Finance

Dematerialization

Dematerialization

Dematerialization is the process in which a company/ registrar takes back physical share certificates of an investor and destroys them. Then an equivalent number of securities in the electronic form are credited to the investor’s account with his Depository Participant (DP). It is usually done at the request of the investor. The first prerequisite is to open an account with a DP and later request for dematerialization of certificates through the DP. Here, purchases made by an investor are credited to his account, and sales are debited.

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The securities held in the dematerialized form are fungible, which means that they do not have any distinguishing features. There are no distinctive numbers to dematerialized shares. All the holdings of a particular security are identical as well as interchangeable. In NSE, trading in dematerialized shares started in December 1996 where Reliance Industries was the first company to trade its 100 shares in Demat form. For BSE, dematerialization of shares commenced a year later in December 1997.

Process of Dematerialization:

Given below are the steps involved in the process of dematerialization:

  1. The investor is supposed to fill up the Demat Request Form (DRF) available with the DP which has to be submitted along with the physical certificates that need to be dematerialized. Odd lot shares are also be dematerialized.
  2. The DP intimates the Depository of the request which has been approved by the user hardware system.
  3. The certificates are submitted to the Registrar by the Depository participant
  4. The Registrar now confirms the dematerialization request from the depository.
  5. After dematerialization of the certificates is done, Registrar updates the accounts and informs the depository about the completion of dematerialization.
  6. The depository participant is notified about the new update in his account by the Depository.
  7. Finally, DP updates the account and informs the investor.

Why it is needed?

Many times it becomes hard to keep track of all the paper-based documents, and also the increasing amount of papers day by day may lead to misplacement of an important document. In the bigger picture, it may become the cause of the breakdown of the Indian Share Market and of any business associated with it as well. Not only that, with every share being transferred 0.5% is saved for stamp duty. The loss of original certificates costs time and money in obtaining duplicate ones. Shares that have been dematerialized receive credits and bonuses directly into their account hence no chances of loss in transit followed by fewer interest charges for loans associated with Demat accounts

Advantages & Disadvantages involved in Dematerialization:

  • Easy and Convenient– A Demat account provides the facility to carry out the transactions electronically. Moreover, it gives the investor the ability to access the Demat account using a computer or smartphone. In addition, you get to convert your physical holdings into electronic format to become the legal owner of your shares.
  • Fund Transfer– By linking your Demat account with the bank account you can easily transfer funds electronically which saves you from the hassles of drawing a cheque or transferring the funds manually.
  • Safe and Secure– All the risks like theft, damage, loss of share certificates, etc. associated with holding shares in physical form have been completely eliminated.
  • Nomination Facility– In your absence, the Demat account provides the facility to grant the right to operate your Demat account to the nominee. With this facility, your nominee can carry out transactions in your Demat when you are not in a situation to do it yourself.
  • Paperless– In addition to excluding the need for paper, the Demat account has also proved to be useful for the companies in reducing their administrative costs and hassles.
  • Avail Loan Facility– It helps you in availing loans against the holdings in dematerialized form by keeping the securities and shares held in Demat account as collateral and taking loans against them.
  • Easily Traceable– The flexibility to be able to monitor the portfolio performance from anywhere across the globe enhances the chances of you making more profits because of the increase in participation and interest.
  • Ease in Receiving Corporate Benefits– All the benefit amounts like dividends, interest, refunds, etc. gets directly credited into the Demat account. Moreover, other benefits like stock splits, bonus shares, rights shares, etc. get directly updated into your Demat account.
  • Multiple Purposes– In the Demat account, not only shares and equities but also government bonds, exchange-traded funds, etc. are traded.

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Final Thoughts:

The introduction of dematerialization allowed accounts to be updated automatically and swiftly. The process of dematerialization applies not only to stocks, but also to various forms of investment such as bonds, mutual funds, and government securities. The use of dematerialization and DEMAT accounts can be simply compared to using a bank and bank accounts to maintain one’s assets rather than personally storing and exchanging paper money during every transaction. Around 99% of shares available in India are already dematerialized.

Author: Mahek Medh

About the Author: Currently, I am in my second-year bachelor’s program and over the period of time I have realized that I enjoy learning about numbers and money, and I find topics of Finance to very interesting thus this is the domain and space where I wish to etch my long term career.

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