DEMATERIALIZATION OF SHARES

BY

J ANITHA

II MBA

13251075

DEFINITION

• Dematerialization is the process of converting physical shares into an electronic form. Shares once converted into dematerialized form are held in a Demat account.

What Does Dematerialization-DEMAT Mean?

The move from physical certificates to electronic book keeping. Actual stock certificates are slowly being removed and retired from circulation in exchange for electronic recording.

FORMATION OF DEMATERIALIZATION

• HOW TO DEMATERIALIZE YOUR SHARES?

Fill up a dematerialization request form, which is available with your DP;

Submit your share certificates along with the form; Receive credit for the dematerialized

shares into your account in 15 days.

DOCCUMENTS REQUIRED FOR DEMAT ACCOUNT

• To open a Demat account you have to provide documents which fulfil the requirements of KYC (Know Your Customer) norms. You have to sign a contract with Stock broker. Generally the documents are:

• PAN (Compulsory)

• Bank statement (last 3 months)

• Address Proof

• Income Tax Return

• Two colour photos

DEMAT CONVERSION

• Converting physical records of investments into electronic records is called "dematerialising" of securities. In order to dematerialise physical securities, investors must fill in a Demat Request Form (DRF), which is available with the DP and submit the same along with physical certificates. Every security has an ISIN (International Securities Identification Number). A separate DRF must be filled for each ISIN.

• The complete process of dematerialisation is outlined below:

• The investor surrenders the certificates for dematerialisation to the DP.

• DP updates the account of the investor.

DEMATERIALIZATION OF SECURITIES

• In finance and financial law, dematerialization refers to the substitution of paper-form securities by book entry securities.

• dematerialized securities are often referred as intermediated securities , in particular by the Unidroit convention on substantive rules for intermediated securities .

THINGS INVESTORS SHOULD KNOW ABOUT ACCOUNT OPENING AND DEMATERIALISATION

• Providing the bank account details at the time of account opening.

• Change in bank account details.

• Change in the address of investor as provided to the DP.

• Opening multiple accounts.

• Minimum balance of securities required in Demat account.

• Account opening and ownership pattern of securities.

• Same combination of names on certificates but different sequence of names on the certificates or demat account.

• Holding a joint account on "Either or Survivor" basis like a bank account.

• Allowing some body else to operate your Demat account.

• Addition/deletion of the names of the account holders after opening the account.

• Closing a demat account and transfer of securities to another account with same or different DP.

• Freezing/ Locking a demat account.

• Dematerialized shares do not have any distinctive number

BENEFITS OF DEMAT ACCOUNT

• A safe and convenient way of holding securities (equity and debt instruments both).

• Securities can be transferred at an instruction immediately.

• Pledging of securities in a short period of time.

• Reduced paper work and transaction cost.

• Odd-lot shares can also be traded (can be even 1 share).

• Nomination facility available.

•Procedure of Demat shares.

MEANING OF A DEPOSITORY

• A Depository NSDL is an organization like a Central Bank where at the request of a shareholder his securities are held in the electronic form through the medium of a Depository Participant.

• Meaning of a depository participant-

A depository participant is one with whom an account has to be opened to trade in the electronic form.

OPERATIONS OF A DEPOSITORY SYSTEM

• The depository system operates in the lines of a banking system. A bank holds funds in its accounts and transfers funds between accounts whereas a depository holds securities in accounts and transfers securities between accounts.

PROBLEMS OF DEPOSITORY SYSTEM

• Lack of control.

• Need for greater supervision.

• Complexity of the system.

PRECAUTIONS

• Separate dematerialization requests will have to be filled for locked-in and free holdings.

• Separate dematerialization requests will have to be filled for holdings locked-in for different reasons.

• Separate dematerialization requests will have to be filled for fully paid up and partly paid-up holdings.

• Separate dematerialization requests will have to be filled for holdings in the different ISINs of a company.

ADVANTAGES OF DEMAT ACCOUNT

• The bonus/right shares allotted to the investor will be immediately credited into his account. There is no risk due to loss on account of fire, theft or mutilation. Transaction costs are usually lower than that in the physical segment. A demat account also helps avoid problems typically associated with physical share certificates. For example: delivery failures caused by signature mismatch, postal delays and loss of certificate during transit. Further, it eliminates the risks associated with forgery and due to damaged stock certificates. Demat account holders also avoid stamp duty (as against 0.5 per cent payable on physical shares) and filling up of transfer deeds.

DISADVANTAGES OF DEMAT

• Trading in securities may become uncontrolled in case of dematerialized securities.

• It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors.

• For dematerialized securities, the role of key market players such as stock-brokers needs to be supervised as they have the capability of manipulating the market.

• Multiple regulatory frameworks have to be conformed to, including the Depositories Act, Regulations and the various Bye-Laws of various depositories.

• Agreements are entered at various levels in the process of dematerialization. These may cause worries to the investor desirous of simplicity.