Before the advent of digital trading, people held share certificates in a physical form. Holding physical share certificates has its own share of risks like loss of certificate, delay in transfer of certificates and forgeries. SEBI has made it compulsory for physical certificates to be converted into virtual shares through the process of dematerialisation. In this article, we will cover what dematerialisation is, why you need it, its process and benefits.
What is Dematerialisation?
Dematerialisation is the process of converting physical securities and shares into electronic form. The underlying goal of this process is to simplify buying, selling, holding and transferring shares by making it foolproof and cost-effective. This process consists of four main entities – issuer, depository, depository participant and beneficial owner.
There are two depositories, namely National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CDSL) in India. The issuer is the entity that floats the shares for trading, whereas the depository participant acts as an interface between depository and the investor. Investors can make use of the depository services via the depository agents.
Why is Dematerialisation Needed?
It can be hard to keep track of paper-based documents.The increase in the number of papers day-by-day might lead to misplacement of an important document. Obtaining a duplicate document can waste your time and money. Additionally, a stamp duty of 0.5% is levied for share transfer. All this can be a major hassle for investors and dematerialisation can help tackle these issues. Dematerialised shares receive bonuses and credits directly into their account, therefore, there is no chance of loss while transit.
Process of Dematerialisation
The process of dematerialisation is as follows:
- Choose a depository participant: The process starts with opening a demat account. In order to open a demat account, you need to choose a depository participant that provides demat services.
- Fill the opening form: To convert the shares into a demat/electronic form, you need to fill the Dematerialisation Request Form (DRF), and deposit it along with the physical share certificates.
- Request Processing: The Depository participant (DP) will process your request. After the request is approved, the physical share certificates will be destroyed and the confirmation of dematerialisation will be sent to the depository.
- Issuing of credits: Then the depository will confirm the dematerialisation of shares to the depository participant. After this is done, a credit will be issued to your account electronically. This cycle usually takes about 15-30 days from the dematerialisation request submission.The process of dematerialisation is only possible with a demat account.
Benefits of Dematerialisation
There are a lot of benefits to dematerialisation of shares and securities. Some of them are:
- It is convenient: Demat accounts allow you to carry all the transactions electronically. Hence, there is no need to be physically present at the broker’s office to do transactions. You can access the demat account using a smartphone or computer from anywhere at any time. Additionally, you can convert your shares into electronic format in order to become the legal owner of the share. The demat account charges are also very minimal.
- The process is paperless: The main benefit of using a demat account is that there is no need for physical paperwork. With a demat account, you can hold securities or shares in digital form, hence the need for paper is zero. Demat accounts have also helped companies with reducing their administrative costs. Cutting down paper is great for the environment as well.
- It is safe and secure: You can carry out transactions in a safe and secure manner with a demat account. You can negate the risk of damage, loss of certificates and theft that are associated with the holding of physical share certificates.
- Easily transfer funds: You can transfer your funds electronically in a straightforward manner by linking your bank account with your demat account. This saves you from the hassle of having to draw a cheque or manually transferring funds.
- Nomination facility is available: Demat accounts offer nomination facility to provide the right to control your demat account in your absence to the nominee. Using this facility, the nominee can carry out trade transactions in your account when you are unable to do it yourself.
- You can get a loan with the help of it: Demat accounts help you with getting a loan against the dematerialised shares.The shares and securities held in a demat account can be held as collateral and a loan can be taken against them.
- It has other purposes also: With a demat account, you not only hold equities and shares but also debt instruments. You can also use this account to hold, sell and purchase mutual fund units. You can also buy government bonds and exchange-traded funds (ETF).
- It is easily traceable: You can monitor your investment portfolio with the help of a demat account from anywhere across the world. This flexibility allows you to monitor your portfolio performance and increases the chance of making a profit.
- Makes it easy to receive corporate benefits: A demat account makes the process of receiving corporate benefits like interest, dividends and refunds easier. All these benefits get directly credited into your account. Additionally, other benefits such as bonus shares, stock splits, etc directly get updated into your demat account.
- Easy transfer of shares: You can transfer shares using a demat account in an easy and transparent manner. The only thing you need is a Delivery Instruction Slip (DIS) that is signed.
- You can temporarily freeze your account: You can pause your demat account for a specified time period. However, you can make use of this facility only if your account holds a particular number of shares.
Dematerialisation has helped the Indian equity market embrace digitisation and has made the trading process glitch-free, smooth and secure. The benefits of dematerialisation also includes increased surety and security of transactions and elimination of unnecessary steps that slow down the process of clearing transactions. With dematerialisation, errors can be prevented that might otherwise be a possibility with physical records.