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The process through which physical securities like share certificates and related documents are converted into electronic form is known as dematerialisation. It takes around 15 to 30 days to dematerialise physical shares. Further, once converted into the electronic form they are held into demat accounts.
A registered Depository Participant (DP) is responsible for providing depository services to the investors and traders. All the electronic securities like bonds, mutual fund units, etc. are held by the DP.
How does the process of dematerialisation work?
You begin by opening a demat account and for that, you are required to shortlist a DP that can offer all the demat services. Following this, you are required to submit a dematerialisation request form which you can find with the DP.
This form should be submitted along with share certificates. You should make sure that on each certificate you should mention and sign ‘Surrendered and Dematerialised’.
Moving up next, your DP will process the request along with the certificate that you wish to dematerialise. The DP takes the request forward to the company, transfer agents and registrars through the respective depository.
Once your request receives approval, the physical form of the certificates will be destroyed to avoid duplication and fraud. The respective depository will receive a confirmation on dematerialisation.
Next, the depository is responsible for confirming the dematerialisation to the DP. As soon as this takes place, the investor’s account will reflect credit in the holding of shares electronically. This entire process that was explained above takes around 15 to 30 days for your physical securities to get dematerialised.
How to purchase dematerialised securities?
Begin by choosing a broker that will assist you in purchasing the securities. Following this, make a payment to the broker who will be responsible for arranging payments to be made to the corporation on the pay-in day.
After this, the securities will be credited to the clearing account of the broker on the pay-out day. The broker will then instruct the DP to debit the clearing account so that the securities can be credited to your (investor’s) account.
Moving ahead, the depository shall then confirm the dematerialisation of the shares to the DP. As soon as this is accomplished, there will be a credit reflected in the investor’s account for holding the shares. You shall receive the shares but in order to receive the credit, you will be required to submit ‘Receipt Instructions’ to your DP.
However, it must be noted that the need to submit such a receipt will arise only if you did not give any standing instructions while opening your demat account.
How to sell dematerialised securities?
Begin by choosing a broker and then sell your securities in a stock exchange that is linked to the National Securities Depository Limited (NSDL). The DP is responsible for debiting your account with the securities sold and crediting the same to the broker’s clearing account.
The DP shall do this after receiving instructions from you. You are supposed to send in this delivery instruction to the DP using delivery instruction slips.
As soon as the request gets approved, the security certificates in the physical form will be destroyed. Following this, a confirmation on dematerialisation is sent to the depository.
Broker shall then give instructions to the respective DP for delivering the clearing corporation ahead of the pay-in day. Next, you will receive the payment from the concerned broker for the sale made by you of your securities.
What is the difference between dematerialisation and rematerialisation?
The difference between dematerialisation and rematerialisation can be easily figured out by their name itself. In order to understand it further a table has been used to differentiate the two.
| DEMATERIALISATION | REMATERIALISATION |
| The process of converting physical shares and debenture/security certificates into electronic form is known as dematerialisation. | The process of converting electronic records of shares, certificates, etc. into the physical form i.e. paper is known as rematerialisation. |
| There is no distinct number assigned for the shares that have been dematerialised. | A distinct number is assigned to every share that has been rematerialised for the purpose of identification. |
| The transaction takes place only in electronic form. | Transactions after rematerialisation take place only in physical mode. |
| The responsibility for account maintenance lies with the depository participant. | The responsibility for account maintenance lies with the company itself. |
| All risks and threats are either eliminated or there lies very low probability. | Risks and threats like theft, loss, fraud and damage are greater in physical form. |
| The maintenance charges on annual basis lie between Rs. 500 to Rs. 1000 | No defined maintenance costs are needed for rematerialised accounts. |
| Dematerialisation is a very easy and comparatively quicker process. It is easier to maintain and is preferred by the majority of investors due to the attached security and hassle free buying and selling of shares. | Rematerialisation is a very complex process and takes a lot of time with hassles around the paperwork. It is cumbersome to keep a record of the physical buying and selling of shares. Rematerialisation is not preferred by many investors as it calls for a lot of expert assistance and creates difficulties. |
Why was dematerialisation necessary?
There are numerous reasons that support the need for dematerialisation. The major reasons have been listed below:
- Errors and mishaps came attached to handling paperwork in the physical mode and correcting them would often take a lot of effort.
- To track all the records of trade and keep a check on the shared documents became very difficult and led to human errors.
- The authorities were not in a position to keep pace with the growing volume of shares in the Indian context and a delay in the same would result in the crippling down of the database.
- Physical handling of databases also resulted in loss of data and theft of shared documents.
What are some benefits of dematerialisation?
- It enables you to manage and keep a track of your shares from any part of the world.
- The hassle around stamp duty gets eliminated with electronic securities.
- The charges that are levied for holding the securities get reduced significantly unlike heavy holding charges levied on physical holdings.
- You are free to buy single security as well as multiple securities in odd lots unlike the physical medium of buying and selling.
- The total time required to complete a transaction has also dropped significantly with the elimination of paperwork.
- All the risks pertaining to theft of securities, loss, damage, fraud, etc. have been eliminated with the advent of dematerialisation.
Dematerialisation has eased the process of buying and selling securities by eliminating all the risks and hassles attached to them. Also, it helps engage more traders and takes a lot less time than the older method of manually handling the securities. Technology has taken over a lot of things in the last two decades, herein, it has made trading and handling shares butter-smooth!