Gone are the days when shares were stored in the form of physical certificates. Digitisation has completely changed how the world works, and so has the stock market. In the modern stock market, physical share certificates have been replaced by electronic ones through dematerialisation.
In this blog, let’s understand what dematerialisation is and how it works in simple language.
What is Dematerialisation of Securities?
Dematerialisation is the process of converting physical shares into electronic form. The converted shares are then stored in a demat account.
A depository is in charge of storing the securities of a shareholder in electronic form. A registered Depository Participant (DP) may hold these securities, which could be in the form of bonds, government securities, or mutual fund units. According to the Depositories Act of 1996, a DP is a depository agent who offers depository services to traders and investors.
Currently, in India, there are two depositories registered with SEBI and are licensed to operate as NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services (India) Ltd.).
A Brief History of Dematerialisation
While now you know the meaning of dematerialisation, it’s also important to understand where this concept started.
After the liberalisation of the Indian economy in 1991, the country began relying more on technology. In 1992, the SEBI (Securities and Exchange Board of India) was formed. The SEBI (Securities and Exchange Board of India) then introduced the Depositories Act in 1996. This act introduced the idea of the dematerialisation of shares to traders. This allowed traders to control their securities from anywhere, anytime.
Around the same time, the National Stock Exchange (NSE) was established. This new electronic exchange introduced an anonymous trading system, which increased the use of dematerialisation of shares.
In 2000, the Companies (Amendment) Act made it mandatory for companies to release IPOs in dematerialised form if the total amount was ten crore or more. As a result, more people opened Demat accounts and entered the online system, and this further drove the popularity of dematerialisation.
Process of Dematerialisation
The process of dematerialisation of shares involves four main parties:
- The Share Issuing Company
- Depository
- Owner or Beneficiary
- Depository Participant (DP) or Broking Firm
Let’s understand the role of each party:
Share Issuing Company
If a company wants to issue dematerialised shares, it first needs to revise its Articles of Association. This document contains the rules that govern the company’s operations. After updating these rules, the company must register itself with a depository.
Depository
As mentioned above, two depositories in India are National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). These depositories provide the company with a unique 12-digit International Securities Identification Number (ISIN) code, which is used to identify each share and security. Most communication between the company and the depository is handled by Registrar and Transfer Agents (RTAs).
Owner or Beneficiary
Every investor who wants to hold shares in the dematerialised form must open free demat Account. This applies to both new and existing investors. The investor’s transactions, like buying and selling ETFs, stocks, bonds, and mutual funds, are recorded in this account. Investors cannot open a demat account directly. Instead, they must use a Depository Participant (DP) or a brokerage firm to open the account on their behalf.
Depository Participants (DP)
A DP is an agent registered with the depositories (NSDL or CDSL). The DP helps investors open a demat Account. They process the investor’s application and documents and then register the account for them. Examples of DPs are Motilal Oswal, Zerodha, HDFC Sky, etc.
Delivery Trading
What is Delivery trading? It involves purchasing stocks with the intention of holding them for an extended period, making it a long-term investment strategy. To facilitate this, investors need a Demat account, which allows them to securely hold their shares in an electronic format, ensuring easy access for future trading or selling when market conditions are favorable.
Steps of Dematerialisation
Step 1: The first step is for investors to open a demat Account. This can be done through a Depository Participant (DP).
Step 2: Once the Demat Account is open, the investor must submit their physical share certificates. Along with this, they will fill out a Dematerialisation Request Form (DRF).
Step 3: The DP then processes the request by verifying the details in the DRF and the physical certificates.
Step 4: After the verification process, the physical certificates are destroyed. The details of the shares are sent to the depository in electronic form.
Step 5: The depository then confirms that the dematerialisation process is complete. It informs the DP that the shares have been converted to electronic form.
Step 6: Finally, the converted shares are credited to the investor’s demat Account. The shares will now be held electronically and can be viewed in the account.
Benefits of Dematerialisation
Paperless Transactions
Dematerialisation helps make transactions paperless. Since shares and other securities are converted into electronic form, all transactions can be done digitally. This also helps cut down administrative costs for listed companies.
Monitoring Investments
Dematerialisation allows you to keep all your investments in one place within your demat account. This helps you monitor your investments online from anywhere. You can track your portfolio regularly and make changes as needed.
Convenience
Dematerialisation has made trading in the Indian stock market much easier. With a demat account, you can carry out all your transactions electronically. You can access your demat account online, which allows you to track all your investments conveniently.
Safety
Holding your securities in a demat account is a secure way to handle stock market transactions. It removes the risks of theft, damage, or loss from holding physical share certificates.
Avail Loan Facility
You can obtain loans with your dematerialised holdings. The securities and shares in your demat account can be used as collateral for getting loans.
Ease in Receiving Corporate Benefits
When your securities are dematerialised, you can receive corporate benefits like dividends, interest, and refunds directly into your demat account. Other benefits, such as stock splits, bonus shares, and rights shares, are also updated in your account.
Problems with Dematerialisation
High-Frequency Share Trading
The ease of communication and the ability to place orders quickly have made the markets more liquid. However, this also means they can be more volatile. Investors now often focus more on short-term gains rather than long-term investments. This can lead to more frequent buying and selling, which can sometimes result in less stable market conditions.
Technological Challenges
Not everyone is comfortable with technology. People who are not fast at using computers or those with slower systems may face difficulties. They might be at a disadvantage compared to those with better technology and faster computer skills. This can affect their ability to trade efficiently and stay competitive in the market.
Conclusion
Overall, dematerialisation is a revolutionary step in the Indian stock market. It has removed the hassle of dealing with piles of paper and endless clerical work. Now, investors can concentrate on their strategies and aim for better profits.
With dematerialisation, trading financial securities have become much easier and safer. It has also made the process more efficient. Investors can keep an eye on their investments anytime and from anywhere, making it much more convenient
However, there are some drawbacks to consider. The increased market volatility and technological challenges can affect trading efficiency. It’s important to be aware of these issues while enjoying the benefits dematerialisation offers.
For a seamless trading experience, download the HDFC Sky App, one of the best trading app in India. This app offers access to over 3,500 listed companies. Open your demat account online today and enjoy a hassle-free trading experience with simplified pricing and zero hidden charges.