What is Dematerialisation (DEMAT) ?
Dematerialisation also known as "DEMAT". It is the method by which the physical share certificates are converted into equal number of securities in an electronic form. This method is same like change paper money to an electronic bank account and is also very helpful for the investors.
The process of changing physical securities to the t book entry form i.e. electronic form is known as dematerialisation or immobilization. The dematting of shares helps in reducing the risk related to bad to fire, theft, deliveries, postal delays, handling problems, loss in transit, forgery, counterfeiting, loss due to mutilation, etc.
It beneficial for the investors as the investors does not have to pay stamp duty on transfer low brokerage of shares, the broker charge low fee for selling dematerialised share as the risk of bad delivery is very low, bonus and rights is directly credited to the accounts which help in reducing paper work and the delay in the work. It also helps in removing the problems and demerits of trading odd lot shares because the market lot for dematerialised shares is only one share.
The account in Depository Participant (DP) need to be opened by the investors for trading in dematerialised securities. Usually, the stock exchange have different sector for trading in dematerialised securities while the other sector for settling the trade in physical or dematerialised form as by the customers.
DEMAT (Depositary) Services
The financial service involved with holding maintaining and dealing in securities in electronic form by a financial intermediary is known as depositary participant which are called as 'DEMAT or depositary services'.
The change of securities from their physical form to electronic form is known as securities demated. The investors can open different number of beneficiary accounts as their want along with the number of depositary required by them. There is no need to maintain minimum number of securities in demat account. An investor receives shares allotted in IPOs directly present in their demat account. The Bonus/Rights/Conversion (of Debentures) shares is directly credited to demat account. The four parties which are involved in the demat transaction are the customer, the Depositary Participant (DP), the depositary and the Share Registrar and Transfer Agent (R&T).
Dematerialised Securities
The SEBI gives the guidelines for the depository system in India. The various securities which are eligible for holding in dematerialised form given by SEBI which are as follows :
- The shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of same type of any incorporated company or other body corporate which consists of underlying shares of ADRs and GDRs.
- The units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securitized debt, money market instruments, government securities, national saving certificates, Kisan Vikas Patra and unlisted securities.
Need of Dematerialisation (DEMAT) Services in India
The need of DEMAT service was recognized in the 1990 due to following reasons :
- There was lot of irregularities in the securities which was seen in the scam of 1992 which also proves the bad performance of settlement system.
- The allotment and transfer of shares was the time consuming process earlier which affected the growth of capital market.
- There was increase in the value of transaction by opening-up of the Indian Economy which lead to increase in the equity cult.
- There was increase in the fiscal deficit made by the government which made the foreign investment important for the growth of the economy due to non-availability of depositories.
- There were various problems related with the dealing of physical shares like:
- The problem of theft, fake or wrong transfer.
- If the signatures does matches than there is delay in the transfer of shares.
- There is lot of paper work required in the buying, selling and transfer leading to costs of handling, storage, transportation and other back office costs.
The Government of India in 1996 framed Depositories Act, 1996 introduced the depositary service for overcoming of these problems.
The depositary are of two types they are dematerialised and immobilized depositary. The paper certificates are removed once the verification by the custodians is done in dematerialisation while in immobilization the initial paper certificates is saved in the vaults by custodians and all the other movement of papers is stopped.
Advantages of Dematerialisation
The advantages of Demat Account are as follows :
1) Advantages to the Issuer :
- The various costs like printing of share certificates and postal charges related to the public issues can be reduced.
- The image of the company will be improved by DEMAT and also because of globalization.
- It will give better knowledge about the name and addresses of the shareholders.
- It will help in inviting the international investors to the companies without having any foreign branches.
- The method of getting approval for the transfers will be removed.
2) Advantages to the Investors :
- The electronic transfer help in removing the difficulty and inter-operation which is related to scrip-based system.
- The risk of loss, theft, damage or fraud and delays in delivery is removed.
