With technological progress and ease of digital payments, holding physical share certificates has become inconvenient compared to maintaining securities in electronic dematerialized format. Dematerialization offers numerous benefits like convenience, speed and eliminates risks associated with physical certificates. This blog covers a step-by-step guide explaining the entire process through which investors can convert their paper share certificates into electronic demat form.
Holding physical share certificates may evoke nostalgia about the good old days when stock investing was done through paper, but the risk, delays and inefficiencies attached with paper-based certificates make them largely redundant in today’s fast digital world. This brings to fore an essential but often poorly understood aspect called Dematerialization of Shares that aims to eradicate issues linked with physical investments by providing electronic substitutes offering superior convenience.
In the most basic sense, share dematerialization refers to the act of converting traditional paper-based physical share certificates to an electronic equivalent that’s credited in the investor’s Demat account facilitating ease of transacting. This analog to digital format conversion ensures the tangible certificates are essentially destroyed making way for a digital alternate held with the depository that keeps record of the holdings.
The commonly asked question by average investors around dematerialization is how does converting paper certificates into electronic records help at all? Why fix something that’s not apparently broken? The answer lies in the problems inherent across physical scrips like risks of loss, theft, mutilation and forgery which create hassles that electronic substitutes can alleviate more efficiently. Add aspects like improved convenience and speed of transacting, avoiding lengthy paperwork and chaotic logistics, it creates a strong case for dematerialized holdings.
This brings us to the concept of Depositories which are organizations that enable investors to hold securities like shares, bonds, mutual funds in electronic dematerialized format through a network of account providers facilitating eased trading and transfer mechanisms. Established under the Depositories Act 1996, these depositories maintain a database of holdings records based on account data provided by the Registrar & Transfer Agents of companies.
The two depositories currently functional are National Securities Depository Limited (NSDL) promoted by institutions like IDBI, UTI, NSE handling over 90% market share while Central Depository Services Limited (CDSL) backed by BSE forms the smaller player. These depositories tie up with Depository Participants (DPs) comprising banks, brokers, custodians who handle account opening and activities like submitting dematerialization requests on client behalf to companies’ RTA verifying holdings and triggering electronic credit in the account.
Getting into the actual dematerialization procedure, clients looking to convert physical certificates need to first open a Demat Account with a SEBI approved Depository Participant and submit the share certificates along with a Dematerialization Request Form issued in duplicate containing security holder information and holdings data like certificate numbers, distinctive numbers, quantity sought to dematerialize etc.
Accurate data needs to be provided in the Form for the DP to verify submitted certificate details who then initiates the dematerialization request with the depository which is forwarded to the issuer/RTA. Post validating credentials and shareholdings against electronic records, the RTA confirms the request with the depository leading to credit of dematerialized securities in client Demat account and simultaneous destruction of certificates.
The necessity around dematerialization arises from key practical difficulties faced while handling physical securities and lack of safety attached leading to investors getting defrauded through theft, forgery or document misplacement. Additionally aspects like enhanced ease of trading, quicker settlement cycles, convenience across shareholder activities also drive growing electronic substitution allowing faster processing.
While Indians intrinsically still have trust issues on virtual investments post stock market scams from Harshad Mehta days, improved systems and audit controls in the demat process rarely allow frauds now. Demat accounts also offer protection through investors insurance up to ₹10 lakhs along with demand draft payment requirements instead of cash largely plugging fraud risks.
On the convenience front, demat shares save investors trips to broker offices and submit elaborate paperwork for routine activities like changing addresses, registering transmission replacing tedious processes with simple email/sms instructions due to standardized KYC compliance norms bringing efficiency and speed. Corporate actions like dividends, splits etc. also get processed faster into Demat accounts than waiting for postal transfer cheques.
Regulatory provisions also continue tilting transactions in favor of electronic holdings through stringent share transfer norms for physical mode to discourage it. Mandatory PAN submission and custom collector verification prior to physical transfer tend to create bottlenecks investors can avoid through seamless demat share movement. SEBI’s vision across capital market reforms envisages further nudging share transactions under electronic depositories minimizing paper intensity.
