What Is Dematerialization (DEMAT)?
Dematerialization is the transformation of physical certificates of ownership of shares or other securities into electronic form so that they can be held in dematerialized form in an account with a Depository.
Because they are the most accurate type of record keeping, some trading businesses demand DEMAT accounts. It was created to provide traders with greater protection and speed. Financial firms have largely adopted dematerialization in accounting bookkeeping.
Dematerialization is the process of converting physical securities, such as stocks and bonds, into electronic forms. This enables investors to hold their securities in an account with a depository instead of having to keep track of paper certificates.
Dematerialization has many benefits, including reducing fraud and making it easier to buy and sell securities. It also helps to streamline the process of corporate actions, such as dividend payments and stock splits.
Why is Dematerialization Demat Needed?
The physical form of securities involves a number of risks, such as loss, theft, mutilation, and forgery. These risks can be effectively eliminated by dematerialization. Moreover, it is difficult to keep track of physical certificates and transfer them every time they are sold or bought.
The process of dematerialization makes it easier to buy and sell securities as there is no need to physically transfer certificates. It also reduces the chances of fraud and makes it easier to track corporate actions.
How Dematerialization Demat Works
Under dematerialization, instead of holding physical certificates, investors hold their securities in an account with a Depository. When an investor wants to buy shares, the depository credits the required number of shares to the investor’s account.
Similarly, when an investor wants to sell shares, the depository debits the required number of shares from the investor’s account. The settlement of trades takes place in T+2 days, where T is the trade date.
The dematerialization process is carried out by depositories such as the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
Process of Dematerialization
1. Selecting a depository participant (DP)
The first step is to select a DP. The investor has to approach a DP of his/her choice and fill up an account opening form.
2. Filling an account opening form
The account opening form requires the investor to provide personal details, such as name, date of birth, address, contact details, etc. The investor also has to mention the type of account he/she wants to open, such as a Demat account, trading account, or both.
3. Submitting documents for verification
The investor has to submit KYC (Know Your Customer) documents, such as identity proof and address proof, for verification. The investor also has to submit a canceled cheque leaf or bank statement for the verification of his/her bank account details.
4. Signing a standardized agreement with the DP
After the documents are verified, the investor has to sign a standardized agreement with the DP. This agreement lays down the rights and obligations of both parties.
5. Verification of documents
Once the agreement is signed, the DP verifies the documents again. After the verification is complete, the DP opens a dematerialization account in the name of the investor.
6. Demat account number and ID are generated
After the account is opened, the depository participant allocates a dematerialization account number (DEMAT) and an identification number (ID) to the investor. The DEMAT account number is used to track the securities held in dematerialized form, while the ID is used to uniquely identify the investor.
The dematerialization process is now complete, and the investor can start buying and selling securities in dematerialized form.
Features of Dematerialization
The main features of dematerialization are as follows
- Eliminates the risks associated with holding physical certificates, such as loss, theft, and forgery.
- Facilitates the buying and selling of securities as there is no need to physically transfer certificates.
- Reduces the chances of fraud and makes it easier to track corporate actions.
- Enables the dematerialization of securities of companies that are not listed on a stock exchange.
- Allows investors to hold multiple types of securities in a single account.
Benefits of Dematerialization
Some of the advantages of dematerialization are as follows
1. Eliminating the risks associated with physical certificates
The dematerialization process eliminates the risks associated with holding physical securities, such as loss, theft, and forgery. This is because dematerialized securities are stored in an electronic format and can only be accessed by the investor using a unique identification number.
2. Easy and convenient fund transfer
Dematerialization is a convenient way of holding securities as it eliminates the need to physically transfer certificates. This is especially useful for investors who hold large quantities of shares.
3. Safe and secure
Dematerialization is a safe and secure way of holding securities as they are stored in an electronic format. This reduces the chances of fraud and makes it easier to track corporate actions.
4. Nomination facility
Dematerialization accounts come with a nomination facility, which allows investors to nominate a person to receive their securities in the event of their death.
One of the main advantages of dematerialization is that it is a paperless process. This not only makes it more convenient for investors but also helps to save the environment.
6. Avail loan facility
Investors can avail of a loan against their dematerialized securities. This can be useful in times of financial difficulty or when an opportunity arises to buy securities at a lower price.
7. Easily traceable
Dematerialized securities are easily traceable as they are stored in an electronic format. This makes it easier to track corporate actions and prevent fraud.
8. Ease in receiving corporate benefits
Investors who hold dematerialized securities can easily receive corporate benefits such as dividends and rights issues. This is because dematerialized securities are stored in an electronic format and can be accessed by the investor using a unique identification number.
9. Multiple purposes
Dematerialization can be used for multiple purposes such as buying and selling securities, availing of loans, and receiving corporate benefits. This makes it a convenient way of holding securities for investors.
Disadvantages of Dematerialization
Some of the disadvantages of dematerialization are as follows:
1. Requires an account with a depository participant
In order to dematerialize securities, investors must open an account with a depository participant. This can be time-consuming and inconvenient for some investors.
2. Limited to certain types of securities
At present, dematerialization is only available for certain types of securities such as shares and bonds. This limits the usefulness of dematerialization for some investors.
3. Requires a PAN card
Investors must have a PAN card in order to dematerialize their securities. This can be a problem for some investors who do not have a PAN card.
4. Charges may be levied
Some depository participants may levy charges for dematerializing securities. This can be an additional expense for investors.
5. Maybe not available in all areas
Dematerialization may not be available in all areas. This can be a problem for investors who live in areas where dematerialization is not available.
Despite the disadvantages, dematerialization is a convenient and safe way of holding securities. It is especially useful for investors who hold large quantities of shares. For these investors, dematerialization can save time and money.
How long does it take to dematerialize the shares?
The dematerialization process usually takes about 15 days.
What is Re-materialization?
Rematerialization is the process of converting dematerialized securities back into physical form. This can be done by requesting re-materialization from the depository participant.
What is a Dematerialization Request Form (DRF)?
The dematerialization request form (DRF) is a form that must be filled by investors in order to dematerialize their securities.
What is a Depository Participant?
A depository participant is an entity that provides depository services to investors. It acts as an intermediary between the investor and the depository.
What is a Depository?
A depository is an institution that holds securities in electronic form. It also provides services related to the dematerialization and rematerialization of securities.
Depository and Depository Participants in USA
In the United States, there are two major depositories – The Depository Trust Company (DTC) and The Depository Trust & Clearing Corporation (DTCC).
The DTC is a subsidiary of the DTCC. It holds securities in an electronic form and provides services related to the dematerialization and rematerialization of securities.
The DTCC is a holding company that provides clearing and settlement services for financial markets. It also provides depository services through its subsidiary, the DTC.
Dematerialization is the process of converting physical shares into electronic forms. This can be done by opening a free Demat account with a depository participant like a bank or a broker. Demat account holders can hold their securities in an electronic form and trade them in the stock market. Government securities and mutual fund units can also be held in a Demat account.
Physical share certificates can be converted into Dematshares by submitting a Demat request form to the company or broker. The form must be signed by all the holders of the physical shares. After the Dematerialization process is complete, the shareholder will receive a Demat account statement from the depository participant.
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