Dematerialisation (DEMAT): Definition, Working and Benefits

Learn about dematerialisation, the process of converting physical securities into electronic or digital form.
Dematerialisation (DEMAT): Definition, Working and Benefits
3 mins
18 August 2023

The process of dematerialisation has revolutionised the way investors hold, trade, and manage their securities, making physical certificates a relic of the past. This article delves into the concept of dematerialisation, the process involved, and the myriad benefits it brings to investors and the financial ecosystem.

Short history of Dematerialisation

The history of dematerialisation in India is closely tied to the liberalisation of the economy in 1991. Following this, the Securities and Exchange Board of India (SEBI) was established in 1992 to regulate the capital markets. In 1996, SEBI played a pivotal role in introducing the process of dematerialisation of securities through the Depositories Act. This marked a significant shift from paper-based securities to electronic form. In 2000, the Companies (Amendment) Act made it mandatory to release Initial Public Offerings (IPOs) worth Rs 10 crore or more exclusively in dematerialised form. Currently, trading in shares without a Demat account is not possible, emphasising the significance of dematerialisation in the modern Indian securities market.

Why is Dematerialisation needed?

The need for dematerialisation arises from the challenges of managing a large volume of paper-based documents. As paper documents accumulate, there is an increased risk of misplacing important records, potentially leading to disruptions in the Indian share market and associated businesses. Furthermore, the dematerialisation process contributes to savings, as it reduces the stamp duty on share transfers. It also saves time and money in obtaining duplicate certificates if the original ones are lost.

Dematerialised shares receive credits and bonuses directly into the shareholder's account, eliminating the risk of loss during transit.

How Dematerialisation works

Dematerialisation involves a systematic process to convert paper-based share securities into electronic certificates. It simplifies the trading process, making it more efficient and cost-effective.

In essence, dematerialisation leverages technology to streamline the trading process, providing a secure platform for stock investors to engage in trading, investment, and earnings. It ensures that shares are easily accessible and transferable in an electronic format, enhancing the overall trading experience and reducing reliance on physical certificates.

Process of Dematerialisation

Dematerialisation is the process of converting physical securities, such as share certificates and bonds, into electronic or digital form. The objective is to eliminate the need for physical documents and enhance the efficiency of trading and ownership transfer. The process involves the following steps:

  1. Opening a Demat Account: Investors need to open a Demat account with a registered Depository Participant (DP). A Demat account functions like a digital repository for holding securities.
  2. Submission of Physical Certificates: To convert physical shares into an electronic form, the investors must obtain and complete the Dematerialisation Request Form (DRF) from the Depository Participant (DP), then submit it along with the original share certificates. They must mention ‘Surrendered for Dematerialisation’ under every certificate.
  3. Verification and processing of request: After submission, the Depository Participant (DP) handles and manages the dematerialisation request, along with the original certificates, and forwards them to the company, registrars, and transfer agents for processing.
  4. Request confirmation: Once the depository receives a confirmation of dematerialisation, the physical certificates are immobilised, which means they can no longer be traded in physical form.
  5. Crediting the Demat account: Once the dematerialisation process is complete, the depository communicates the same to the Depository Participant (DP), and the holdings of assets are then displayed electronically in the shareholder's Demat account.

Benefits of Dematerialisation

The shift towards dematerialisation has brought about a host of advantages that cater to investors, companies, and the financial sector as a whole:

  1. Elimination of Physical Risk: Physical certificates are susceptible to loss, theft, damage, or forgery. Dematerialisation eradicates these risks, ensuring that the investor's holdings remain secure in digital form.
  2. Efficient Trading: Dematerialisation has significantly expedited the trading process. Buying and selling securities can be executed electronically, reducing the settlement period and enhancing liquidity.
  3. Reduced Costs: The cost associated with printing, distributing, and storing physical certificates is eliminated through dematerialisation. This results in cost savings for both investors and companies.
  4. Simplified Ownership Transfer: Transferring ownership of securities was a complex and time-consuming process with physical certificates. Dematerialisation simplifies this procedure, making it quicker and more convenient.
  5. Access to Information: Demat accounts provide investors with a comprehensive view of their holdings and transaction history. This accessibility to information empowers investors to make informed decisions.

Problems with Dematerialisation

  1. High-frequency share trading:
    Dematerialisation has made communication and order execution more efficient, increasing market liquidity. However, it has also led to higher market volatility, as investors often prioritise short-term gains over long-term profits. The ease of high-frequency trading can result in rapid and unpredictable market fluctuations, impacting investment strategies.
  2. Technological challenges:
    Dematerialisation relies on technology, which can be a challenge for individuals with limited computer proficiency or slower hardware. Those with advanced software and computer skills gain an advantage, potentially leaving less tech-savvy investors at a disadvantage. This digital divide may hinder equitable participation in dematerialised markets.

 

Conclusion

The dematerialisation of securities has ushered in a new era of efficiency, security, and accessibility in the financial realm. By eliminating the constraints of physical certificates, investors can seamlessly navigate the world of trading and investment. The process, although seemingly technical, holds the promise of simplifying the intricate web of ownership transfer and trading, benefitting both individual investors and the larger financial ecosystem.

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Frequently asked questions

What do you mean by dematerialise?

Dematerialisation refers to the process of converting physical, paper-based securities certificates, such as shares, bonds, and mutual funds, into digital electronic format, thus making the transfer of ownership faster, more secure, and efficient.

What is dematerialisation and its process?

Dematerialisation is the process of converting physical paper shares and other securities into digital format that can be stored in a Demat account with a Depository Participant (DP) authorised by the National Securities Depository Limited (NSDL) or the Central Depository Services (India) Limited (CDSL). The process involves filling out a Dematerialisation Request Form (DRF) and submitting it with the original share certificates to the DP for further processing. Further, after the submission, the DP forwards documents to the depository, and upon confirmation, the securities are converted to digital form.

What are the objectives of dematerialisation?

The primary objective of dematerialisation is to offer investors a secure, convenient, and paperless means to hold their securities electronically in a Demat account. The move from physical share certificates to Demat shares reduces the risks of theft, loss, and fraud while making the process of buying, selling and transacting securities more efficient, streamlined, and safe. Dematerialisation also helps reduce transaction costs, improve liquidity and increase market efficiency.

What documents are required for dematerialisation?

The documents needed for dematerialisation include the dematerialisation request form (DRF), physical share certificates, Know Your Customer (KYC) documents, and power of attorney (POA).

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