Ever since the introduction of demat accounts and electronic share trading in India, the possession of physical share certificates has been declining steadily. In fact, the Securities and Exchange Board of India (SEBI) has mandated that companies issue shares only in the dematerialized form and not as physical share certificates. You’re now probably wondering ‘what is dematerialization?’, aren’t you? Keep reading to know everything about the concept of share dematerialization.
What is dematerialization?
The process by which the physical share certificates of a company are converted to an electronic form is what is commonly known as dematerialization of shares. These dematerialized shares are then held in a demat account that you open with a depository. In the current context of stock trading, share dematerialization is mandatory in order to be able to sell or transfer your shares to another account.
Advantages of dematerialization of shares
Now that you know the answer to the question ‘what is dematerialization?,’ let's take a quick look at some of the benefits of share dematerialization.
1. Enhanced safety: Since dematerialization entails conversion of physical shares into electronic ones, you don’t have to worry about damage, mutilation, loss, or theft of your share certificates. You get to safely store all your shares in one single demat account that can be accessed from almost anywhere in the world.
2. Increased security: When physical share certificates were still in use, there were many instances of forgery, fraud, and duplication. However, with dematerialized shares, none of these incidents are possible.
3. Facilitation of instant transfer: With physical share certificates, transferring shares from one person to another would typically take days on end. But thanks to share dematerialization, share transfer is now exceptionally easy and almost instant.
The process of dematerialization of shares
- The share dematerialization process is quite simple and easy to understand. Also, it takes just a few days to complete. Here’s a brief explanation about the process of dematerialization of shares.
- Firstly, you’re required to open a demat account with a depository via a depository participant (DP). Generally, the stockbroker with whom you have a trading account also doubles as a DP.
- Once you’ve opened a demat account, you’ll have to submit a duly-filled Dematerialization Request Form (DRF) to your DP, along with the physical share certificates that you own.
- If you own shares of multiple companies, then you’ll have to submit a duly-filled DRF for each company along with the relevant share certificates.
- Upon receiving the DRF, your DP will scrutinize both the form as well as the securities to ensure that everything is in order.
- Once the DP is satisfied with your request, you will receive a Dematerialization Request Number (DRN) as an acknowledgement.
- The DP then forwards your request to the Registrar and Share Transfer Agent (RTA) of the company.
- Once the RTA of the company accepts your dematerialization request, the physical share certificates are converted to the electronic mode and are subsequently destroyed.
- And finally, the now dematerialized shares are credited to your demat account, which you can subsequently either sell or transfer to other accounts.
As you can see from the above explanation, share dematerialization is uncomplicated and requires only a few minutes of your time. Dematerialization of shares has simplified the entire process of share trading, which was previously quite cumbersome. It has ushered in a new era of electronic share trading and has contributed immensely towards the growth and popularity of share trading amongst the public.
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