I wont blame those who are more familiar with Harry Potter and his adventures at Hogwarts School of Witchcraft and Wizardry for pre-supposing that the word “Dematerialisation” is something akin to “Disapparation” – both in terms of appearance and meaning. Take heart, because Dematerialisation(or Demat as it is commonly referred to) stands for disappearance of share/debenture bond certificates into thin air.but the similarity between the two words ends there.
What are Physical Certificates?
When I purchase the equity shares or bonds/debentures issued by a company, I’m issued something called a physical certificate that contains details of the number of securities standing to my credit, the serial numbers thereof, the face value, date of allotment, etc. Till about five years ago this is the only piece of documentary evidence that an investor had to support his claims of having invested a certain sum of money in that particular company.
The certificates by themselves posed many problems.it had to be stored carefully in a safe place so that it wouldn’t get stolen, lost or defaced by the ravages of time. Then there were also the problems associated with wrong transfers and fake certificates. However, the introduction of Demat has done away with all these problems and made life a lot easier.
What exactly is Dematerialisation?
Simply put, Dematerialisation is the process by which my holding of physical certificates is converted into an electronic record. To put it more simply, just as a bank holds my money in a savings account, the record of my share holdings is held by an institution called a Depository. Given a choice, would you prefer to carry tons of cash on your person or prefer to carry a debit card instead while on a shopping spree? If you prefer to carry cash, there may be many problems.some notes may be torn or soiled and not accepted at merchant establishments and there is also the problem of security while carrying money in the pocket. Got it now?
What are the benefits of Dematerialisation?
Since Dematerialised shares are nothing but an electronic record, there’s no question of them being fake or spurious.
As there is no physical certificate, there is no need to find a safe place to keep it under lock and key.
It also allows the convenience of buying highly priced shares of blue-chip companies in small numbers. Whereas previously, shares had to be bought in market lots of 100 shares, I now have the opportunity of buying even 1 share of Infosys and claim to be its shareholder!
In case of allotment of bonus shares by my company, they can be directly credited to my Demat account thus obviating the hassles of postal delays and certificates getting lost in transit.
How do I go about Dematerialising physical certificates?
There are four easy steps for dematerialising physical certificates -
The first thing to be done is to open a Demat Account with a Depository Participant(DP). The DPs are statutorily required to be registered with SEBI and comprise almost all Banks and big Broking Houses.
After completion of the account opening formalities, submit a request to the DP in the Dematerialisation Request Form for dematerialisation along with the certificates of the companies to be dematerialised. I will need to write across the face of the surrendered certificate’Surrendered for Dematerialisation.’ This certificates are defaced so that they can be destroyed and not be misused in the future.
The DP will issue an acknowledgement slip duly signed and stamped by its authorised signatory on receipt of the certificates.
Finally, when the issuing company(of the certificates) or its registrar confirms accepting the request for dematerialisation, my account would be automatically credited for those many shares.
What if I want to buy or sell shares thereafter?
When I buy or sell shares in demat, all I have to do is to get a confirmation of the purchase/sale by my broker and approach my DP with a request to debit or credit my account, as the case may be, for the transaction. The account will immediately be updated. Its as simple as that!
Is this whole process costly?
Not at all! On the contrary things have become more financially pleasing with the introduction of Demat. The concept of Stamp Duty which was applicable to physical certificates is no longer there. The most common charges incurred would be:
a) Account Maintenance Charges – Most DPs charge nominal amounts towards this.in the range of Rs. 25-30 per month payable annually. Some DPs collect this amount as Account Opening Charges.
b) Demat charges – These are incurred at the time of conversion of the physical certificates into demat form and are very nominal in nature too.
There are a few other charges like those for off-market transactions and for pledged accounts but those are not applicable to us at this juncture.
The settlement of transactions also takes a shorter duration when the shares are in Demat form thus saving a vital resource for all of us. For those who might want to convert the demat shares back into physical certificates, that’s perfectly fine. Again, for a nominal charge your DP can take it up with the issuing company or its Registrar and do the needful within a short span of time.
The DP also sends an “Account Statement” periodically(monthly/quarterly/semi-annually) just like a bank does for a savings bank account. This aids us in keeping track of our securities bought and sold from time to time. For those not familiar with this concept, I guess it must have given a decent overview of Dematerialisation and the fundas it involves.
Now, moving on to Disapparation.