Dematerialization, also known as ‘Demat’, indicates the converting of shares/securities from a physical certificate to an electronic form. This allows for paperless trading via state-of-the-art technology since these transactions of shares are done electronically without relying on the traditional route of share certificates and transfer deeds.
In essence, Demat offers potential investors a way to get around the time-consuming task of transferring shares in their names. It also bypasses problems like delays in processing, bad deliveries via post or some other conventional sources.
Of course, dematerialization of shares is an option and an investor still has the choice of holding shares in the physical form of certificates. Nonetheless, the investor would have to demat the shares in order to sell them via the Stock Exchanges. In the same fashion, if an investor opts to buy shares, these shares will be delivered only in demat form.
Depositories & Demat Operations – How do they work?
The Depository Participant (DP) is considered to be the agent of the Depository. In other words, depository is the platform via which investors’ shares are kept in electronic format and Depository Participants are the link between the investor and a company via the Depository acting in the interest of the investor. The company whose shares are sold is referred to as the Issuer.
A Depository (like in a Central Bank) is responsible for holding investor securities in electronic form. This system is analogous to the banking system in that the bank deals with the safe keeping of funds, while Depository transfers securities between accounts.
How to Demat Shares from Physical Certificates
In order to demat or convert shares into an electronic balance, an investor would need to open an account with a DP. When the account is opened, each investor is given a Client ID number. Following that, an investor may fill out a Dematerialization Request Form or DRF – the investor’s representative agent, the DP, will provide this. This would translate into surrendering physical shares to the DP in order to have them dematted.
When the DP receives the shares along with the request form, DRF, an electronic request will be directed to the company’s (Issuer’s) registrar and share transfer agent via the Depository to confirm demat process. And each of these requests will carry its own transaction number, to facilitate tracking details.
At the same time, the Depository Participant surrenders the DRF request form along with the shares to the company (Issuer) registrar and share transfer agent. This will contain a cover letter asking the registrar and transfer agent of the company for confirmation of demat. After proper verification of requests and documentation from the DP, confirmation of demat is communicated to the Depository.
The confirmation is then communicated from the Depository to the DP, which has access to investor accounts. Following confirmation from the Depository, the investor account will have the shares dematerialized. On the investor’s behalf, the DP is responsible for holding the shares in the electronic form after this point. Subsequently, the investor becomes the beneficial owner of these dematted shares.
Rights of Shareholders Holding Dematted Shares
As far as dividends on dematted shares are concerned, the DP distributes a list of demat account holders with the corresponding number of shares in electronic format to respective companies. This list of demat account holders consists of Beneficiary Persons or Benpos. The company will then issue dividend warrants in favor of the demat account investors on the grounds of Benpos.
The Depositories Act of 1996 was implemented to control processes related to Depositories and demat operations in India. The two Indian Depositories in operation include the NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).
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