Benefits of Demat of Private Company Shares

Dematerialization (also known as Demat) is the conversion of shares held in physical form to electronic form for the same number of holdings. It enables the shareholder to get its physical certificates converted into electronic balances. Below are the benefits of demat of private company shares.

1. Safety and Security — Elimination of Loss or Theft of Shares

The most important advantage of a Demat of physical shares is the safety and security that it offers. When financial assets were held in physical form, there was always a risk of loss or theft of the share certificates. In a scenario of loss or theft, an investor would have to go through a ton of paperwork and operational challenges to be able to try and recover those assets. And even then there would be no guarantee of recovery. Holding shares in Demat form is safer and more secure. There is a negligible chance of theft or loss of assets when held in Demat form.

2. Faster and Smoother Settlements

Before dematerialization, trade settlement used to take 14 days due to the physical movement of paper shares from the seller to the RTA to the buyer. But with a Demat account, the settlement cycle has reduced from 14 days to 2 working days, saving the investors’ time, effort and energy. It’s rightly said, ’time is money!’.

3. Reduction in Errors

In the world of physical and offline settlements, due to the extent of manual work involved, there were a lot of manual errors as well. These were often referred to as "Vanda" trades or error trades. One of the biggest advantages of a Demat account is that these erroneous trades have been significantly reduced.

4. Easy Transmission

Due to dematerialization, in the unfortunate event of the death of a Demat account holder, the ownership of assets held in the Demat account can be quickly transferred to the next of kin. This is possible by either opening a joint Demat account or by adding the next of kin as a nominee to the Demat account. This was not possible when shares were held in physical form since the legal heirs had to go through too much effort to claim rights on the financial assets of the deceased Demat account holder. Easy transmission (transfer) of assets has been a significant advantage of Demat of physical shares.

5. Better Liquidity and Monetisation

Apart from easy transfer, another advantage of Demat of physical shares is that it facilitates easy liquidation of assets. You can easily liquidate i.e. sell, or take a loan against shares, mutual funds etc if you are holding these financial assets in a dematerialized form. Easy liquidation and monetization is not possible when assets are held in physical form.

6. Yields and Returns v/s Physical Assets — E.g. Gold

In addition to providing safety and higher liquidity, Demat of physical shares also help you hold physical assets in dematerialized form. Recently, the Government of India issued Sovereign Gold Bonds, which effectively gives an investor exposure to Gold with an additional return of 2.5%. This works wonderfully in favour of investors as they get the twin benefit of exposure to Gold as well as 2.5% annual interest which is otherwise not received by holding gold as an asset in a physical form.

7. Elimination of Odd-lot Problems

The greatest advantage of a Demat of private company shares is that it has solved the odd-lot problem. Earlier, physical shares used to be sold in lots but with the introduction of Demat accounts, you can buy and sell even a single share.

8. One-Stop Storage for all Assets

A Demat account not only stores your shares but also stores all your financial assets such as debentures, bonds, exchange-traded funds, unit-linked insurance policies etc. An important advantage of a Demat account is that all the assets are available under one roof, which makes for easy maintenance and tracking. It is also helpful while filing taxes as all your records are maintained in one place.

9. Simplified Accounting and Management

When financial assets are held in Demat form, all transactions get auto accounted for by the depository participant. This makes reconciliation and management of accounts extremely simple.

10. Central Point for Updating Information

Earlier, any change in address, contact details or nominee details had to be intimated to multiple companies. But with a Demat account, you can simply inform your depository participant i.e broker of the change in KYC records and the same will be rectified across all Demat accounts.

Conclusion

In India, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are currently the two registered depositories with SEBI. However, investors cannot directly trade through depositories and must interact through a depository participant. Both the NSDL and CDSL have hundreds of depository participants through whom investors can deal. To convert shares of a private limited company into Demat form, the company and the investors of the company must enter into an agreement with depository participants.

About SBS

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