What is Dematerialisation?
In the modern-day banking system, any person investing in shares is very likely to have been suggested to opt for a 'Demat' or 'Demat Account.' Before deciding whether 'Demat' is an appropriate choice, it is essential to understand what is 'Demat.' The process of Demat was first introduced to India with the implementation of the Depositories Act 1996 for National Stock Exchange trades. Under the act, investors were given the "option to hold securities in physical or dematerialised form, or to rematerialise securities previously held in dematerialised form."
What is Demat?
Demat or Dematerialisation is the procedure of converting physical copies of shares and certificates into digital copies. Initially, investors were provided physical certificates of ownership. The investors were required to keep the physical certificates safe and undamaged. In case the certificate was damaged or lost, it would result in a loss for the investor or beneficiaries. However, with the Depositories Act 1996, new rules were implemented, due to which all unlisted public companies were mandated to issue dematerialised shares only. The dematerialisation of shares helps investors to conduct transactions promptly and securely.
The Process of Dematerialisation
The process of share dematerialisation involves four parties. The four primary parties involved are the share issuing company, depository, owner or beneficiary, and depository participant (DP) or brokerage firm.
- Share issuing company – Any company intending to issue dematerialised shares needs to revise its Article of Association, regulations for company operation, to deal dematerialised shares. After revision of regulations, companies must register with a depository.
- Depository – Currently, there are two depositories in India: National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CDSL). The depositories provide companies with a unique 12 digit International Securities Identification Number to identify each share and securities. Most dealings between the company and depository are intermediated by Registrar and Transfer Agents.
- Owner or Beneficiary – Under the current rules and regulations, new and old share investors must open a 'Demat Account.' The investor's actions, such as buying and selling exchange traded funds (ETFs), stocks, bonds, and mutual funds, are recorded in the registered account. Investors cannot register for an account on their own directly. Depository participants or brokerage firms register for demat account on behalf of their client (share owner).
- Depository participants (DP) – DP are registered agents of Depositories. DP register for demat accounts for their clients after processing their registration form and documents.
Steps of Dematerialisation
- Investors open demat account with the help of a Depository participant.
- The investor surrenders physical certificates with a 'Dematerialisation Request Form.'
- Depository participants begin to process the request form.
- Post-processing of request, all submitted physical certificates are destroyed, and shares are sent to the depository.
- Depository confirms the Dematerialisation of shares to the depository participant.
- Converted shares are credited to the registered demat account.
An investor can opt to rematerialise their shares even after Dematerialisation. Rematerialisation is the process of converting the dematerialised shares back to physical copies of certificates. Some investors opt to rematerialise their share in order to avoid maintenance charges on their demat account. Post-rematerialisation, the investors can conduct transactions physically only. Rematerialisation of shares shifts the authority of the account to the share issuing company.
Process of Rematerialisation
Similar to the process of share dematerialisation, investors are required to fill a Remat Request Form (RRF) with their respective depository agents. During the process of rematerialisation, investors cannot trade their shares. The process of rematerialisation is conducted in the following way:
- Investor contacts their respective depository participant.
- Depository participants provide a Remat Request Form (RRF) to the investor.
- After receiving the filled RRF depository participant submits the request to the depository and share issuer and temporarily blocks the investor's account.
- After successfully processing the request, the share issuer prints physical certificates and dispatches the certificates after confirming with the depository.
- The blocked balance on the account is debited.
Duration of Process of Dematerialisation and Rematerialisation
The entire process of Demat and Remat both takes about 30 days from the time of submission of the request to processing of the request.
Things to note for Dematerialisation and Rematerialisation
- According to the new rules and regulations, it is mandatory to conduct all transactions through a registered dematerialisation account.
- Transactions through registered dematerialisation account are faster.
- Rematerialised shares do not require a maintenance cost. However, security threats are higher compared to dematerialised shares.