Introduction to Dematerialization
Dematerialization is a process by which a person can convert their physical shares and securities into digital or electronic format. With the dematerialization of the physical shares and securities, it becomes easier for an individual to buy, sell, transfer and hold shares. It secures them from any theft and makes it cost-effective at the same time.
Process of Dematerialization
Step#1: The process starts by opening a Demat account (trading account), all you need to do is shortlist a depository participant that offers Demat services. You can also open a share market online.
Step#2: To covert the physical shares into electronic or Demat form, you need to generate a Dematerialization Request. You have to submit a DRF i.e., Dematerialization Request Form available with the DP (Depository Participant). It has to be filled in and deposited along with the share certificates that you are holding. Each certificate must mention “Surrendered for Dematerialization”.
Step#3: The DP will process this request along with the share certificates submitted by you, and simultaneously to the registrar and transfer agents through the depository.
Step#4: Once the application is approved, all the share certifications in the physical form submitted by you will be destroyed and confirmation of dematerialization of shares will be sent to the depository.
Step#5: The depository will confirm the dematerialization of share to the DP, and once it is over, your shares will be credited in your Demat Account which can be seen electronically.
Time is taken in the dematerialization Process:
The total time taken in the dematerialization of physical shares into electronic format can vary from 15 to 30 days from the submission of the request.
Also, it is only possible to dematerialize your shares when you open the trading account. Therefore, the first step in the process is the most important.
How is dematerialization better than the physical share model?
Demat was introduced by SEBI in the year 1997, before that shares where held in the form of share certificates. The old method was time-consuming and laded many loopholes. It did not ensure the safety of share certificates as it could be lost or mutilated.
It requires an individual to buy the shares from a broker with an attached transfer form. the buyer needed to send the certificate along with the transfer form to the company’s registrar to get a new certificate in print format with their names. The entire process took 30 days and involved many risks, as it could be lost in transit, misplaced or mutilated.
There were even reported cases of form rejection due to signatures not matching the transfer form to the signature of the company’s records. With the introduction of dematerialization, it became the best way to overcome those problems.
How are Demat trading account and banking linked in a seamless loop?
Most of the individuals misunderstand trading to be a combination of purchase and sale. It also means payments and custody of shares. For an individual to buy shares in the trading account the account has to be pre-funded or he/she is required to pay from their account by T+1.
Post-purchase, on the T+2 day, your stock trading account online will be credited to reflect the bought shares. When you sell shares, the Demat account is debited on the T+1 day to the extent of shares sold and the net amount gets credited to your bank account on T+2 day.
Rapid Progress in Dematerialization due to inherent advantages.
According to a circular passed by SEBI, a person can hold shares in physical form, but the transfer of share is only possible after dematerialization. About 99% of share available in India are already dematerialized. The process of dematerialization has made it easy to buy, sell or transfer the shares and most importantly secure through a demat account.