Dematerialization of Shares

Historically, share trading was done through the paper format. Both the investors and the issuing company had to face huge risks and demerits like huge floatation costs, complex transfer process, excessive wastage of time and money and many more. Thus, to mollify this negativeness, Dematerialisation concept was introduced in Indian Financial Market.

Overview

It is the process through which an investor’s physical share certificate gets converted to electronic format which is maintained in an account with the Depository Participant. An investor’s demat account is opened with Depository Participant and after surrendering his physical shares, they get turned into electronic form in his demat account.

Depository Vs Depository Participant (DP)

One often gets confused between the two terms. The basic difference between them is that a Depository is the body which is responsible for storing and maintaining investor’s securities in demat or electronic format while Depository Participant (DP) is the market intermediary through which investors can avail the depository services. There are only two Depositories in India, NSDL and CDSL, while DPs include banks, brokers, custodians and financial institutions.

How Dematerialization has an edge over conventional Paper Method trading

Dealing in demat format is beneficial for investors, brokers and companies alike. It reduces the risk of holding shares in physical format from investor’s perspective. It’s beneficial for brokers as it reduces the risk of delayed settlement and enhances profit because of increased participation. From share issuing company’s perspective, issuance in demat format reduces the cost of new issue as papers are not involved. Other advantages to mention-
•    All the benefits of corporate action like bonus, stock split, rights etc are managed through the depository leading to elimination of transit losses
•    Interest on loan against demat shares are less as compared to physical shares
•    Investors save stamp duty while transferring shares and need to pay less brokerage in demat shares.

Demat Conversion

Most of the trading in shares are done in demat format now-a-days. So the investors, who still hold shares in paper format, need to dematerialize them first. In order to dematerialize physical/paper shares, investors need to fill Demat Request Form (DRF), and submit the same along with physical shares. DRF is available with the DP and you simply need to raise a request for demat conversion with the DP. Finally DP updates the account of the investor and shares are allocated in investor demat holding.

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