What Is Dematerialization (Demat)?
Dematerialization in short is called as ‘demat’. It is the process by which an investor can get physical share certificates converted into electronic form(digital) maintained in an account with the Depository Participant.
The investors can dematerialize only those share certificates that are already registered in their name and belong to the list of securities admitted for dematerialization at the depositories.
Depository : The organization responsible to maintain investor’s securities in the electronic form is called the depository. In other words, a depository can therefore be conceived of as a “Bank” for securities. In India there are two such organizations viz. NSDL and CDSL.
The depository concept is similar to the Banking system with the exception that banks handle funds whereas a depository handles securities of the investors. An investor wishing to utilize the services offered by a depository has to open an account with the depository through a Depository Participant.
Depository Participant : The market intermediary through whom the depository services can be availed by the investors is called a Depository Participant (DP). As per SEBI regulations, DP could be organizations involved in the business of providing financial services like banks, brokers, custodians and financial institutions.
This system of using the existing distribution channel (mainly constituting DPs) helps the depository to reach a wide cross section of investors spread across a large geographical area at a minimum cost. The admission of the DPs involve a detailed evaluation by the depository of their capability to meet with the strict service standards and a further evaluation and approval from SEBI. Realizing the potential, all the custodians in India and a number of banks, financial institutions and major brokers have already joined as DPs to provide services in a number of cities.
Advantages of a depository services :
- Trading in demat segment completely eliminates the risk of bad deliveries.
- In case of transfer of electronic shares, you save 0.5% in stamp duty.
- Avoids the cost of courier/ notarization/ the need for further follow-up with your broker for shares returned for company objection
- No loss of certificates in transit and saves substantial expenses involved in obtaining duplicate certificates, when the original share certificates become mutilated or misplaced.
- Increasing liquidity of securities due to immediate transfer & registration Reduction in brokerage for trading in dematerialized shares Receive bonuses and rights into the depository account as a direct credit, thus eliminating risk of loss in transit.
- Lower interest charge for loans taken against demat shares as compared to the interest for loan against physical shares. RBI has increased the limit of loans availed against dematerialized securities as collateral to Rs 20 lakh per borrower as against Rs 10 lakh per borrower in case of loans against physical securities.
- RBI has also reduced the minimum margin to 25% for loans against dematerialized securities, as against 50% for loans against physical securities.
Procedure of opening a demat account:
Opening a depository account is as simple as opening a bank account. You can open a depository account with any DP convenient to you by following these steps:
- Fill up the account opening form, which is available with the DP.
- Sign the DP-client agreement, which defines the rights and duties of the DP and the person wishing to open the account.
- Receive your client account number (client ID). This client id along with your DP id gives you a unique identification in the depository system.
- There is no restriction on the number of depository accounts you can open.
- However, if your existing physical shares are in joint names, be sure to open the account in the same order of names before you submit your share certificates for demat
Procedure to dematerialize your share certificates:
Fill up a dematerialization request form, which is available with your DP.
Submit your share certificates along with the form; (write “surrendered for demat” on the face of the certificate before submitting it for demat).
Receive credit for the dematerialized shares into your account within 15 days.
In case of directly purchasing dematerialized shares from the broker, instruct your broker to purchase the dematerialized shares from the stock exchanges linked to the depositories.
Once the order is executed, you have to instruct your DP to receive securities from your broker’s clearing account.
You have to ensure that your broker also gives a matching instruction to his DP to transfer the shares purchased on your behalf into your depository account.
You should also ensure that your broker transfers the shares purchased from his clearing account to your depository account, before the book closure/record date to avail the benefits of corporate action.
Stocks traded under demat:
Securities and Exchange Board of India (SEBI) has already specified for settlement only in the dematerialized form in for 761 particular scripts. Investors interested in these stocks receive shares only in demat form without any instruction to your broker.
While SEBI has instructed the institutional investors to sell 421 scripts only in the demat form. The shares by non institutional investors can be sold in both physical and demat form. As there is a mix of both form of stocks, it is possible if you have purchased a stock in this category, you may get delivery of both physical and demat shares.