Dematerialization

A process of converting the physical certificate of shares and other securities into electronic form.

Dematerialization (DEMAT) converts the physical certificate of shares and other securities into electronic form.

Actual stock/ shares certificates have been removed from circulation in the markets, and the exchange has adopted a new way of recording them in a digital bookkeeping form. 

It was introduced with technological advancement and increased complexities involved in keeping physical records of shares. 

Some benefits are convenience, cost-efficiency, ease of investing, safety, flexibility, buy-sell-hold-transfer securities easily, foolproof, ease of tracking old records, and no fear of being lost.

Despite having these benefits, it also includes the process of recording transactions accurately.

Earlier, paper certificates were very common and popular. These certificates include the number of shares, serial numbers, the company's common seal, and the signature of promoters, directors, and senior managers.

All the companies issue shares electronically to their shareholders, and the securities are kept in electronic form with depositories of the respective countries.

Nowadays, almost all companies transfer their shares electronically to Demat A/c of their shareholders directly. However, if someone wishes to convert their old physical shares, they can do so by following the dematerializing process.

Earlier, shares were traded and kept in physical form. However, it sometimes becomes difficult for investors to buy and sell shares.

Many disadvantages associated with physical shares like theft, fraud, and depositories also found it difficult to keep a check on all the activities.  

Hence, with the advancement of technology and the growing internet connectivity, dematerialization has become a major initiative since 1960.

Dematerializing shares

The process of dematerializing shares is as follows: 

Step 1: Open a Demat A/c with your respective broker.

Step 2: Fill out the Demat Request Form ( DRF ) and deposit it with the physical certificate of shares to your broker for converting them into electronic form.

Step 3: A separate form for every share with a different ISIN ( International Securities Identification Number) will be required.

Step 4: The brokerage firm will further request the issuing company (the company that had issued the share certificate earlier).

Step 5: Once all this process is done and the issuing company approves the request, the physical certificate of shares will be destroyed, and a confirmation message will be sent to the depository of that region.

Step 6: After the depository confirms the dematerialization process, all the shares will be dematerialized, i.e., converted into electronic form.

Step 7: It usually takes around 15 days to a month to complete this process.

Depository

These government organizations safely keep securities such as stocks, bonds, and currency of the general public.

It also helps to make the trading process fast, eliminating the risk of default, delay, and fake securities and lowering the transaction cost and convenience.

Banks and other public financial institutions are examples of financial depositories.

Benefits of dematerialization

Some of the benefits are:

1. Security and safety - Converting physical shares into electronic form can reduce the chances of certificates getting lost or misplaced. All the information related to securities is kept electronically.

The risk of theft and fraud has been reduced considerably. It is no longer required to keep share certificates in lockers or under safe custody.

2. Speed - As securities transactions are not done via paper, they are easily transacted online. Thus it leads to an increase in trading efficiency. 

Traders are not required to wait for a long transaction process; they can buy, sell and hold the shares in just a few seconds.

3. Relatively cheaper- Administrative expenses like stamp duty, postage fees, and other legal charges are no longer required to pay. 

You need to pay a certain amount of brokerage fees to your respective brokers, which will help you smoothly conduct the entire process. However, brokerage charges are very low/minimal.

4. Convenience - Earlier, it was a cumbersome process. It took several days to a few months to manage all these transfers of shares from one individual to another.

It was a lengthy process, as the old investor needed to send the certificate to issuing companies to change the ownership of shares and then give the updated one back to a new investor.

Introducing this has saved a lot of energy, time, and money. You can transfer, buy, and sell your shares with single click relevance of how far the opposing party is. 

5. Secured benefits - All corporate benefits like bonuses, dividends, and stock splits are directly credited into the bank accounts. 

6. Trade Anywhere - A user with a good internet connection can trade anywhere in the world. 

7. Recording data - All the security information is recorded electronically. Demat A/c automatically updates all the transaction-related data with brokers and depositories.

This helps to save a lot of time and effort.

8. Flexibility -  Earlier, shares were traded in unaffordable lots to many small and retail investors. With dematerialization, even a single unit of share can be transacted.

This opened many investment opportunities to small and retail investors.

FAQs

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Researched and Authored by Tanishq | LinkedIn