What is the dematerialization of securities?

Physical shares, such as share certificates and other records, are converted to electronic format and kept in a Demat Account by dematerialization. Enable a free Demat account by clicking here.

A depository is responsible for electronically storing a shareholder's shares. Bonds, government securities, and mutual fund units are all examples of securities owned by a registered Depository Participant (DP). A depository agent is a person who provides depository services to traders and investors on behalf of the depository.

Currently, there are two depositories authorized to work in India that registered with SEBI:

CDSL (Central Depository Services (India) Ltd.)

NSDL (National Securities Depository Ltd.)

Process of dematerialization

1.Opening a Demat account is the first step of dematerialization. To open a Demat account, you must first identify a Depository Participant (DP) who provides Demat services.

2.To convert physical shares to electronic/Demat form, a Dematerialization Request Form (DRF) must be completed and deposited with share certificates with the Depository Participant (DP). 'Surrendered for Dematerialization' must be written on each share certificate.

3.Through the depository, the DP must process this request along with the share certificates and send them to the firm and registrars, and transfer agents.

4.If the request is accepted, the physical share certificates will be discarded, and the depository will receive a confirmation of dematerialization.

5.The depository would then notify the DP that the shares have dematerialized. If this completed, an electronic credit in the holding of shares will appear in the investor's account.

6.From the time the dematerialization proposal send, this period takes between 15 to 30 days.

7.Dematerialization is only possible with a Demat account, so learning how to open one is necessary for understanding dematerialization.

Purchasing dematerialized securities involves the following steps:

Step 1: Find a broker who can assist you in purchasing securities.

Step 2: Pay the dealer, who will negotiate for the clearing company to pay on the pay-in day.

Step 3: On the pay-out day, the share's credit to the broker's clearing account.

Step 4: The broker will issue its Depository Participant (DP) guidance to debit the clearing account and credit it to your account.

Step 5: The depository will then affirm to the DP that the shares have dematerialized. If this completed, an electronic credit in the holding of shares will appear in the investor's account.

Step 6: Shares will deposit into your account. If you did not give standing orders when your account was opened, you would need to provide 'Receipt Instructions 'to the DP to claim the credit.

Selling dematerialized securities entails the following steps:

Step 1: Find a broker and sell the shares on an NSDL-affiliated stock exchange (National Securities Depository Limited)

Step 2: Tell the Depository Participant (DP) to deduct the number of shares sold from your portfolio and reimburse the broker's clearing account.

Step 3: Using the delivery instruction slips, give the delivery instruction to your Depository Participant (DP).

Step 4: If the request is accepted, the physical share certificates will be discarded, and a dematerialization receipt will be submitted to the depository.

Step 5: Before the pay-in day, the broker will send orders to its DP for distribution to the clearing corporation.

Step 6: The dealer will pay you for the shares you have sold.

Why was dematerialization needed?

1. 1.In the past, handling share-related paperwork in a physical format often resulted in mistakes and unintended mishaps.
2. 2.It was impossible to keep track of paperwork and exchange information related to conversion and maintenance transactions.
3. 3.The authorities in charge of updating these documents were unable to keep up with the growing amount of share papers, which, if left unchecked, could cripple the Indian stock exchange and related businesses' financial foundation.

Benefits of dematerialization

The advantages of the dematerialization of shares are various. The following are a few of them:

1.You can handle your shares and transfers from anywhere at any time.

2.Electronic shares exclude from stamp duty.

3.The storage charges are small.

4.Physical security risks such as burglary, failure, forgery, and injury are minimized.

5.Securities may be bought in odd lots or as a single security.

6.Time taken to complete a transaction shorten due to the absence of paperwork.