Second Amendment Act, 2023 by the Ministry of Corporate Affairs introduced rule 9B. Under this rule, all private companies should have their securities dematerialized by September 30, 2024.
The amendment applies to all companies except small and government companies. The government took this action to prevent fraudulent share transfers.
The introduction of dematerialization of shares is greatly helpful for investors. It removes the hassle of maintaining piles of paper and doing the clerical work. Instead, investors can now focus on their strategies and gain more profit from the market.
If you wish for the smooth management of shares, relaxation in stamp duties and more secure transactions, this is your sign to opt for dematerialization today.
Our trusted technology, assortment of investment services and dedicated relationship managers— all come together to provide you with the most easy-to-navigate setup. Connect with our experts and learn more about Demat accounts today!
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