While dematerialized holdings remove risks like certificate forgery, mutilation etc. through electronic encryption, lack of client awareness on aspects like statement verification lead to instances like unscrupulous pledging through fabricated authorizations. However frauds in Demat accounts tend to leave electronic audit trails easier for tracking than paper certificates.
In summary, dematerialization aims to trigger a monumental paper to digital transformation exercise across stock investing through extensive security certificates conversions into electronic demat shares. This offers India an opportunity to expand financial inclusion riding the tech wave with various Fintech innovations linking trading platforms to payment gateways and digital KYC systems enabling indulgent consumer experiences. Alignment to such tech disruption can hugely benefit investors through radical efficiency enhancements, risk reduction and convenience quotients across share transactions!
What is Dematerialization of Shares?
Dematerialization or simply ‘demat’ refers to the act of converting traditional paper-based physical share certificates into digital format that is electronically held at a Depository. These depositories facilitate holding of securities in dematerialized or demated format through ties ups with Depository Participants (DPs) who offer demat accounts to investors.
The two depositories currently operational in India are:
1. National Securities Depository Limited (NSDL)
2. Central Depository Services Limited (CDSL)
These depositories are regulated under the Depositories Act, 1996 which provides the legal framework for establishing securities depositories and governs various aspects related to dematerialization like ownership rights of demat account holders.
Coming to what dematerialization actually involves – it refers to the process through which an investor can surrender his/her physical shares certificates against an equivalent number of securities being credited in his/her electronic demat account. So basically the tangible paper certificates gets destroyed in exchange for getting an electronic credit representing the same shareholding.
This electronic holding gets reflected through an account statement that the depository sends monthly to the BO (Beneficiary Owner which is essentially the demat account holder). The statement provides details like number of securities held across various companies, purchase rates and quantities along with any corporate actions.
Why Dematerialize Your Physical Securities?
1. Eliminates risks attached with physical certificates – Handling paper certificates comes with associated issues like loss, misplacement, theft as well as forgery risks which demat form alleviates since holdings are encrypted digitally.
2. Convenience and speed while transacting – Transferring physical securities is cumbersome as it requires submitting delivery instructions, share transfer deeds and stamp duty payments apart from facing delays. Demat form allows seamless, faster transfers and pledging mechanisms through simple account holders authorization.
3. Corporate actions processed quicker – Dividend payments, bonus and stock split credits take longer through paper mode compared to instant reflections when securities are held in demat format. Changing client details also becomes easier by simply updating KYC credentials instead of informing various companies separately.
4. Smoother settlement cycles – Scripts held in demat form have shorter settlement cycles (T+2 days) unlike non-demat transactions which could take weeks to settle the trade with exchange of paper certificates. This quickens pay-outs improving efficiency.
5. Ease of record keeping – A single demat account statement helps investors track their various equity, mutual fund holdings etc. easily instead of maintaining individual portfolios. Credit and debit updates reflect changes instantly bringing transparency.
Steps for Dematerialization of Physical Shares
The key steps involved in dematerializing paper share certificates into demat or electronic form are explained below:
Open a Demat Account
First requirement is opening a Demat account with any SEBI registered Depository Participant (DP) like banks, brokers, financial institutions who are authorized to offer such accounts by the depositories NSDL/CDSL. Documents like KYC proofs are required while opening the demat account in the same process as opening savings accounts.
Gather Share Certificates
Gather all the physical share certificates you intend to dematerialize and tally their quantities with your portfolio records. Ensure certificates are valid and authenticated by companies with accurate folio numbers, shareholder details etc. mentioned. Invalid or disputed certificates will get rejected in the demat request.
Fill Dematerialization Request Form (DRF)
Once your demat account gets opened, obtain the demat request form (DRF) from your DP which you need to accurately fill with details like client ID, account number, folio numbers, security ISIN along with quantity to dematerialize for every certificate submitted. Identical details as on certificates need to be provided or else reconciliation issues arise.
