The process of dematerialisation has revolutionised the way investors hold, trade, and manage their securities, making physical certificates a relic of the past. This article delves into the concept of dematerialisation, the process involved, and the myriad benefits it brings to investors and the financial ecosystem.
What is Dematerialisation?
Dematerialisation is the process of converting physical share certificates and securities into electronic form, enabling seamless and cost-effective trading, transferring, and holding of shares. This process eliminates the need for physical certificates, providing a streamlined, foolproof method of handling securities. In India, the two depositories facilitating dematerialisation are Central Depository Services India Limited (CDSL) and National Securities Depository Limited (NSDL), both regulated by the Securities and Exchange Board of India (SEBI).
Why is Dematerialisation needed?
The need for dematerialisation arises from the challenges of managing a large volume of paper-based documents. As paper documents accumulate, there is an increased risk of misplacing important records, potentially leading to disruptions in the Indian share market and associated businesses. Furthermore, the dematerialisation process contributes to savings, as it reduces the stamp duty on share transfers. It also saves time and money in obtaining duplicate certificates if the original ones are lost.
Dematerialised shares receive credits and bonuses directly into the shareholder's account, eliminating the risk of loss during transit.
What is Dematerialisation of securities?
Dematerialisation refers specifically to the conversion of tangible securities, such as share certificates and other financial documents, into a digital format stored in a Demat account. Depositories play a crucial role by holding securities in electronic form, which can include bonds, mutual fund units, and government securities. These services are provided by Depository Participants (DPs), authorised agents under the Depositories Act, 1996, ensuring secure and accessible management of an investor’s holdings.
Short history of dematerialisation
The concept of dematerialisation in India gained traction following the liberalisation of the economy in 1991. In 1992, SEBI was established to regulate the capital markets, eventually introducing dematerialisation under the Depositories Act of 1996. By 2000, it became mandatory for companies issuing IPOs worth Rs. 10 crore or more to offer shares exclusively in dematerialised form. Today, trading in shares without a Demat account is not permitted, underscoring the critical role of dematerialisation in modern financial markets.
How Dematerialisation works
Dematerialisation involves a systematic process to convert paper-based share securities into electronic certificates. It simplifies the trading process, making it more efficient and cost-effective.
In essence, dematerialisation leverages technology to streamline the trading process, providing a secure platform for stock investors to engage in trading, investment, and earnings. It ensures that shares are easily accessible and transferable in an electronic format, enhancing the overall trading experience and reducing reliance on physical certificates.
Process of Dematerialisation
Dematerialisation is the process of converting physical securities, such as share certificates and bonds, into electronic or digital form. The objective is to eliminate the need for physical documents and enhance the efficiency of trading and ownership transfer. The process involves the following steps:
- Opening a Demat Account: Investors need to open a Demat account with a registered Depository Participant (DP). A Demat account functions like a digital repository for holding securities.
- Submission of Physical Certificates: To convert physical shares into an electronic form, the investors must obtain and complete the Dematerialisation Request Form (DRF) from the Depository Participant (DP), then submit it along with the original share certificates. They must mention ‘Surrendered for Dematerialisation’ under every certificate.
- Verification and processing of request: After submission, the Depository Participant (DP) handles and manages the dematerialisation request, along with the original certificates, and forwards them to the company, registrars, and transfer agents for processing.
- Request confirmation: Once the depository receives a confirmation of dematerialisation, the physical certificates are immobilised, which means they can no longer be traded in physical form.
- Crediting the Demat account: Once the dematerialisation process is complete, the depository communicates the same to the Depository Participant (DP), and the holdings of assets are then displayed electronically in the shareholder's Demat account.
Additional topics you may wish to read about
- What is Stakeholder
- How to Close Demat Account Online
- Different Types of Demat Account
- Lifetime Free Demat Account (AMC Free)
- Open a Demat Account Without Aadhar Card
- What is Fear and Greed Index
Benefits of Dematerialisation
The benefits of dematerialisation help investors, companies, and the financial sector by simplifying the management of securities.
- Convenience and accessibility
Demat accounts allow investors to conduct transactions electronically, removing the need for physical presence at a broker’s office. Investors can manage their holdings from anywhere using a computer or smartphone. - Efficient fund transfers
Linking a Demat account to a bank account facilitates easy and quick fund transfers, eliminating the need for manual processes like cheque issuance. - Security
Dematerialisation eliminates risks associated with physical certificates, such as loss, theft, or damage, ensuring secure management of securities. - Nomination facility
Demat accounts offer the flexibility of appointing a nominee, enabling seamless account operations in the absence of the account holder. - Paperless transactions
By holding securities electronically, dematerialisation minimises paperwork, reducing administrative costs for companies and promoting environmental sustainability. - Loan facility
Shares held in a Demat account can serve as collateral for loans, providing an additional financial benefit to investors. - Portfolio monitoring
Investors can easily track their portfolio performance from any location, encouraging more informed decision-making and increased participation. - Corporate benefits
Dividends, interest payments, refunds, and benefits such as bonus shares or stock splits are automatically credited to the Demat account, simplifying the process for shareholders. - Diverse investment options
A Demat account supports a range of financial instruments, including equities, debt instruments, mutual funds, government bonds, and exchange-traded funds, consolidating all investments in one place.
Problems with Dematerialisation
1. High-frequency share trading
Dematerialisation has made communication and order execution more efficient, increasing market liquidity. However, it has also led to higher market volatility, as investors often prioritise short-term gains over long-term profits. The ease of high-frequency trading can result in rapid and unpredictable market fluctuations, impacting investment strategies.
2. Technological challenges:
Dematerialisation relies on technology, which can be a challenge for individuals with limited computer proficiency or slower hardware. Those with advanced software and computer skills gain an advantage, potentially leaving less tech-savvy investors at a disadvantage. This digital divide may hinder equitable participation in dematerialised markets.
Conclusion
The dematerialisation of securities has ushered in a new era of efficiency, security, and accessibility in the financial realm. By eliminating the constraints of physical certificates, investors can seamlessly navigate the world of trading and investment. The process, although seemingly technical, holds the promise of simplifying the intricate web of ownership transfer and trading, benefitting both individual investors and the larger financial ecosystem.
