What is Dematerialisation Meaning?

The dematerialisation of shares meaning refers to the process of converting physical share certificates into electronic form. The primary purpose is to hold and transfer securities more safely, faster, and efficiently. It eliminates the risks linked with paper certificates, such as loss, theft, forgery, or physical damage, and ensures smooth participation in the stock market through a Demat account. 

In simple terms, dematerialisation allows investors to store their shares digitally instead of keeping physical documents. As many investors move towards online investing, dematerialisation has become essential for secure and convenient management of securities. 

Importance of Dematerialisation 

Below are the key reasons why dematerialisation is needed in the share market: 
 

• Elimination of Physical Certificates: Dematerialisation removes the need for physical share certificates, which are prone to loss, theft, damage, or forgery. Electronic records ensure a safer, tamper-proof way of holding shares. 
• Faster and More Efficient Transactions: With dematerialised shares, the buying, selling, and transfer of shares can be done almost instantly through digital systems, reducing the time and cost associated with paper-based processes. 
• Reduced Risk of Fraud: Physical certificates can be easily forged or manipulated. Dematerialisation ensures that shares are stored in a secure electronic format, making fraudulent activities such as fake share certificates much harder to execute. 
• Lower Costs: Handling physical shares involves administrative costs such as printing, postage, and storage. With dematerialisation, these expenses are minimised, reducing overall transaction costs for investors and companies. 
• Improved Liquidity: The ease of transferring shares electronically enhances market liquidity, as investors can quickly and easily buy and sell shares, fostering a more dynamic and efficient market. 

Dematerialisation Process 

The processes of dematerialisation are as follows: 

Opening a Demat Account: 

An investor needs to open a Demat account with a registered DP. In this account, all securities will be electronically stored and maintained. 

Submission of Physical Certificates :

To start the conversion, the investor needs to fill in the Dematerialisation Request Form (DRF) as provided by the DP and submit the same along with the original physical share certificates. Each certificate is to be stamped as “Surrendered for Dematerialisation”. 

Verification and Processing of Request: 

Post-submission, the details are reviewed by the DP and forwarded to the company's registrar and transfer agent for verification and further processing of the DRF and certificates. 

Request Confirmation: 

Once the depository gets confirmation from the Registrars and Transfer Agents ( RTA), physical certificates are permanently cancelled or immobilised. They cannot be used any further or traded in physical form. 

Crediting the Demat Account:

After completion, the depository informs the DP, and the equivalent number of electronic shares is credited to the investor’s Demat account. The investor can then view, trade, or manage these holdings digitally. 

History of Dematerialisation 

The concept of dematerialisation grew significantly in India after the economic liberalisation of 1991. To regulate and modernise the capital markets, the Securities and Exchange Board of India (SEBI) was set up in 1992. SEBI later introduced the dematerialisation framework under the Depositories Act, 1996. By 2000, it became mandatory for companies issuing IPOs worth ₹10 crore or more to offer shares exclusively in electronic form. Today, a Demat account is a basic requirement to participate in the stock market, and therefore, dematerialisation has become an integral part of the financial development of India. 

What are the Advantages & Disadvantages of Dematerialisation? 

Below is the table highlighting advantages and disadvantages of dematerialisation: 
  

What are the Problems with Dematerialisation? 

The following section explains the problem with dematerialisation in the share market: 
 

• Technical Issues: Sometimes, dematerialisation can face technical glitches, leading to delays in the conversion of physical shares into electronic form, which can cause inconvenience for investors. 
• Cost and Fees: There can be hidden costs or charges for dematerialising physical shares, such as account maintenance fees with depositories or brokers, which may discourage small investors. 
• Fraud and Security Risks: While dematerialisation reduces physical theft, it also opens doors for cyber fraud and hacking, making it crucial for investors to have secure online accounts. 
• Complexity for New Investors: Understanding the dematerialisation process can be confusing for new or less tech-savvy investors, especially with the need to open a Demat account and understand the rules. 
• Non-Compliance Issues: Some investors may face issues with the proper documentation or non-compliance with dematerialisation regulations, leading to delays or rejections in converting physical shares into electronic form. 

Things to Consider with Dematerialisation 

The following are the things one should consider about dematerialisation: 

• Many older investors may find the process unfamiliar or challenging, especially when converting very old physical certificates. 
• Verification and processing can sometimes take time, depending on the RTA and DP. 
• The dematerialisation request may be rejected if the information in the DRF does not match company records or if share certificates are incorrect. 
• The process involves intermediaries like Depository Participants (DPs) and Registrars and Transfer Agents (RTAs), which can be time-consuming 

Conclusion 

The dematerialisation of shares has revolutionised the stock market by replacing physical certificates with electronic records, making transactions faster and more secure. This shift has increased transparency and reduced the risk of fraud. Investors can easily track their holdings through a stock market app, offering convenience and real-time updates.