What is Dematerialization and its process?

The year 1996 revolutionised the Indian stock market when the Securities and the Exchange Board of India introduced an account called Demat Account. The idea behind the introduction of the Demat account was to do away with the complex process of physical trading where investors had to be present at the stock exchanges to buy and sell securities. With a Demat account, SEBI introduced the current form of online trading, where investors can buy and sell securities online and hold their investments virtually in the Demat account. But, what about the shares investors bought before 1996 which are held in the form of physical share certificates?

That is where the process of dematerialization introduced by SEBI helps investors to convert their physical shares into electronic form through a Demat account. The process of dematerialization is vital to ensure you can trade in the shares you hold as physical certificates by converting them into virtual shares. This blog highlights what is dematerialization and the entire dematerialization process.

What is a Demat Account?

It is important to understand the concept of the Demat account before learning the process of dematerialization as you can only dematerialize your physical shares by opening a Demat account. ‘Demat’ refers to dematerialization, a process by which physical securities are converted into electronic format. Therefore, a trader can use a Demat account to hold, transfer, and transact securities without the hassles of dealing with physical securities. As a result, trading has become a safer, quicker, and much more efficient method of storing securities and executing trades.

A Demat account helps manage your equity, bonds, and mutual fund investments. It is similar to a bank account. The only difference is that instead of holding money in a bank account, a Demat holds securities – shares, bonds, or debentures. You don’t need to carry physical shares with you when you have a Demat account.

Dematerialization Process

Before the introduction of digital trading, people held physical share certificates. However, SEBI has made it mandatory that physical share certificates should be converted to virtual shares through the dematerialization process. Dematerialization is the process of converting your physical shares into electronic form. This consists of four primary parties: depository, issuer, beneficial owner and depository participant.

There are two depositories in India— National Securities Depository Limited and Central Securities Depository Limited. The issuer is the company that floats the shares, whereas the depository participant is a SEBI-registered entity that acts as an intermediary between the investor and the depository. Investors avail of depository services only through depository agents. Dematerialization is comparable to keeping your money in a bank account. In Demat form, your physical share certificates are replaced by electronic book entries; purchases of shares are reflected as credits in your Demat account, and sales are reflected as debits. Before you learn what is dematerialization process, here are some rules of the dematerialization process:

• In the process of dematerialization, a company revises its Article of Association through a special resolution in the general meeting, allowing it to issue shares in electronic form.
• Private companies, then, have to register with both NSDL and CDSL. The depositories have their own set of criteria for registration, and the issuer has to comply with them.
• Post-registration, the depositories provide a unique ISIN for each of the shares. An ISIN is a 12-digit code used to identify different securities such as shares, bonds, etc.
• The companies get access to depository services only through an intermediary. If the issuer wants to transfer the dematerialized shares, it has to arrange for Demat connectivity from depositories.

Features of Dematerialization

The dematerialization process involves numerous investor-oriented features which allow investors to trade effectively and make informed financial decisions. The dematerialization process converts the physical shares into the electronic form to ensure an investor can trade in the shares using an online Demat account. Through dematerialization, investors can safely transact as the depository institutions cross-check the transactions. Furthermore, as the dematerialization process includes the opening of the Demat account, it allows investors the ease of trading and other unique features such as stock analysis, data charts, financial reports, etc.

Importance and Benefits of Dematerialization

Numerous investors still hold physical share certificates they bought before 1996. However, SEBI has made it mandatory to follow the process of dematerialization to convert the physical shares into electronic form. These include:

• Safety: Dematerialization eliminates the chances of shares being lost, forged or misplaced, increasing the safety of the holding. They are stored in secure depositories, which has made theft a thing of the past.
• Convenience: Thanks to the electronic nature of dematerialized shares, the problems related to their storage and maintenance have been eliminated. You won’t have to deal with lost or damaged certificates anymore.
• Accessibility: All the records of shares are stored electronically and online. This allows you to access dematerialized shares from almost anywhere and anytime using the internet.
• Cost-efficiency: Electronic trading doesn’t require cumbersome paperwork, which reduces a lot of expenses.
• Flexibility: Dematerialization led to increased flexibility and therefore improved access for small investors. Now, one can buy/sell even a single share without any restriction on the numbers.

What is Re-materialization?

Unlike the process of dematerialization, re-materialization converts electronic shares to physical certificates. You can opt to rematerialize your shares anytime you want, which is done within 30 days. However, rematerialized shares are illiquid as they cannot be traded. However, re-materialized shares are illiquid as they cannot be traded until they are converted to electronic shares following the dematerialization process.

Difference Between Dematerialization and Re-materialization

Dematerialized shares have unique ISINs, while re-materialized shares have distinct numbers.

• Dematerialized transactions take place electronically, but re-materialized shares are traded physically. As per the latest SEBI norms, re-materialized shares cannot be traded.
• Rematerialized shares are maintained by depositories, while respective companies maintain re-materialized shares.
• Since electronic shares are stored in secure depositories, investors need to pay the maintenance charges with annual fees ranging from Rs. 500-1000. Individual investors store re-materialized shares that do not levy any maintenance charges.
• The most significant difference between dematerialization and re-materialization is the safety of the securities. The threat of theft is lower in dematerialized shares, while it is easier to forge/steal physical certificates.

