Dematerialization

So, there was a time when investors used to carry shares in physical files, put them into suitcases and go to their stockbrokers in order to sell them off. Similarly, when they bought any shares, you would get heaps of files from the broker which they needed to store.

Of course, they had the option to let those be with the broker, but won’t that be a risky affair. Then came the concept of Dematerialization!

Wait, what?

Dematerialization of Shares

The word “Dematerialization” might look like a heavy technical term but simply put, it is basically a way of converting your stocks into a non-physical or non-tangible entity.

Once you Dematerialize your shares, there is no further need to access your stocks physically. In fact, all these shares are moved to a Demat Account that can be accessed online, anytime, anywhere without anybody else’s dependency.

It is something like you do with your banking account.

If you use internet banking, then you actually credit and debit ‘digits’ and not any physical money. The only difference between a bank account and a demat account is bank account takes care of money while the demat account keeps your investment products such as Equity stocks.

The Demat accounts are managed by Depositories only.

In India, there are 2 such Depositories namely NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). In case you want to open a demat account, then you need to get in touch with a depository participant (or a stockbroker) that is a member of any of the depositories mentioned above.

However, the shares that are getting dematerialized and moved into your demat account must be in your name.

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Dematerialization of Shares Process

The process of dematerialization might look cumbersome to you, especially if you have the habit of using the internet for the most part of your daily routine be it booking a cab, ordering food and so on.

In order to dematerialize your physical shares, as the first step, you need to fill-up the dematerialization request form. This is how a dematerialization form looks like:

Some of the basic details you need to fill up in this form include:

• Name of the Company where you have invested
• Type of security out of Equity, Debentures, bonds etc.
• Details of the shares bought with information on Folio number, Quantity, Purchase date etc.
• Monetary value/face value of shares
• Requisite signatures

There will be specific fields where signatures and inputs of your DP and its corresponding executive will be needed as well.

Feel free to refer to this CDSL Dematerialization form in order to clearly understand how a CDSL demat account actually works.

You need to submit your share certificates along with this dematerialization form and make sure you write “Surrendered for Demat Account” on top of each of the stock certificates before you submit those to the stockbroker.

Now, the stockbroker will need to process this request to the company, registrars and transfer agents in parallel.

Once the process is complete, the shares in the form of physical files are destroyed by the stockbroker. The depository will be notified once the shares are dematerialized by the stockbroker.

Once the notification is received by the depository, a verification of the dematerialization post-checking will be sent back to the depository participant.

Generally, stockbrokers take a duration of 2 to 4 weeks or so for the whole process of dematerialization to complete and credit the respective shares into your demat account, although it can be less than that. Then those shares will be reflected in the online demat account of yours.

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Dematerialization Example

Let’s take a basic example to understand this concept of dematerialization.

For instance, let’s say Rakesh’s father invested in a stock of MRF in 2001 and he has all the shares in physical files.

It’s been a long time and they have been able to keep those files safely but they always feel insecure about the safety of these files. Now, this is where dematerialization comes in.

Rakesh can simply call up a stockbroker and open a demat account.

The broker will send an executive who will learn the concern and then, will suggest going ahead with the demat account where all these physical files get converted to electronic entries with a depository associated with the stockbroker.

Rakesh, with the consent of this father, confirms to go ahead with the demat account and get DIS slips in return of the physical shares they are looking to convert.

Now, post dematerialization, all the shares of MRF will be linked to the demat account in the name of Rakesh’s father.

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Dematerialization Types

Primarily, there are two types of dematerializations done.

First is the one where neither the client nor the depository participant keeps any physical scrip. Here an electronic ledger is maintained by the DP and the client can access it using private credentials.

The second type is the one where depository vaults are maintained in order to store the physical scrips. In parallel, the scrip entries are maintained at the server level as well.

Thus, as a trader, you can discuss with your stockbroker on what kind of dematerialization you are looking for. The charges may vary although a few stockbrokers provide this facility for free as well.

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Compulsory Dematerialization of Shares

Since 2018, the dematerialization of shares has been made compulsory by SEBI. There have been a lot of mandates added by the stock market regulator in order to maximize the usage of the online demat account format.

Some of those are listed below:

• A public company, if looking to issue new securities, can only do so in the dematerialized format.
• You cannot transfer physical securities. This has been added as a sub-rule under the existing 9A rule.
• If you are holding physical securities, you cannot subscribe to new ones unless you have the current ones in the dematerialized format.
• The company that you hold the stock of will assist you in getting your shares dematerialized as per the communication by SEBI.

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Dematerialization Charges

There are generally no charges levied by any of the depositories, however, different stockbrokers may charge a small amount depending on the number of shares to be dematerialized and/or the overall amount of the shares involved in the dematerialization process.

It is advised you check with your broker and seek a written document that confirms the said pricing.

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Dematerialization Advantages and Disadvantages

Let’s quickly look at some of the advantages of Dematerialization:

• No risk of forgery, theft or loss of the securities you own.
• Access to your shares is easy and can be done online.
• Transfer of shares can be done online or through your stockbroker.
• Even for the regulatory bodies, with dematerialization, the process of handling the orders and linked entities has become much simpler.
• There is no stamp duty that you need to pay for securities that are electronic in nature.
• Unlike in the case of physical shares, you can trade (buy shares or sell shares) stocks even in a single unit which is not possible if you use physical shares.
• Pledging and un-pledging your shares is easier in a demat account rather than the shares in physical form.

You can also check this detailed review on the benefits of demat account for further reference.

At the same time, there could be few concerns with the dematerialization of the shares. Let’s discuss those here:

• You might not be able to control yourself with the frequency of your trading.
• Few investors might find the process of dematerialization a little cumbersome
• In case you are someone who is not tech-savvy, then you will be relatively more prone to internet fraud.
• Most likely, you will need to pay a demat account opening fees along with annual maintenance charges (AMC).

For more information, you can check detailed information on disadvantages of demat account.

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Dematerialization Conclusion

In the end, it can be said that the dematerialization of shares has huge advantages against the earlier convention of holding the shares in the physical format.

Irrespective of the fact, that you trade in the stock market on a daily basis or you invest for years, having a demat account with the dematerialization of shares done definitely makes your life hassle-free.

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