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what-is-dematerialization

What is Dematerialization?

Introduction to Dematerialization

Dematerialization is all about converting your physical shares and securities into digital or electronic form. The idea is to simplify the entire process of buying, selling, transferring and holding shares and also about making it cost-effective and foolproof. In order to understand the importance of dematerialization, one needs to grasp the benefits of dematerialization and the benefits of a demat account. Let us focus on what is a demat account and what is dematerialization at the outset

Demat account is an account where you hold shares and other securities in custody. A demat account is somewhat like a bank account, the only difference being that in a bank account you hold funds and in a demat account you hold shares and other securities. Dematerialization, on the other hand, is a process. It is the process of converting your physical shares into dematerialized shares and holding it in an electronic form instead of physical certificates.

Dematerialization and the drawbacks of the physical shares model

Before the concept of demat was first introduced by SEBI in 1997, shares were held in the form of share certificates. It was quite cumbersome. One had to safely keep the share certificates in custody and ensure that it does not get lost or mutilated. When the shares were purchased through a broker, the broker would give you the share certificates in the name of the seller with the transfer form attached to it. The buyer would have to send the certificates along with the transfer form to the company’s registrar to get new certificates printed with their names. The entire process would take more than a month and involved a lot of risks. Certificates could get lost in transit, they could get misplaced or they could get mutilated. Quite often, the transfer form got rejected because the signature in the transfer form did not match with the signature in the company’s records. It is to overcome all these problems that dematerialization was introduced in 1997.

Demat; trading account and banking are linked in a seamless loop

Your trading activity is a combination of your purchases and your sale. However, trading is not just about trades but also payments and custody of shares. This is how it works. When you buy shares in the trading account, the account has to be pre-funded or you have to pay from your bank account by T+1. Then on T+2 day the shares get credited to your demat account. When you sell shares, then the demat account gets debited on T+1 day to the extent of shares sold and the net amount (after costs) gets credited to your bank account on T+2 day. That is how the relationship works.

Rapid progress in dematerialization due to inherent advantages

Currently, more than 99% of all shares available in India are already dematerialized and 100% of the settlement in the exchanges on a daily basis take place in demat mode only. It has made the process of buying, selling and transferring shares easier, quicker, safer and virtually seamless if you have an online trading and demat account.

Three facets of dematerialization

What we talk of demat, there are three facets we need to understand to get a complete 360o perspective of the demat process…

  • First step is the dematerialization of physical shares. This is the first phase when the physical shares held are sent to the DP for dematerialization along with the demat request form (DRF). In case the certificates are not in your name, then you can send the share certificates to the DP along with a transfer-cum-demat form.
  • The second facet is the trading and settlement in demat form. That is the model that exchanges follow today. All trades are executed and settled in demat form only. You buy in demat, sell in demat and the trades get aggregated and settled by the exchange in demat form. This also has important implications for IPO allotments since they are done directly in demat form as credits to your demat account. When you buy shares in the trading account, these shares get credited in demat mode into your trading account on T+2 day. Similarly, when you sell shares in demat mode, then the shares get debited to your demat account on T+1 day.
  • The third facet of dematerialization is handling the corporate actions and data updates to your demat account. Bonuses and splits are automatically credited to your demat account based on the number of shares held by you on the record date. In case of dividends, the data on ownership on record date is downloaded to the registrar and the dividends are automatically credited to the mandated bank account. The demat account is also used to centrally make changes to the customer’s details like address, mobile phone, bank mandate and signature

Dematerialization is the process of converting your physical shares into an electronic form as well as trading and settling trades in demat form. It is one of the key pillars of modern capital markets.

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"Prevent Unauthorized transactions in your Trading/Demat Account --> Update your mobile numbers/email IDs with your stock brokers/Depository Participant. Receive alerts/information of your transaction/all debit and other important transactions in your Trading/ Demat Account directly from Exchange/CDSL at the end of the day .......... Issued in the interest of investors." | "KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary." | "No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorize your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account." |"Investment in Securities Market/Commodity Market is subject to Market Risk. | RGESS investors kindly download New Retail Investor Certificate from link - https://www.cdslindia.com/investors/rgessverification.aspx | Dear Investor kindly update Aadhar Number with your demat account, contact your nearest branch."
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