How does the Dematerialization and Re-materialization of Securities happen?

The process of dematerialization and re-materialization is as follows:

Dematerialization:

• To initiate the process of dematerialization, you need to open a demat account through a depository participant.
• Fill a dematerialization request form and submit it to the depository participant with the physical certificates. Mention ‘Surrendered for Dematerialization’ on all the security certificates.
• After submission of the form and certificates, the DP verifies the details and forwards the form to the company and the registrars through the depository.
• Post-approval, the physical certificates are destroyed and the exact amount of electronic shares are credited to the Demat account.
• The shares are credited in the Demat account of the investor after receiving confirmation from the depository.
• The entire process takes 15-30 days.

However, if you have dematerialized shares and want to convert them back to physical shares, you have to go through re-materialization.

Rematerialization:

• Fill a Remat request form and submit it to the depository participant.
• On receiving the form, the DP verifies the details and if everything is in order, they issue an acknowledgement slip with stamp and sign.
• Post-verification of details, the DP intimates the depository about the re-materialization request. The DP enters the request in software and a Re-materialization request Number is generated.
• The depository forwards the request with the documents to the registrar of the company.
• The registrar, then, verifies all the details. In case of any discrepancies, the registrar will demand its rectification and forward the request to the DP.
• If all the details are found correct, the registrar informs the depository and proceeds to print the certificates.
• The registrar sends the physical certificates to the client. Post-conversion, the shares are allotted distinct numbers by the registrar.
• The depository on receiving the confirmation, informs the DP who then notifies the investor and updates the account. The entire process takes 30 days.

To initiate the process of dematerialization, you need to open a Demat account through a depository participant.

• Fill out a dematerialization request form and submit it to the depository participant with the physical certificates. Mention ‘Surrendered for Dematerialization’ on all the security certificates.
• After submission of the form and certificates, the DP verifies the details and forwards the form to the company and the registrars through the depository.
• Post-approval, the physical certificates are destroyed, and the exact amount of electronic shares are credited to the Demat account.
• The shares are credited to the investor’s Demat account after receiving confirmation from the depository.
• The entire process takes 15-30 days.

Re-materialization Process:

• Fill out a Remat request form and submit it to the depository participant.
• On receiving the form, the DP verifies the details, and if everything is in order, they issue an acknowledgement slip with a stamp and sign.
• Post-verification of details, the DP intimates the depository about the re-materialization request. The DP enters the request in software, and a Re-materialization request Number is generated.
• The depository forwards the request with the documents to the registrar of the company.
• The registrar then verifies all the details. In case of any discrepancies, the registrar will demand its rectification and forward the request to the DP.
• If all the details are found correct, the registrar informs the depository and proceeds to print the certificates.
• The registrar sends the physical certificates to the client. Post-conversion, the shares are allotted distinct numbers by the registrar.
• On receiving the confirmation, the depository informs the DP, who then notifies the investor and updates the account. The entire process takes 30 days.

Process of Dematerialization

The process of dematerialization Includes two steps. The first is opening a Demat account, and the next is to raise a request for the dematerialization of shares. Here is how you can complete the two steps:

1. Open a Demat Account

• Step 1: Visit your preferred DP’s website and open a Demat and trading account quickly and effortlessly.
• Step 2: Click on the ‘Open a Demat and trading account’ link on their website.
• Step 3: Fill in the application form.
• Step 4: Upload scanned copies of all the necessary documents for Know Your Customer (KYC).
• Step 5: Sign the agreement with the DP along with the charges. This agreement contains the duties and responsibilities of both the depository participant and the account holder. Therefore, it is important to read them thoroughly before putting your signature.
• Step 6: Once all the relevant documents are submitted, your application will be processed by the DP.
• Step 7: On successful approval of your Demat and trading account application, you will receive a unique user ID and password to access your trading account and a Demat account number.

2. Raise a Request for Dematerialization of Shares

Once you open a Demat account, you will have to put in a request to convert your physical share certificates into the dematerialized format. You can follow the steps mentioned below to raise a dematerialization request with your DP:

• Step 1: Contact your DP for a Dematerialization Request Form (DRF).
• Step 2: Fill up the DRF with all the required details and put your signature. Submit the duly filled form and your physical share certificates to your DP. It is important to mention ‘Surrendered for Dematerialization’ on each physical share certificate.
• Step 3: Your DP will process your request after receiving the DRF and the surrendered physical share certificates.
• Step 4: Further on, your DP would send the dematerialization request to the concerned company’s appointed Registrar and Share Transfer Agent (RTA).
• Step 5: Once the dematerialization request is approved, your physical share certificates get destroyed, and your Demat account gets credited with the relevant number of shares.

Final Word

Dematerialization of shares is an important step in securing your investments and ensuring that you can trade them easily and quickly using an online trading app. Now that you know what dematerialization is, you can open a Demat account and raise a dematerialization request to convert your physical shares into electronic form.