Dematerialization

What is dematerialization?

• Dematerialization is the process of converting physical shares into an electronic form. Shares once converted into the dematerialized form are held in Demat account.
• India adopted the demat system successfully and there are plans to facilitate the trading of almost all financial assets in demat format in the future.

Advantages of Dematerialization

• Share transactions like sale or purchase and transfer/transmission etc. can be effected in a much simpler and faster way. 
• There is no risk due to loss on account of fire, theft or mutilation.
•  There is no chance of bad delivery at the time of selling shares as there is no signature mismatch.
• Transaction costs are usually lower than that in the physical segment.
• The bonus /rights shares allotted to the investor will be immediately credited into his account.
• Time and money is saved as you are not dealing in paper now. You need not go to the notary, broker for taking delivery or submitting the share certificate
• Liquidity is very high in case of demat format as whole process in automated.
• Interest on loan against demat shares are less as compared to physical shares
• Investors save stamp duty while transferring shares in demat format.

Securities that can be dematerialized

According to the SEBI (Depositories and Participants) Regulations, 1996, the following securities are eligible for holding in demat form

• Shares, Scrips, Stocks, Bonds, Debentures, debenture stock or other marketable securities of similar nature of any incorporated company of body corporate including underlying shares of ADRs and GDRs
• Units of Mutual Funds, Rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securitized debt, money market instruments, and unlisted securities.

Dematerialization Process (as per NSDL website)

1. The client (registered owner) will submit a request to the DP in the ‘Dematerialization Request Form for dematerialization, along with the certificates of securities to be dematerialized. Before submission, the client has to deface the certificates by writing “SURRENDERED FOR DEMATERIALISATION”.
2. The DP will verify that the form is duly filled in and the number of certificates, number of securities and the security type (equity, debenture etc.) are as given in the DRF. If the form and security count is in order, the DP will issue an acknowledgment slip duly signed and stamped, to the client.
3. The DP will scrutinize the form and the certificates. This scrutiny involves the following —Verification of Client’s signature on the dematerialization request with the specimen signature (the signature on the account opening form). If the signature differs, the DP should ensure the identity of the client. Compare the names on DRF and certificates with the client account, Paid up status, ISIN (International Securities Identification Number), Lock – in status, Distinctive numbers etc.
4. In case the securities are not in order, they are returned to the client and acknowledgment is obtained. The DP will reject the request and return the DRF and certificates in case: A single DRF is used to dematerialize securities of more than one company.
5. The certificates are mutilated, or they are defaced in such a way that the material information is not readable. It may advise the client to send the certificates to the Issuer/ R&T agent and get new securities issued in lieu thereof.
6. Part of the certificates pertaining to a single DRF is partly paid-up; the DP will reject the request and return the DRF along with the certificates. The DP may advise the client to send separate requests for the fully paid-up and partly paid-up securities.
7. Part of the certificates pertaining to a single DRF is locked-in, the DP will reject the request and return the DRF along with the certificates to the client. The DP may advise the client to send a separate request for the locked-in certificates. Also, certificates locked-in for different reasons should not be submitted together with a single DRF
8. In case the securities are in order, the details of the request as mentioned in the form are entered in the DPM (software provided by NSDL to the DP) and a Dematerialization Request Number (DRN) will be generated by the system.
9. The DRN so generated is entered in the space provided for the purpose in the dematerialization request form.
10. A person other than the person who entered the data is expected to verify details recorded for the DRN. The request is then released by the DP which is forwarded electronically to DM (DM – Depository Module, NSDL’s software system) by DPM.
11. The DM forwards the request to the Issuer/ R&T agent electronically.
12. The DP will fill the relevant portion viz., the authorization portion of the demat request form.
13. The DP will punch the certificates on the company name so that it does not destroy any material information on the certificate.
14. The DP will then dispatch the certificates along with the request form and a covering letter to the Issuer/ R&T agent.
15. The Issuer/ R&T agent confirms acceptance of the request for dematerialization in his system DPM (SHR) and the same will be forwarded to the DM if the request is found in order.
16. The DM will electronically authorize the creation of appropriate credit balances in the client’s account.
17. The DPM will credit the client’s account automatically.
18. The DP must inform the client of the changes in the client’s account following the confirmation of the request.
19. The issuer/ R&T may reject dematerialization request in some cases. The issuer or its R&T Agent will send an objection memo to the DP, with or without DRF and security certificates depending upon the reason for rejection. The DP/Investor has to remove reasons for objection within 15 days of receiving the objection memo. If the DP fails to remove the objections within 15 days, the issuer or its R&T Agent may reject the request and return DRF and accompanying certificates to the DP. The DP, if the client so requires, may generate a new dematerialization request and send the securities again to the issuer or its R&T Agent.
20. No fresh request can be generated for the same securities until the issuer or its R&T Agent has rejected the earlier request and informed NSDL and the DP about it.

This is the complete process of dematerialization of securities in India.