What is dematerialisation?

In 1994, the National Stock Exchange was incorporated and with its incorporation, electronic screen-based trading began in India. This type of trading always made stock prices available to everyone. It also necessitated a shift to electronic modes of securities. This was achieved by converting physical records to digital records through a process called dematerialisation.

It is important to understand what is dematerialisation to fully understand how this impacted trading in the stock markets.

In dematerialisation, the physical certificates are extinguished and converted into an electronic form. Even if the actual physical certificates exist, they cannot be used for trading. The company issuing shares no longer holds share certificates in its record. The electronic record is held with the depository participant in the demat account.

How to convert physical certificates into demat form:

For dematerialisation of securities, it is important to submit a Dematerialisation Request Form (DRF) to the depository participant along with the physical certificate. The physical certificates have to be in your name. If they are not in your name, they have to first be transferred to your name before being dematerialised. When you submit the shares for demat, you will have to write ‘surrendered for demat’ clearly on the face of it. This is to prevent subsequent misuse.

Once the process is complete, the depository participant will convert the shares into demat form and this will be credited to your account. At any time in the future, the electronic demat shares can be converted into physical form through a process called rematerialisation. In this process, the electronic record is converted to a physical record. The stock exchange has notified companies whose shares are only available in demat form. If you purchase any shares in a demat form, then you only get an electronic record. However, shares held by non-institutional investors can be sold in both physical and demat form.

Dematerialisation services are provided in India by two companies, National Securities Depository Limited or NSDL and Central Depository Services (India) Limited or CDSL. To provide dematerialisation services to individuals, there are agents called depository participants who register with either of the depositories. The list of depository participants is available on the NSDL and CDSL websites. The account that the person has to open is called a demat account.

What is demat account? It is an electronic repository for the online investments made by a person. It is an online storage for different instruments like equity shares, mutual funds, exchange traded funds, bonds, treasury bills, non-convertible debentures, etc. It allows the account holder to view the balance of the account at any point of time. The current market value of the instruments can also be seen from the demat account.

Whatever securities are dematerialised get credited to a person’s account. There are no restrictions on the number of demat accounts that can be held by a person. This means a person can open an account with a CDSL registered intermediary as well as an NSDL registered intermediary without any problems.

A depository participant levies different charges such as annual maintenance fees, debit transaction fees, dematerialisation fees, rematerialisation fees on the account. Some charges are payable yearly whereas others are service based charges which must be paid only in case any transactions are done.

Maithili Pawar is a finance professor. She has written on share market basics. Through this article, she has provided detailed information on stock market.