In order to mitigate the risks associated with share trading in paper format, dematerialisation concept was introduced in Indian Financial Market. Dematerialisation or Demat in short is the process through which an investor's physical share certificate gets converted to electronic format which is maintained in an account with the Depository Participant.
India adopted the demat System successfully and there are plans to facilitate trading of almost all financial assets in demat format in future. Through this article, we will try to understand the demat process and its benefits from common investor's perspective.
What is Dematerialisation of Shares ?
Dematerialisation is the process of converting physical shares into electronic format. An investor who wants to dematerialise his shares needs to open a demat account with Depository Participant. Investor surrenders his physical shares and in turn gets electronic shares in his demat account.
Storage of Dematerialised Shares - Depository
Depository is the body which is responsible for storing and maintaining investor's securities in demat or electronic format. In India there are two depositories i.e. NSDL and CDSL.
Who is a Depository Participant?
Depository Participant (DP) is the market intermediary through which investors can avail the depository services. Depository Participant provides financial services and includes organizations like banks, brokers, custodians and financial institutions.
Advantages of Demat
Dealing in demat format is beneficial for investors, brokers and companies alike. It reduces the risk of holding shares in physical format from investor's perspective. It's beneficial for brokers as it reduces the risk of delayed settlement and enhances profit because of increased participation.
From share issuing company's perspective, issuance in demat format reduces the cost of new issue as papers are not involved. Efficiency and timeliness of the issue is also maintained while companies deal in demat format.
There are a lot of other benefits, but let's focus on benefits with respect to common investor and the same are listed below.
• Demat format reduces the risk of bad deliveries
• Time and money is saved as you are not dealing in paper now. You need not go to the notary, broker for taking delivery or submitting the share certificate
• Liquidity is very high in case of demat format as whole process in automated.
• All the benefits of corporate action like bonus, stock split, rights etc are managed through the depository leading to elimination of transit losses
• Interest on loan against demat shares are less as compared to physical shares
• Investors save stamp duty while transferring shares in demat format.
• One needs to pay less brokerage in case of demat shares
Demat Conversion
Most of the trading in shares are done in demat format now a day, but there are few investors who still hold shares in paper format. You cannot deal in paper shares now, so you need to dematerialise them first. In order to dematerialise physical/paper shares, investors need to fill Demat Request Form (DRF), and submit the same along with physical shares. DRF is available with the DP and you simply need to raise a request for demat conversion with the DP.
Their representative will come and get the DRF form signed. So the complete process of dematerialisation involves:
1. Investor surrenders the physical certificates for dematerialisation to the DP along with DRF.
2. DP updates the account of the investor and shares are allocated in investor demat holding.
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