After reading this article you will learn about the Dematerialisation and Rematerialisation of Shares.
Dematerialisation of Shares:
Dematerialisation is the process wherein share certificates or other securities held in physical form are converted into electronic form and credited to demat account of an investor opened with a depository participant.
The demat account offers a number of benefits to the investor as he is not required to keep the shares or other securities in safe custody eliminating the risk of fire, theft, loss in transit, delay in transfer, bad delivery, fake or forged shares etc.
Several initiatives have been taken by SEBI to promote dematerialised or paperless trading, which can go a long way in eliminating the risks of bad delivery and forged shares. It introduced compulsory trading of shares in dematerialised form in specified scrips by institutional investors with effect from January 15, 1998.
Subsequently, SEBI has made compulsory trading of shares of all the companies listed in stock exchanges in demat form with effect from 2nd January 2002.
Hence, if the investor wants to trade in respect of the companies which have established connectivity with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL), he may have to open a beneficiary account with a depository participant of his choice. The procedure of opening a demat account with DP is similar to opening an account with a bank.
Steps Involved in Dematerialisation:
The following steps are involved in dematerialisation of shares:
1. The investor has to open a beneficiary account with a depository participant (DP) of his choice to hold shares in demat form and undertake scripless trading.
2. Investor has to submit Demat Request Form (DRF) and share certificates to DP who in turn will check whether securities are available for demat.
3. The investor should deface the share certificates by stamping ‘Surrendered for Dematerialisation’ and DP will punch two holes on the name of the company and draw two parallel lines across the face of the certificate.
4. Depository participant enters the demat requests in the system to be sent to depository. DP despatches the physical certificates along with the demat request form to the Registrar and Transfer Agent (TRA) or issuer company.
5. Depository records the details of the electronic requests in the system and forwards the request to RTA or Issuer Company.
6. RTA or the issuer company on receiving the electronic request and the physical documents verifies and checks them. Once the RTA/company finds that the documents are in order, dematerialisation of the securities is electronically confirmed to the depository.
7. Depository credits the dematerialised securities to the beneficiary account of the investor and intimates the DP electronically. The DP then issues a statement of transaction to the client.
An investor can close a demat account by giving an application in the prescribed form.
In case, there is any balance in the demat account sought to be closed, the following steps are necessary:
(a) Rematerialisation of securities standing to the credit of the demat account; or
(b) Transferring the balance to the credit of another demat account with the same participant or with some other participant.
Electronic Settlement of Trade:
(A) Procedure for Selling Dematerialised Securities:
The procedure for selling dematerialised securities in stock exchanges is similar to the procedure for selling physical securities. The only major difference is that instead of delivering physical securities to the broker, the investor instructs his depository participant (DP) to debit his demat account with the number of securities sold by him and credit the broker’s clearing account.
The procedure for selling dematerialised securities is given below:
(i) Investor sells securities in any of the stock exchanges linked to depository through a broker.
(ii) Investor instructs his DP to debit his demat account with the number of securities sold and credit the broker’s clearing account.
(iii) Before the pay-in day, broker of the investor transfers the securities to clearing corporation.
(iv) The broker receives payment from the stock exchange.
(v) The investor receives payment from the broker for the sale of securities in the same manner as received in case of sale of physical securities.
(B) Procedure for Purchasing Dematerialised Securities:
The procedure for purchasing dematerialised securities is also similar to the procedure for buying physical securities:
(i) Investor instructs DP to receive credits into his account in the prescribed form. There may be one time standing instruction or separate instruction each time to receive credits.
(ii) Investor purchases securities in any of the stock exchanges linked to depository through a broker.
(iii) Broker receives payment from investor and arranges payment to clearing corporation.
(iv) Broker receives credit to securities in clearing account on the pay-out day.
(v) Broker gives instructions to DP to debit clearing account and credit client’s account.
(vi) Investor receives shares into his account by way of book entry.
Rematerialisation of Shares:
Rematerialisation is the process of conversion of electronic holdings of securities into physical certificate form. For rematerialisation of scrips, the investors have to fill up a Remat Request Form (RRF) and submit it to the depository participant.
The DP forwards the request to depository after verifying the investor’s balances. Depository in turn intimates the Registrars and Transfer Agent or the issuer company. RTA/company prints the certificates and despatches the same to the investor.