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What is Dematerialization?

14 Mins 17 Mar 2023 0 COMMENT

What is dematerialization of shares?

What do we understand by dematerialization of shares. When we talk of dematerialization, we are referring to the act of converting physical shares into demat or electronic form. Here we under stand in detail, as to what is dematerialisation and also shall attempt to understand in detail the process of dematerialisation.

If you are holding physical shares (which cannot be traded any longer), the first step is to undertake dematerialization of shares. For that one has to submit DRF to the DP. Dematerialization of securities is a much broader concept and also includes holding ETFs, gold ETFs, mutual funds and other private bonds

How does dematerialization work?

Dematerialization refers to the process of converting the physical shares into electronic form. Today, it is not possible to trade in physical shares and the first step is to dematerialize these shares by sending it to the registrar. Interestingly, since its opening to demat in 1997, India has taken rapid strides and today there are more than 10.7 crore demat accounts in India. The first step to dematerialization is to convert physical shares to demat by first opening a demat account. For that the holder has to submit a demat request form (DRF) and also simultaneously surrender the physical certificates.

It must be remembered that today physical share transfer is not possible, except in the case of transmission of shares. Even in that case, the shares have to be first converted into demat mode before these shares can be sold in the open market. Dematerializing the physical shares helps to simplify the entire process of buying, selling, transferring and holding shares. In addition, it is safer, more effective and almost foolproof.

Process of Dematerialization vs Demat Accounts?

We often get confused between a demat account and the process of dematerialization of securities. They are interconnected but they are not one and the same. For instance, Demat account is an electronic account where you hold shares and other securities like bonds, gold bonds and ETFs in custody. In a sense, the bank account and the demat account behave in the same way. Just as you can debit and credit cash to the bank account, you can debit and credit shares to the demat account. That is what demat account is all about!

Let us turn to the process of Dematerialization. It refer to the process of converting physical shares into electronic dematerialized shares. This is a one-time process and once the shares are dematerialized and held in demat form, the stock can be freely traded through the trading account. Here it must be noted that once shares are converted into demat form, the physical shares are cancelled and they will remain permanently in demat form with the shareholder name recorded as the beneficial owner.

3 Steps to the Dematerialization Process

The process of dematerialization of physical shares into electronic form has to be split into 3 steps for the same of simplicity.

1) The first step in the dematerialization of physical shares, is about converting the physical shares into electronic form. Before doing that, you must first confirm that the physical share certificates are registered in the name of the buyer and if not, that must be done first. You can do transfer cum demat. In this stage, the physical shares with transfer forms are sent to the company to convert physical shares into electronic shares. The process flows now is to fill up a demat request form (DRF) and submit it with necessary supporting documents to the depository participant (DP). At this stage, the DP scrutinizes and if OK in all aspects, it is sent to the registrar for dematerialization. Once that process is completed, the shares in demat. The process takes around 15-20 days.

2) Once the physical shares are converted into demat form, the next step is to have the stocks ready for demat trading and demat settlement. Today 100% of the clearing and settlement on the stock exchanges happens in demat mode. IPOs are also allotted in demat mode only. NSE and BSE see all trades are executed and settled in demat form only. The entire trading, clearing and settlement ecosystem has become demat driven. Effectively, you buy in demat, sell in demat and the trades get aggregated and settled by the exchange in demat form. Let us understand the process flow for a moment. When you buy shares in the trading account, they get credited in demat mode into your demat account on T+1 date. When you sell shares in demat mode, it gets debited to your demat account on the same day and the credit comes to your bank account on T+1.

3) A very important and critical aspect of dematerialization is handling the corporate actions and data updates to demat account. This is something that makes the role of demat account very unique. Some of the major non-cash corporate actions like Bonuses and stock splits automatically get credited to demat account based on the number of shares held on the record date. Cash based corporate actions like dividends and interest are credited directly to the mandated bank account. There is one more important application of the demat account. it is a lot easier to update personal details via intimation to all companies where you hold shares. You can make centralized changes to the profile details like address, mobile phone, bank mandate and signature. You just need to modify details once and it gets reflected across all current and future holdings.

The process of demat is quite simple, provided you have the documentation completed and fully in place. The rest of the process is just a set of simple steps.

Benefits of Dematerialization

DEMAT accounts, which enable electronic transactions when shares of stock are bought and sold, enable dematerialization. The certificates for the user's stocks and other securities are kept in a DEMAT account to enable smooth trades.

Dematerialization was introduced in order to get rid of such a paper-based procedure. Additionally, using computerized bookkeeping made it possible for accounts to be updated quickly and automatically.

Dematerialization applies to all investment types, including equities as well as bonds, mutual funds, and government securities. Dematerialization and DEMAT accounts are used to maintain assets, similar to using bank and bank accounts as opposed to individually storing and exchanging paper money for each transaction.

When a debit card is used to make a purchase, a digital record of the transaction is made, and the money is taken out of the cardholder's account. Without using paper money, money is transacted between buyers and sellers. Dematerialization results in the completion of stock transactions without the need for physical certificates.

If a bond or other security owner wants to dematerialize the document, they often surrender the certificate through a middleman. They ought to be informed electronically that the record has been dematerialized and that they are now free to make transactions.

Some assets, like publicly traded shares, need a DEMAT account to be exchanged and used in other ways. This is due to the fact that instead of paper-based records of transactions, markets today operate through electronic means.

Increased transaction security and certainty as well as the removal of processes that can slow down the clearing of transactions are other advantages of dematerialization. Errors that could otherwise be made when managing tangible records can be avoided. By removing paperwork that could have included processing charges, some savings might also be possible.

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