Submit DRF and Certificates to DP
Submit the Request Form in duplicate with your share certificates to the Depository Participant for processing the request. Ensure certificates and DRF details match perfectly and certificates are arranged sequentially as per DRF order. Missing certificates should be reported immediately on the transmission slip.
Physical Verification by DP
The DP upon receipt physically verifies share quantities mentioned on the certificates with DRF details for accuracy. In case of issues, clarifications might be sought from the client else certificates get stamped and DRF approved triggering electronic request dispatch to the issuer/RTA.
Depository Dispatches Request to Issuer Electronically
After physical verification, the DP will digitally intimate the relevant share issuer/ Registrar through the securities Depository regarding the dematerialization request made by the client. This electronic communication contains your demat account and KYC credentials.
RTA Verification of Request
The issuer company’s RTA (Registrar & Transfer Agent) upon receiving the dematerialization request from Depository checks all credential details of client like PAN, account numbers, certificate numbers, folio details etc. with their database for accuracy. The RTA might revert in case any discrepancies are noted requiring client clarification via DP.
Authorization of Demat Request
Post verification, the RTA approves the dematerialization request after checking credentials which triggers the debit entry in their system for relevant shares against the physical folios. Simultaneously, certificates also get stamped as ‘Surrendered for Dematerialization’.
Extinguishment of Physical Certificates
Once units represented in share certificates submitted are electronically credited to your demat account, it signifies completion of the dematerialization process. Simultaneously, the certificates also get destroyed by the RTA upon demat authorization through a process termed as ‘extinguishment’. This ensures parallel existence of the same security in both physical and demat mode is avoided.
Electronic Credit of Securities in Demat Account
With the request approval by RTA, your demat account gets electronically credited with the equivalent number of securities you requested to dematerialize from your holdings in paper certificates. This completion of process is intimated via Statements of Holding by the Depository to the client.
Intimation to Client After Dematerialization
Once the entire process is complete with share quantities getting credited to your demat account and same reflecting in periodic statements of holdings, the DP also intimates the client through dematerialization confirmation slips shared across email or post highlighting successful receipt and dematerialization.
Timeline for Completion of Dematerialization
Under regulations, the demat request procedure should get completed within 21 days from the date of submission of demat request and share certificates to DP. In case of any delays, the Depository Participant is liable to compensate the client per day based on limits set. Actual process generally completed earlier within 15 days except in cases requiring further verifications.
Dematerialization Charges/Fees Involved
While dematerializing shares does make holding and transacting the securities convenient, it does come at a cost in the form of various charges levied by depositories/DPs –
1. **Account opening fee** – Charged by DPs for opening the demat account itself during on-boarding. Differs across banks/brokers.
2. **Annual Maintenance charges** – This is an annual fee charged by DPs for maintaining live demat accounts covering services offered. Generally varies from ₹300-500 per year. Zero balance/high value accounts might waive this.
3. **Dematerialization charges** – One time fee charged per scrip/certificate request raised for dematerialization. Ranges from ₹25-50 per certificate with additional stamp duty applicable in certain states. Minimum fees might apply.
4. **Transaction charges** – Trading, pledge and other depository transaction charges are separate and charged per instance by DPs.
Apart from the above, AMCs on mutual funds, GST on the different heads also apply indirectly hiking overall costs.
Tracking Demat Request Status
Investors keen on tracking the status of their submitted demat requests can check the same via:
a) **Logging into demat account** – Depository portal/apps show status of requests raised once DP processes
b) **Depository Participant (DPs)** – Request status visible to them in back-end demat module integration
c) **NSDL/CDSL toll free numbers** – Helplines 1800 222 990/ 1800 200 5522 where request DRN can be shared for checking status after client details verification
In case status shows request rejection, the reason for the same needs evaluated for rectification through resubmission. Successful request completion is intimated through Statements of Holding from Depository.
