Prior to the introduction of demat account in 1997, shares and securities were held in the form of share certificates. It posed various challenges to hold the shares and securities in the physical form. One had to ensure the safety of share certificates as it involved huge risks as certificates could get stolen, lost in transit or get mutilated. Moreover, it was quite cumbersome as transfer would often get rejected due to signature mismatch and similar such issues. In order to overcome these challenges, SEBI introduced the concept of dematerialization.
Dematerialization in simple words means converting your physical shares and securities into digital or electronic form. With dematerialization, the entire process of buying, selling, holding and transferring shares and securities became simple, cost-effective and safe.
To further understand the concept of dematerialization, we will walk you through the meaning, benefits and process of dematerialization. Let us first focus on the meaning of dematerialization.
What is dematerialization?
As mentioned earlier, dematerialization is the process of converting physical shares and securities into electronic form and holding them in the demat account. This means, with dematerialization securities are no longer in the form of certificates and can be registered and transferred electronically. Dematerialization eliminated the tedious paperwork and automated the entire process of trading and investing.
The responsibility of holding the shares and securities in the electronic format is on the depository. At present, there are two depositories in India who are registered with SEBI – NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services (India) Ltd.). A depository participant is the agent of the depository providing depository services to investors and traders.
After understanding the meaning of dematerialization, let us now understand the process of dematerialization.
Process of dematerialization
- The first and foremost step in the process of dematerialization is to open a demat account with the depository participant.
- For conversion of physical shares into electronic format, you need to obtain a Dematerialization Request Form (DRF) from the depository participant and fill it. After filling the form, you need to submit the same to the depository participant along with the share certificates. While submitting the share certificates, you need to mention the words ‘Surrendered for Dematerialization’ on every single certificate.
- The depository participant will then process the request. On approval of the request, the physical share certificates will be destroyed and a confirmation of the dematerialization will be sent to the depository.
- On receiving the confirmation from depository to the depository participant, you will get a credit in the holding of shares in your demat account. The entire process of dematerialization takes about 15 to 30 days.
After understanding the process of dematerialization, let us learn the benefits of dematerialization.
Benefits of Dematerialization
- You can transact and manage your portfolio from anywhere across the globe.
- No stamp duty is applicable on shares held in dematerialized form as it was applicable when the shares were held in physical form.
- Holding and maintenance charges for shares held in the dematerialized form are nominal.
- There is no problem of odd lots like it was there when the shares were issued and settled in physical form. Now you can purchase or sell any quantity of shares you like.
- Since no paperwork is involved, the transactions get completed quickly in shorter span of time.
- By using a single dematerialized account you can make investments in multiple avenues like equity, government securities, exchange-traded funds, mutual funds and bond.
The above mentioned are a few of the benefits of dematerialization.
Opening a demat account is mandatory in today’s time and if you are considering to open a demat account, you may contact Kotak Securities. They will assist you at every step of your investment.