Dematerialization offers flexibility along with security and convenience. Holding share certificates in physical format carried risks like certificate forgeries, loss of important share certificates, and consequent delays in certificate transfers. Dematerialization eliminates these hassles by allowing customers to convert their physical certificates into electronic format. Shares in the electronic format are held in a Demat account.
Process of dematerialization
- Dematerialization starts with opening a Demat account. For demat account opening,you need to shortlist aDepository Participant (DP) that offers Demat services.
- To convert the physical shares into electronic/demat form, A Dematerialization Request Form (DRF), which is available with the Depository Participant (DP), has to be filled in and deposited along with share certificates. On each share certificate, 'Surrendered for Dematerialization' needs to be mentioned.
- The DP needs to process this request along with the share certificates to the company and simultaneously to registrars and transfer agents through the depository
- Once the request is approved, the share certificates in the physical form will be destroyed and a confirmation of dematerialization will be sent to the depository
- The depository will then confirm the dematerialization of shares to the DP. Once this is done, a credit in the holding of shares will reflect in the investor's account electronically.
- This cycle takes about 15 to 30 days after the submission of dematerialization request
- Dematerialization is possible only with a Demat account, Learn about how to open a demat account to understand dematerialization.
Why dematerialization was needed?
- Handling of paperwork related to shares in physical format often led to errors and unforeseen mishaps in the past.
- Tracking records and share documents with respect to 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.
Benefits of dematerialization
- It allows you to conveniently manage your shares and transactions from anywhere
- Stamp duty is not levied on your electronic securities
- When you open a demat account, it provides paperless transactions of securities.
- Nominal holding charges are levied.
The depository system
A depository is responsible for holding the securities of a shareholder in the electronic form. These securities could be in the form of bonds, government securities and mutual fund units, which are held by a registered Depository Participant (DP)
Currently, there are two depositories registered with SEBI. They are:
- National Securities Depository Limited (NSDL)
- Central Depository Services (India) Limited (CDSL)
A DP is the agent of the depository providing depository services to traders and investors.