Rectification Process If Demat Request Gets Rejected
While utmost care is exercised by clients when filling dematerialization forms, mismatches might still occur due to signature differences, PAN/Aadhar discrepancies, certificate number errors etc. resulting in request rejection by issuer/RTAs.
In such cases, investors should contact their DP immediately with the rejection reason request details for resubmission. The process steps remain largely unchanged but certain documents might need furnishing in case of major credential mismatches:
1. **Mismatch in Name** – Need KYC proofs showing name change trail like marriage certificate, gazette notification etc.
2. **PAN Discrepancy** – Copy of PAN card showing correct PAN linked to Aadhar on records to be shared
3. **Incorrect Details Filled** – For cases like invalid certificate numbers, identification issue, provide valid documents showing correct details under client name
4. **Non-matching Signature** – Freshly signed and witnessed DRFs might be called where client signatures during account opening don’t match with DRF signatures found previously leading to cancellation
The revised request post rectification of the identified issues should ensure successful completion provided no other major concerns flagged during the process.
Precautions to be Taken During Dematerialization
While on surface dematerialization appears straightforward, minor negligence/oversight might severely impact process completion resulting in delays or cancellation. Few aspects investors should consider:
– Verify DP credentials like registration validity before account opening
– Ensure name filled during new demat account opening matches PAN records
– Keep certificates securely before submission or it leads to mismatch
– Clearly fill each and every detail accurately as per certificates and previously submitted records in account opening form while submitting the DRF
– Double check certificate number, distinct quantity, face value details etc. twice from certificates before filling to avoid rejection
– Do proper addition of number of certificates as well as quantity of shares while filling to avoid shortfall issues
– Ensure certificates submitted are valid & authentic bearing company seal and signatures before submission
– Clearly highlight damaged/partially damaged/lost certificates reporting on transmission slip/DRF for specialized processing through affidavits etc.
Conclusion
In summary, while the entire dematerialization procedure might appear cumbersome to investors used to handling physical securities, it provides immense ease, convenience and efficiency for transacting, holding securities while eliminating risks inherent across paper certificates. Maintaining few precautions and diligently following up with DPs during the process phases discussed above will ensure smooth completion within reasonable timelines giving clients the freedom to enjoy simplified investing through electronic holdings across exchanges. Thus investors should seriously evaluate eliminating paper-based investments by surrendering eligible securities for conversion to demat form.
FAQS
1. What is dematerialization of shares?
Dematerialization (or “demat”) refers to the conversion of physical share certificates into electronic format that is held in a Demat account with a Depository Participant (DP).
2. Why dematerialize shares with MUDS Management?
MUDS Management is a SEBI-registered intermediary with over 15 years of experience providing reliable demat account opening and dematerialization services at competitive pricing.
3. What are the documents required for demat account opening?
The key documents required are PAN Card, Address Proof, Bank Account Proof and Recent Photograph. Additional documents may be needed in certain cases.
4. What is the procedure for dematerializing shares?
The key steps are submitting a Demat Request Form (DRF) with share certificates to the DP, DP verification & dispatch to the company’s RTA, RTA validation and electronic credit of dematerialized shares.
5. How much time does dematerialization take?
The process generally completes within 15-20 days from submission of documents to the credit in Demat account. The regulatory timeline is 21 working days.
6. What charges are applicable for dematerialization?
MUDS Management charges Rs. 50 per certificate + Service Tax for dematerialization with minimum fees of Rs. 500 per request. Account opening and other charges extra.
7. How to track the status of my demat request?
Clients can track the status by logging into their demat account, contacting their RM or checking directly with depositories using the DRN.
8. What happens if my demat request gets rejected?
In case of rejection due to discrepancies, revised documents need to be submitted based on the reason cited for smooth re-processing.
9. Does MUDS Management also offer trading account services?
Yes, MUDS also facilitates opening of trading accounts across various brokers allowing smooth trading of dematerialized securities.
10. Why choose MUDS Management for demat services?
MUDS is a professionally managed broking intermediary with high client satisfaction offering seamless demat account opening, dematerialization and trading account facilitation at competitive rates in the industry.