In this article, Deepti Reddy pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Advantages of Dematerialization of Shares.
With the evolution of Information Technology, voluminous paper work involved has been eliminated through dematerialization of shares and automation of the process of transactions. It offered paperless trading, whereby share transactions and transfers are processed electronically without involving any share certificate or transfer deed after the share certificate has been converted from physical to electronic form.
Dematerialization is the process of converting physical share into electronic format. An investor who wants to dematerialise his share needs to open DE-MAT account with depositary participant (is a market intermediary through which investors can avail depository services). Investor surrenders his physical shares and get electronic shares in turn to his de-mat account.
Why dematerialization needed?
- According to the Depositories Act, 1996, an investor has the option to hold shares either in physical or in dematerialised form.
- Dematerialization of shares is optional and investor can hold shares in physical form. However one have to de-mat the shares if want to buy or sell the same through the Stock Exchanges.
- Handling of paperwork related to shares in physical format often led to errors an unforeseen mishaps
- Tracking records and share documents with respect to transfer and upkeep transactions was difficult.
- The authorities in charge of updating these documents could not keep up with the increasing volume of share papers, which, if left unchecked, could cripple the financial base of the Indian share market and associated business
A Depository is an organisation like a Central Bank. A depository is responsible for holding the securities in the electronic form at the request of the shareholder. The securities could be in the form of bonds, government securities and mutual fund units, which are held by a registered Depository Participant (DP).
A Depository Participant (DP) is the agent of the depository providing depository services to traders and investors. They are the intermediaries between depository and investors. They hold securities of the investors and intimate them the status of their holding from time to time.
Types of Depositories
There are two types of depositories registered with SEBI. They are,
- National Securities Depository Limited (NSDL)
- Central Depository Services (India) Limited (CDSL)
Dematerialization of shares by a company
Any private company wants to transfer its dematerialised shares it may arrange de-mat connectivity from depositors like NSDL or CDSL along with a Register and Transfer agent (RTA) by entering into a tripartite agreement between the company, the depositors and the transfer agent. Private companies should register with both the central depositories i.e., National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited(CDSL) in the first place. If the registration is successful depositories will be providing companies with an International Securities Identification Number (ISIN) for each of the share when the security is admitted in depository system.
Steps involved in the process of dematerialization of shares by company,
- Beneficiary Owner (BO) has to open a de-mat account with a Depository participant and obtain an demat account number.
- Beneficiary owner need to fill in a Demat Request Form (DRF) and submit the same with the physical certificate/s to the depository participants for dematerialization. For every ISIN, a separate DRF has to be used. If the BO has free and lock-in shares of the same ISIN, separate de-mat request has to be set up for free shares and lock-in shares.
- DP would verify that the DRF has been filled correctly.
- DP would setup a de-mat request on the CDSL or NSDL system and send the same to the Company and the Registrar and Transfer Agent.
- Issuer or Registrar and Transfer Agent (RTA) would verify the certificates and confirms the request.
- Once the request was raised, DP would deface and mutilate the physical certificates, generate a Demat Request Number (DRN) and send an electronic communication to the depository and also sends the DRF and the share certificate to the company.
- On receiving confirmation, depository will credit an equivalent number of securities in the de-mat account of the BO maintained with the depositories CDSL or NSDL.
- The depository will electronically download the details of the demat request and communicate the same to the electronic registry maintained by the Registrar of Companies.
De-mat Account and Conversion for individuals
The process of opening De-mat account is similar to opening a bank account.
- Investor has to choose a DP based on his convenience and the DP’s Charges
- Before opening the de-mat account, the investor have to execute an agreement on stamp paper to be provided by the DP, which defines the rights and obligations of both, the investor and DP’s.
- A photocopy of PAN card along with the original for verification by the DP
- Address proof such as passport, voter ID card, ration card, driving license, bank passport, verified copies of Telephone bills(latest ones not more than two months), electricity bills (latest two months bills) etc.,
- On opening a de-mat account, a unique BO ID (Beneficial Owner Identification) number is allotted, which should be quoted in all future transactions.
- A De-mat account can be opened and maintained even with zero balance.
Conversion and Re-materialisation of Shares to De-mat Account,
- Shares should be registered in the favour of investor before they can be dematerialised.
- Investor need to lodge the share certificates and a duly executed transfer deed with the company.
- Investors need to fill Demat Request Form (DRF) in triplicate along with the relevant details such as Dematerialization account number and submit the same along with physical shares to the Depository Participant. The combination of names in the shares must be same as that in the account.
- Once the request was raised Depository Participant (DP) will send an electronic request through depository to the company for confirmation of dematerialization.
- After verifying the documents received from the DP, the company will confirm the dematerialization of shares to the depository
- Once the shares for dematerialization have been submitted it may take 15 to 21 working days to credit in the account.
- After receiving the confirmation from the depository, the DP updates the account of the investor and shares are allocated in investor de-mat account.
- If we need the securities in to the physical form all we have to do is to submit Re-materialisation Request Form (RRF) through your DP in the same manner as Dematerialization.
- The charges for dematerialising differ from one Depository Participant to another.
- If a shareholder who wants to transfer shares to the demat account of another can transfer by issuing appropriate instructions to the concerned depository participant through Delivery Instruction Slip (DIS) which will be issued by the DP
Advantages of Dematerialization
- Dematerialization helps to avoid the time consuming and complex process of getting shares transferred in the name of buyers and also aims to shrink inherent problems
- No Stamp duty for transfer of securities in the Depository system whereas for physical share, the stamp duty of 0.25% of sale value is payable on transfer of shares.
- Facility for freezing or locking of investor accounts to make it non-operational for specified period
- Instead of filling for transfer deeds a simple form can be given to the DP.
- Facility to pledge and hypothecate securities. Banks prefer to lend against shares held in electronic form and offer better terms.
- DP will have a periodic statement of account holdings and an investor can obtain a statement of holdings as and when required for fee.
- In case investor losses periodic statements of holdings, he can inform DP and obtain a duplicate statement.
Benefit to Investors
- Every transaction in investors account need to be authorised by him, which creates total control of the investor over his investment.
- Reduces the risk of holding shares in physical format so that the risk of losing shares due to theft, fire, flood and earthquake can be eliminated.
- Reduces the risk of delayed settlement and enhances the profit because of increased participation.
- Reduces the risk of bad deliveries.
- Liquidity of securities is high.
- No need for notary, broker for taking delivery or submitting the share certificate.
- Investors save stamp duty while transferring shares in de-mat format.
- Ensures faster payment on sale of shares.
- Loan interest on de-mat shares are less compared to physical shares.
- Brokerage payment is less in case of de-mat shares.
- It provides more acceptability and liquidity of securities.
Benefit to Company,
- it helps in reducing the cost of new issues due to lower printing and distribution costs.
- It increases the efficiency of registrars and transfer agents and the secretarial department of the company
- Provides better communication facilities and timely services with shareholders, investors etc.
Benefit for brokers
- It provides greater profit due to increase in volume of trading.
- Eliminates the chances of forgery and bad delivery.
- Increases the trading efficiency, profitability and confidence in investors.