- There is no problem in the filling of transfer deeds and doing the transfer of documents with the company.
- The time taken in transfer of shares to the name of the shareholder is reduced.
- It helps in removing the risk related to the loss and fraudulent blocking of share certificates in postal transit.
- The shareholder can save the stamp duty @0.5% of the market value of shares by the help of dematerialisation but need to pay other charges charged by the DPs.
- There is less problem involved in the DEMAT method as compared to the physical method were the shares are bought and sold at marketable lot.
- In the DEMAT mode, there is no discretion is available to the Board of Directors as in case in physical mode in which there is scope for the Board of Directors registration of a transfer of power vested with the Board by the Articles of Association of the Company as the transfer of shares will not pass through the company in the DEMAT mode.
- In DEMAT mode, there is surety of reality.
Disadvantages of Dematerialisation
The disadvantages of dematerialisation of shares are as follows :
- There is no control over the trading in securities in the case of dematerialised securities.
- It is important to check the trading in dematerialised securities by capital market regulator and the trading should not be a loss for the investors. In case of dematerialised securities the work of the important market players like stock-brokers has to be checked as they can manipulate the market.
- The various regulatory guidelines need to be established which consist of Depositories Act, Regulations and the various Bye Laws of various depositories. Also, there should be an agreement at the various level in the process of dematerialisation. It may lead to anxiety to the investor desire of simplicity according to the transactions in dematerialised securities.
Process of Depository
The depository process are as follows:
Step 1: Opening an Account :
In the first step, an investor who wish to use the services of demat need to open an account with the depositary by the DP which could either custodian, a bank, a broker or individual with the net worth of minimum 1 crore. An investor must have a PAN card for opening the demat account and also there need to be an agreement with DP by which he gets the client account number or client ID number.
Step 2: Dematerialization :
In the second step, the investors give the application by filling the Dematerialization Request Form (DRF) for converting the physical holdings of securities into the dematerialization form to the DP. The DP sends the form in seven days along with the security certificates to the issuers or its registrar and transfer agent once there is electronic registration of the request with the depositary.
The depositary electronically moves the demat request to the respective issuer or its registrar and transfer agent who will checked the validation of the security certificates and also that the DRF is being recorded as the member in its register of members. Once the verification is done than the issuer or its register and transfer agent allows an electronic credit for the security according to the respective /client. Hence, the depositary lead, the credit entries to be done in the account of the client.
Step 3: Rematerialization :
In this step, the investors needs to submit an application to the depositury by the help of DP for withdrawing the security balance. In the application, an investor appeals for the withdrawal of balance in his account in a Rematerialisation Request Form (RRF). The participants after receiving the RRF checks whether the adequate number of security is present in the account of the client if its happens than the participant approves the RRF and stop the balance of the customers for the re-materialization quantity and electronically moves the request to the depositary.
The depositary electronically moves the known rematerialisation application to the issuer or to its registrar agent on the regular basis. The registrar and transfer agent makes the electronic confirmation of the depositary which the RRF has been accepted. Hence, the issuer or registrar and transfer agent moves the share certificates emerging from the rematerialization request in 30 days.
Step 4: Distributing Dividend :
In this step, the issuer like the company, registrar or transfer agent will give the information about the dates for book closures, redemption or maturity of security conversion of warrants and call money from time-to time to the depositary of the corporate actions. The depositary will give the electronic list of holdings of the customers on cut-off date. According to the list of holding the client distributes the dividend, interest and other financial advantages to the customers. The company or the register and transfer agent will distribute the dividend and interest when the profit is in the form of securities if the newly created security is an eligible security and the customers has agreed to get the profit in the form of securities by depository.
Step 5: Closing an Account :
In this step the customer who want to close an account will make an application according to the format which has affected the participant. The customer can close the account there is no amount outstanding but in case any balance exists than the account will be closed in the following way :
- By rematerialisation of all the present balance in his account.
