Dematerialisation & Rematerialisation: Meaning and Process

What is Dematerialisation and Rematerialisation?

There was a time when the Indian stock market used the open outcry system and tangible certificates were the standard means of trading. Traditionally, this meant that traders and investors had to complete a lot of paperwork. It also contributed to the dangers that come with handling actual copies.

To improve efficiency and transparency in the trading process, the Securities and Exchange Board of India (SEBI) eventually presented a new alternative. The steps that followed required a switch from employing physical certificates to digitally storing securities. Yet, traders still have the ability to convert digitally held assets into physical forms, and they do so in order to transform their digital securities into physical forms.

When investing in the Indian financial market, you need to know words like 'dematerialisation' and 'rematerialisation'. They are critical processes that enable you to manage your investments without effort, making your shares and securities readily available. However, it's easy to confuse the meaning and functioning of these two terms. Our detailed guide will help you understand both processes better and talk about buying and selling dematerialised securities.

What is Dematerialisation?

Dematerialisation is transforming a physical share or security into an electronic form. Before the Depositories Act of 1996, investors were expected to maintain physical copies of their investments, leaving the documents susceptible to wear and tear over time. However, you can now hold all your shares and securities in an electronic format, making them easier to maintain and transact. The Act introduced new regulations that required all unlisted public firms to exclusively issue dematerialized shares. Investors can perform transactions quickly and safely with the help of the process of dematerialization of shares.

The process of Dematerialisation includes:

Dematerialization of shares primarily includes 4 different parties. These are:

• The share-issuing firm
• The Depository
• The Owner or the beneficiary
• The Depository Participant (DP)

The share-issuing firm: Every firm planning to issue dematerialized shares must amend its Articles of Association, which set forth the rules for how the company will be run, in order to trade in dematerialized shares. Post the revision of regulations, it is mandatory for the companies to register with a depository.

The Depository: National Securities Depository Ltd (NSDL) and Central Depository Securities Limited (CDSL) are the two depositories operating in India. For the purpose of uniquely identifying each share and security, the depositories give businesses a 12-digit International Securities Identification Number. Registrars and Transfer Agents typically act as an intermediary between the company and the repository.

The Owner or the Beneficiary: Both new and experienced share investors are required to open a "Demat Account" under the current rules and regulations. The registered account keeps track of the investor's transactions, including purchases and sales of exchange-traded funds (ETFs), stocks, bonds, and mutual funds. Investors are unable to open an account on their own. On behalf of their client, depository participants or brokerage firms open a demat account.

The Depository Participant (DP): DP is the Depositories' registered agent. After processing their registration form and supporting documentation, they open demat accounts for their clients.

Steps of Dematerialisation:

1. Investors use a DP to open a demat account.
2. The investor returns the physical certificates using a "Dematerialisation Request Form"
3. The request form is now being processed by DP
4. All physical certificates that were provided are destroyed when request processing is complete, and shares are then delivered to the depository
5. The depository affirms the dematerialization of the shares to the depository participant
6. Converted shares are then credited to the registered demat account

What is Rematerialisation?

As the term suggests, rematerialisation is the reverse of the dematerialisation process. Investors who have converted their debenture certificates and securities into an electronic format can choose to return them to their physical forms again. Some people decide to rematerialise their shares to evade the maintenance cost of a Demat account. However, it's worth noting that once you rematerialise the securities, all transactions will take place only in a physical format. Investors cannot trade assets on the relevant market while they are being rematerialized.

Additional Read: How to Convert Physical Shares into Demat?

Process of Rematerialisation:

Investors must complete a Remat Request Form (RRF) with their respective DP, just as the share dematerialisation process. Investors cannot trade their shares while the process of rematerialisation is taking place. Rematerialisation takes place in the steps described below:

1. Investor gets in touch with their respective DP.
2. Investors receive a Remat Request Form (RRF) from depository participants.
3. Following receipt of the completed RRF, the depository participant submits the request to the share issuer and depository, blocking the investor's account temporarily.
4. The share issuer prints actual certificates after successfully processing the request, and after verifying with the depository, sends the certificates.
5. The account gets debited for the blocked balance.

Is there a difference between a Demat account and dematerialisation?

Yes, the difference is that dematerialisation is the process through which your investments are converted to an electronic format. In contrast, Demat is a type of account you need to open to make that happen. These days, it has become increasingly easy to have a Demat account and start investing in the financial market.

What is Demat vs Remat?

The below table highlights the key differences between dematerialisation and rematerialisation.

Things to note for Dematerialisation and Rematerialisation:

• All transactions must be carried out through a registered dematerialisation account, as per the new laws and guidelines.
• Transactions made with a registered dematerialisation account move more quickly.
• When shares are rematerialised, the account's control is transferred to the company that issued the shares.
• Shares that have been rematerialised don't cost anything to maintain. However, compared to dematerialised shares, security risks are greater.
• Rematerialisation of shares transfers control of the account to the company that issued the shares.

Generally, the meanings and purposes of the processes of dematerialisation and rematerialisation have different functions and operations. Rematerialisation transforms securities back into physical certificates after the dematerialisation process has changed them from physical to digital versions. The choice between the two depends on your needs as a trader and the two processes and features are very different.

Know how to Buy/Sell Dematerialised Securities

• Open a Demat account with your chosen DP.
• Search for the stock on the platform your broker has provided.
• Place an order to either buy or sell.
• If you're buying, the broker will receive the purchased securities in their account on the same day. They will then request the DP credit the investor's account with the shares.
• Your account will be debited, and the broker's account credited if you're selling.

Conclusion

Dematerialisation has made it much safer to make transactions, allowing more and more people to start investing. Be sure to find a reputed broker who helps you understand the nitty-gritties of the market while trading.

FAQs:

   1. What does it mean by rematerialisation of shares?

Rematerialisation is the process of changing dematerialised securities and share certificates from an electronic to physical format.

   2. What is the dematerialisation process?

• Open a Demat account.
• Submit the Dematerialisation Request Form (DRF) along with physical certificates to the DP.
• Your request will be reviewed and transferred to the share issuer. If everything is in order, your physical shares will be converted to an electronic form within 2 to 3 weeks and sent to your Demat account within 2 to 3 weeks.

   3. What are the advantages of dematerialisation?

• Lower risk of fraud, forgery, and damage to your shares and securities
• Quick and instant transfer of securities from one account to another
• Makes trading more convenient, allowing new investors and traders to join in
• Lower cost of transactions as no stamp duty is required

Disclaimer : ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  Investments in securities market are subject to market risks, read all the related documents carefully before investing. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents are solely for informational and educational purpose.