What is dematerialisation of securities?


Managing your investment in securities is easy in electronic or demat form and it has many advantages over managing it in physical form

As a share or debenture holder, it is important for you to be aware of the procedures to manage your investment in securities (the collective name for equity shares, debentures, bonds, mutual fund units etc.)

Managing your investment in securities is simple and easy in electronic form (dematerialised form) and it has many advantages over managing it in physical form (share / debenture certificates). Accordingly, this write-up details dematerialisation of securities, its advantages and how to manage your investment in demat mode.

Dematerialisation of securities

Your investments in shares and debentures can be held in electronic or dematerialised form in a depository. Depository is an entity which holds securities (shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors.

National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL) are the depositories that are licensed to operate in India and are registered with SEBI (Securities and Exchange Board of India).

Dematerialisation is comparable to keeping your money in a bank account. In demat form, your physical share certificates are replaced by electronic book entries; purchase of shares are reflected as credits in your demat account and sales are reflected as debits.

Bank-Depository: An Analogy

Bank Depository
Holds funds in an account Holds securities in demat account
Transfers funds between accounts on the instruction of the account holder Transfers securities between accounts on the instruction of the demat account holder
Facilitates transfer of money without having to handle money Facilitates transfer of ownership of securities without having to handle securities (shares &
debentures etc.)
Facilitates safekeeping of money Facilitates safekeeping of securities

Who is a depository participant?

  • A depository participant (DP) is an agent of the depository through which you maintain and operate your demat account; the DP provides the interface between you and the depository.
  • Just as banking services can be availed through a branch, depository services can be availed through a DP. Any financial service provider, including, financial institutions, banks, state financial corporations, stock-brokers, NBFC etc complying with SEBI’s norms can be register and function as a DP.

What are the advantages / benefits of demat?

It is advisable to hold your securities in demat form as it offers many advantages as under:

Primary markets

  • Nowadays, public issues are taking place in demat mode. Accordingly, to apply in public issues, you need to have demat account.
  • Allotment of shares in public issue is credited to your demat account and hence there is no scope of loss of share certificates in transit.
  •  

Secondary markets

As per the available statistics at BSE and NSE, 99.9% transactions are taking place in dematerialised mode only. Shares bought through the stock exchange is credited to your demat account.

Unlike in physical shares, there is no scope for bad delivery or fake shares. Further, unlike physical certificates, you do not have to send the shares purchased to the company to transfer it to your name. Therefore, there is no scope for delay in transfer or for loss of share certificates in transit. There is considerable reduction in paperwork and transaction cost in demat mode.

You can view all your investments in listed companies or mutual funds in single account. You receive all the corporate benefits like rights, bonus shares directly into your demat account and dividend into bank account registered in your demat account.

Trading with physical shares through stock exchange

Nowadays, 99.9% transactions take place in dematerialised mode only. However, stock exchanges provide an additional trading window to facilitate trading by small investors in physical mode (maximum of 500 shares, irrespective of their value).

This is a one time facility for small investors who hold shares in their name and the buyer of these shares has to demat such shares before selling it through the exchange. This facility is provided only for companies which are traded in compulsory demat mode.

Further, in the case of companies that have failed to establish connectivity with the two depositories, then trading in the stock exchange is allowed only in physical form.

Managing your investment in demat mode

  • It is safe and convenient to hold securities in demat form. Unlike physical certificates, there is no scope of loss, misplacement, theft or deterioration of securities in demat mode.
  • Correspondences like annual reports, notice for AGM etc. are despatched to the address of investor mentioned in their demat account. Therefore, in case of change in your address, it is sufficient that you intimate the DP alone for all your investments in securities. Whereas if you hold physical certificates, you have to intimate each company separately.
  • Refunds, dividend, interest and redemption payment of debentures are automatically credited to the bank account mentioned in your demat account, where ever such facility is available. Otherwise, the
  • payment instrument is despatched to your address mentioned in your demat account, with your bank number printed on the warrant to prevent misuse.
  • Therefore, in case of change in your bank account, it is sufficient that you intimate the DP alone for all your investments in securities. Whereas if you hold physical certificates, you have to intimate each company separately.
  • You can avail the nomination facility for your demat account with the DP. Whereas if you hold physical certificates, you have to avail nomination separately for each company.
  • In the event of demise of the account holder, the securities held in the demat account are transmitted to the nominee by the DP.
  • Whereas in the case of physical certificates, your nominee will have to correspond separately with each company for transmission of shares in his / her name.
  • Non cash benefits like issue of bonus shares, stock splits, consolidation, mergers etc. are automatically credited to your demat account. Whereas, in physical certificates there is a potential for loss in transit, delay in despatch etc.
  • Unlike in physical certificates, stamp duty is not applicable for transfer of securities in demat mode.
  • Depositories offer alerts on debits or credits in your demat account, received due to IPO or other corporate actions through SMS.
  • Therefore, monitoring your investments is easier in demat mode.
  • Pledging your securities in demat form is simpler than pledging physical certificates.
  • Unlike with physical certificates, you can trade even one single share in the stock exchange in demat mode as there is no problem of odd lots (shares in compulsory demat list).

Source: Securities and Exchange Board of India



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