- By transferring the balanced security in the other account which can be of same participant or with different participants.
The participant will check that there is no balance pending in the closure of such an account and only if there is no balance pending than the participant can work on closing the account of the customers according to the request.
Types of Depository Services in India
There are two types of depository services working in the country which are National Securities Depositories Limited (NSDL) and Central Depositories Services Limited (CDSL) are as follows :
NSDL (National Securities Depositories Limited)
NSDL was formed in November, 1996. It was the first Indian depository company. It was jointly sponsored by the Unit Trust of India, NSE, State Bank of India, HDFC Bank and Citibank. It is the public company which is managed by a Board of Directors and follows the rules and regulations by the business rules.
It is the public limited which was formed under the Companies Act, 1956 which had the paid up equity capital of 105 crore. In the year 2000, the paid-up capital was reduced to 80 crore as the NSDL has bought back its shares of the face value of 125 crore. Still the net worth of NSDL is more than 100 crore as per the guidelines of SEBI. The shareholders of NSDL as on March 31, 2016 are as follows :
- Industrial Development Bank of India
- Administrator of the Specified Undertaking of the Unit Trust of India - DRF
- National Stock Exchange
- State Bank of India
- Oriental Bank of Commerce
- Citibank N.A.
- Standard Chartered Bank
- HDFC Bank Limited
- The Hong Kong and Shanghai Banking Corporation Limited
- Deutsche Bank A.G.
- Dena Bank
- Canara Bank
- Axis Bank
- Union Bank of India
Role of NSDL
The various role performed by National Securities Depositories Limited are as follows :
- It helps in surrendering and withdrawing of securities to and from the depositary.
- It helps in maintaining the investors holding in the electronic form.
- It affects the settlement of securities which are traded on the exchanges.
- It also helps in settling the securities which are not traded in the stock exchange.
- There is the transfer of securities.
- Guaranteeing the dematerialised of securities.
- There is the electronic credit facility in the public offerings of companies.
- There should be receipt of non-cash corporate profit like bonus, rights, etc.
CDSL (Central Depository Services Limited)
Central Depositary Services (CDS) is another depositary. It is being linked with the stock exchange till now. It started its working after receiving the certificate of commencement of business from SEBI. The Bombay Stock Exchange (BSE) along with the Bank of India, Bank of Baroda, State Bank of India and HDFC Bank has sponsored Central Depository Services (India) Limited (CDSL). It is the secondary depositary in India for dealing in an electronic form of securities.
There was a very important part of BSE in the making of CDSL as BSE is been involved with the venture starting from the inception and has contributed to the working of the project. The initial capital was 7104.50 crores. The various shareholders related to CDSL by the effect from March, 2016 is as follows :
- BSE Ltd.
- Bank of India
- Bank of Baroda
- State Bank of India
- HDFC Bank Ltd.
- Standard Chartered Bank
- Canara Bank
- Life Insurance Corporation of India
- Union Bank of India
- Bank of Maharashtra
- The Calcutta Stock Exchange Limited
Role of CDSL
The various role of Central Depository Services Limited are as follows :
- It is involved in the process of dematerialisation which means changing the physical certificates into the electronic form.
- It also does rematerialisation which means changing the securities in demat form into physical certificates.
- It also helps in repurchasing and redemption of mutual fund units.
- It is involved in the electronic settlement of trades in stock exchanges.
- It guarantees the dematerialised securities against loan.
- It helps in the electronic credit of securities selected in public issue, right issue.
- It helps in receiving the non-cash corporate benefits like bonus in the electronic form.
- The closing of demat account should be done to avoid the unnecessary debit from the account.
- It provides nomination facilities for the demat account.
- There is service given for changing the address.
- There is proper transmission of securities.
- The various other facilities like holding debt instrument in the same account or using the stock lending and borrowing facility.
Also Read :
Difference Between NSDL & CDSL
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