What Is Dematerialization of Shares?

Introduction

The Indian share market has emerged as one of the most popular avenues for investors willing to employ their funds in short-term or long-term solutions. Previously, firms issued share certificates in paper format. While paper certificates were easy to give and hold, they had a risk element for the shareholder. 

Certificate forgeries, loss of documents, and lags in certificate transfer were common problems that shareholders faced with physical share certificates. Considering these risks, financial regulators introduced the concept of Dematerialization. 

Dematerialization converts your paper-based share certificates into an electronic format. Here’s everything you need to know about what is dematerialisation of shares, its benefits, and how it works in India. 
 

What is Dematerialization of Securities?

Dematerialization of shares is the conversion of paper-based share certificates into electronic certificates. After dematerialization, e-certificates replace the original share certificates for trading purposes within the stock market. You must open a Demat account with a registered depository to hold these electronic shares and exchange them safely when trading in future. 

The Securities and Exchange Board of India (SEBI) has made it mandatory for companies to issue shares only in the dematerialized format. Currently, a lack of dematerialization of shares will refrain you from selling or transferring your shares to another shareholder’s account. With electronic bookkeeping, DEMAT accounts ensure high-end security, ease of operation, and convenient transferability for shareholders and firms. 

In India, a regulated depository holds shareholders’ securities digitally. Presently, two depositories are duly registered with the Securities and Exchange Board of India (SEBI) to perform the duties expected of a depository. These two licensed depositories are the National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Ltd. (CDSL). 
 

How does dematerialization work?

Dematerialization of shares adopts a systematic process to convert paper-based share securities into electronic certificates. The process eliminates the dependence on brokers and other financial intermediaries for security trading, eventually giving complete control to the shareholder. 

Also, dematerialization removes the pressure of additional expenses on you. It streamlines the trading process by offering a safe platform for global stock investors to invest, interact, and earn. In simple terms, dematerialization works to simplify trading by using technology. 
 

The benefits of dematerialization

●    Ease in management

You can manage and trade your shares with electronic certificates at your convenience. Dematerialization saves time, money, and effort by eliminating the need for physical presence. You only need a smartphone, laptop, or computer to move your shares in and out of your Demat account without any potential risk or hassle. Moreover, dematerialization makes you the legal owner of the shares you hold. 

●    Economical, time-saving, and environment-friendly

Dematerialization helps you avoid extra expenses which can otherwise burden your pocket. It saves stamp duty charges as they do not apply to e-securities. Also, the holding charges for shares in Demat accounts are nominal. With dematerialization, you can buy securities in any number based on your income level. Moreover, dematerialization eliminates paperwork which eventually avoids the wastage of paper. 

●    Safe trading

Dematerialization gives an electronic form to all your physical securities. This conversion eliminates the risk element from share trading to a large extent. You can safely purchase, sell, or trade your securities at your will without worrying about theft, forgery, or identity impersonation.

●    Quick loans 

You can easily use your assets, like bonds and debentures, as collateral to secure a low-interest loan. Dematerialization increases the liquidity of your securities by easing their trading across multiple platforms with ease. 

●    Other benefits

●    Relief from dealing with brokers who can burden you with their exorbitant fees
●    No delay in share transfers or share trading
●    Increased trading opportunities that fit your budget and preference
●    Owners can freeze or unfreeze their Demat accounts based on their needs
 

What is the process of dematerialisation of shares?

The process of dematerialization comprises a few simple steps.

1.    As mentioned above, converting physical share certificates into electronically operable certificates starts with opening a Demat account. You must choose a trusted Depository Participant (DP) that provides dematerialization services.
2.    The DP requests you fill out a Dematerialization Request Form (DRF) before proceeding with your application. You must submit the DRF along with physical share certificates. Also, you must mention the words ‘Surrendered for dematerialization’ on each share certificate you submit with the DP. 
3.    The DP then forwards your request and the share certificates to the company. Next, they move to the registrars and transfer agents via the depository for processing.
4.    The physical share certificates become inoperable after the successful approval of the dematerialization request. The confirmation of dematerialization is sent to the depository.
5.    At last, the depository confirms the share certificate conversion into electronic certificates to the DP. You will then see a credit in the shareholding in your Demat account.

Notedly, the entire process of dematerialization takes around 15 to 30 days from the submission of the request with the DP. 
 

Problems with dematerialization

●    Ease in share trading by dematerialization has increased liquidity but has rendered markets with high volatility.
●    Managing electronically-controlled Demat accounts can be difficult for people with little to no knowledge of smart gadgets.
 
 

Conclusion

Share markets are one of the safest zones for investing in short-term or long-term securities. They offer high-end security to investors alongside good returns. Dematerialization of securities adds an extra layer of safety in share trading. With the e-conversion of share certificates, you not only legalize your company ownership but also streamline the purchase and sale of securities. Moreover, dematerialization is a simple process and requires minimum paperwork. 

Avoid carrying physical share certificates and replace them with e-certificates for enhanced trading experience and usage.