The process by which the physical share certificates of a company are converted to an electronic form is what is commonly known as dematerialization of shares. These dematerialized shares are then held in an online demat account that you open with a depository. In the current context of stock trading, share dematerialization is mandatory in order to be able to sell or transfer your shares to another account.
Advantages of dematerialization of shares
Now that you know the answer to the question ‘what is dematerialization?,’ let's take a quick look at some of the benefits of share dematerialization.
1. Enhanced safety: Since dematerialization entails conversion of physical shares into electronic ones, you don’t have to worry about damage, mutilation, loss, or theft of your share certificates. You get to safely store all your shares in one single demat account that can be accessed from almost anywhere in the world.
2. Increased security: When physical share certificates were still in use, there were many instances of forgery, fraud, and duplication. However, with dematerialized shares, none of these incidents are possible.
3. Facilitation of instant transfer: With physical share certificates, transferring shares from one person to another would typically take days on end. But thanks to share dematerialization, share transfer is now exceptionally easy and almost instant.
The process of dematerialization of shares
Step#1:
The process starts by opening a Demat account (trading account), all you need to do is shortlist a depository participant that offers Demat services. You can also open a share market online.
Step#2:
To covert the physical shares into electronic or Demat form, you need to generate a Dematerialization Request. You have to submit a DRF i.e., Dematerialization Request Form available with the DP (Depository Participant). It has to be filled in and deposited along with the share certificates that you are holding. Each certificate must mention “Surrendered for Dematerialization”.
Step#3:
The DP will process this request along with the share certificates submitted by you, and simultaneously to the registrar and transfer agents through the depository.
Step#4:
Once the application is approved, all the share certifications in the physical form submitted by you will be destroyed and confirmation of dematerialization of shares will be sent to the depository.
Step#5:
The depository will confirm the dematerialization of share to the DP, and once it is over, your shares will be credited in your Demat Account which can be seen electronically.
Time taken in the dematerialization Process:
The total time taken in the dematerialization of physical shares into electronic format can vary from 15 to 30 days from the submission of the request.
Also, it is only possible to dematerialize your shares when you open the trading account. Therefore, the first step in the process is the most important.
How is dematerialization better than the physical share model?
Demat was introduced by SEBI in the year 1997, before that shares where held in the form of share certificates. The old method was time-consuming and laded many loopholes. It did not ensure the safety of share certificates as it could be lost or mutilated.
It requires an individual to buy the shares from a broker with an attached transfer form. the buyer needed to send the certificate along with the transfer form to the company’s registrar to get a new certificate in print format with their names. The entire process took 30 days and involved many risks, as it could be lost in transit, misplaced or mutilated.
There were even reported cases of form rejection due to signatures not matching the transfer form to the signature of the company’s records. With the introduction of dematerialization, it became the best way to overcome those problems.
How are Demat trading account and banking linked in a seamless loop?
Most of the individuals misunderstand trading to be a combination of purchase and sale. It also means payments and custody of shares. For an individual to buy shares in the trading account the account has to be pre-funded or he/she is required to pay from their account by T+1.
Post-purchase, on the T+2 day, your stock trading account online will be credited to reflect the bought shares. When you sell shares, the Demat account is debited on the T+1 day to the extent of shares sold and the net amount gets credited to your bank account on T+2 day.
Conclusion
As you can see from the above explanation, share dematerialization is uncomplicated and requires only a few minutes of your time. Dematerialization of shares has simplified the entire process of share trading, which was previously quite cumbersome. It has ushered in a new era of electronic share trading and has contributed immensely towards the growth and popularity of share trading amongst the public.