The physical share certificates are converted into electronic form through a process called dematerialisation. Dematerialization’s primary goal is to streamline and reduce the cost of buying, selling, holding, and transferring shares.
Dematerialisation was required in 1996 because handling actual share certificates and other paper documents relating to shares had difficult to handle. Managing a large number of papers also becomes highly stressful and Investors had to pay fees including handling fees and stamp duty prior to dematerialisation. Since shares are no longer physically present, there is no need for stamping or physical holding of shares, which removed these charges.
In 1996, dematerialisation was becoming essential to put into practice. Scams were the main reason that circulated in the stock market at that time such as non-issuance of bank receipts (BR). The few stock market frauds that were active were holding actual shares but failing to pay the required sum at the time of delivery, etc. Along with the scams and frauds, there were also the everyday issues that every investor faced when trading on the stock market, such as having to physically appear at the BSE every day, filling out excessive paperwork, paying for a complicated process, waiting in line to get share certificates, etc. Dematerialisation was implemented in India with all of these issues in mind, which means that every investor now needs to have a DEMAT & trading account.
In India, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) have the authority to maintain all Demat Accounts.
Process of Dematerialisation
- Opening a Demat account is the first step in dematerialisation. For a demat account opening, you must choose a Depository Participant (DP) that provides Demat services.
- You need to generate a dematerialisation request after opening a DEMAT Account in order to transform your physical shares into electronic form. To do so, you are required to submit a Dematerialisation Request Form (DRF) which is available with the DP. Complete the paperwork, give it to your DP, and include the physical share certificates that you own.
- Through the depository, the DP must process this request along with the share certificates and send them immediately to the company, registrars, and transfer agents.
- The actual share certificates will be destroyed after the request is authorized, and the depository will get notification of the dematerialisation.
- The depository will subsequently notify the DP that the shares have been dematerialised. After that, an electronic credit in the holding of shares will appear in the investor’s account.
Benefits of Dematerialisation:
1. Safe & Secure
Trading on the stock market was not at all secure before 1996. When physical share certificates were given to investors, there was always a risk of theft, loss, or manipulation. But after Dematerialisation, trading on the stock market safe and secure because there is no longer a chance for share theft, loss, or manipulation.
2. Facilitation of Instant Transfer
Transferring shares from one person to another with physical share certificates would generally take many days. But share transfers are now incredibly simple and instantaneous thanks to share dematerialisation.
Since all shares and other financial securities are held in DEMAT Accounts electronically, there is no longer any need for physical share certificates, which were provided to investors before 1996.
4. Loan Facility
You can get a loan against your holdings by using the securities you have in your Demat Account, which act as collateral against the loan. No bank can deny you a loan against the securities you have in Demat Account, although the loan amount may vary depending on how many securities you own there.
The elimination of time-consuming paperwork in electronic trading reduces costs significantly.
Dealing in the stock market is now easier than it was in 1996 since there is no need to go anywhere and can complete everything with only a tap on a smartphone or a mouse click on a computer.
Dematerialisation has undoubtedly saved lots of time, money, and other difficulties associated with stock market trading.