What is Dematerialisation: Meaning, Process & Benefits

Dematerialisation meaning refers to turning physical share certificates into electronic format. This conversion eliminates the hassle of keeping physical securities certificates. Forging, losing certificates, and delaying securities transfer are all risks associated with holding shares and securities in their physical form. In India, electronically storing the shares is the responsibility of National Securities Depository Ltd. and Central Depository Services Ltd.

A SEBI circular states that although shares can be held in physical form, transfers only become feasible following Dematerialisation process. In India, around 99% of the shares are already dematerialized. Dematerialisation has simplified the process of purchasing, selling, and transferring shares while also ensuring their security via a demat account.

Trading in electronic shares is mandatory in the stock market, according to SEBI guidelines. You can open a demat account from a reliable broker and buy or sell shares from your smartphone or computer, with an internet connection.

How does Dematerialisation Work?

Dematerialisation is a systematic process to convert physical share certificates into electronic certificates. This process eliminates the dependence on brokers and other intermediaries for trading securities. Dematerialisation gives shareholders complete control.

The Dematerialisation process also relieves you of additional expenses. It simplifies the trading process by providing a safe platform for global investors to invest, interact, and earn. Thus, by using technology, Dematerialisation simplifies trading.

Process of Dematerialisation of Shares

The process of Dematerialisation consists of the following five simple steps:

Step 1: Opening the Demat Account With DP

The first step towards the Dematerialisation of shares is to open a Demat account. For this, you need to shortlist Depository Participants (DPs) that provide Demat services. 

Step 2: Fill Out the DRF (Dematerialisation Request Form)

To convert physical shares into electronic form, a Dematerialisation Request Form (DRF) must be filled out and deposited along with the share certificates with the DP. Additionally, it is necessary to mention “Surrendered for Dematerialisation” on each share certificate.

Step 3: DP Processes Request

DPs need to process this request along with the share certificate and send it to registrars and transfer agents simultaneously.

Step 4: Request Approval

As soon as the request is approved, the physical share certificates will be destroyed, and the depository will receive confirmation of the Dematerialisation.

Step 5: Confirmation of Dematerialisation

A confirmation of the Dematerialisation of shares will be provided to the DP by the depository. An electronic credit will appear in the investor’s account once this has been done. After submitting the Dematerialisation request, this process takes 15-30 days.

Advantages of Dematerialisation

Here are some advantages of Dematerialisation follows:

• Reduced paperwork: The requirement for the physical shares is eliminated through Dematerialisation, which lowers the amount of paperwork needed for trading in shares and transfers.
• Convenience: Having stocks in electronic form removes the possibility of losing or injuring traditional share certificates and is more practical.
• Speed: The stock purchase and sale process has become faster and more efficient as a result of the Dematerialisation of shares.
• Transparency: The trading process has become more transparent as a result of Dematerialisation, which allows investors to easily watch their holdings and transactions.
• Cost savings: The price of the printing process, stamping, and managing physical share certificates has decreased as a result of Dematerialisation.
• Reduced fraud: The danger of fraud connected to tangible share certificates, such as fraudulent certificates, duplication, or theft, has decreased as a result of Dematerialisation.

Disadvantages of Dematerialisation

Here are a few disadvantages of Dematerialisation as follows:

• Tech issue: Dematerialisation is heavily dependent on technology, and any system disruption or failure could result in serious issues for investors.
• Risks related to cyber security: As electronic share trading becomes more prevalent, there is a higher chance that data breaches and cyber assaults will threaten the safety of investors' shares.
• Complexity: For some investors, particularly those that aren't tech-savvy or acquainted with the process, the dematerialisation process might be complicated and confusing.
• Additional costs: Keeping a demat account & conducting electronic share trading may incur additional costs for investors.
• Limited accessibility: Not all investors have access to dematerialisation yet, particularly those who reside in isolated or rural locations where they do not have access to the required infrastructure or technology.

Problems with Dematerialisation

The following are the two main problems with Dematerialisation:

Conclusion

The process of turning physical securities into digital format, which is easier, quicker, and more secure, is known as Dematerialisation. In order to trade on the stock market in India, investors must undergo Dematerialisation. Opening a Demat account, providing physical share certificates, being verified, dematerializing, holding digital shares, and trading are all part of the procedure.

Dematerialisation has several advantages, like less paperwork, greater transparency, and a decrease in fraud, but it also has significant drawbacks, including reliance on technology, cybersecurity threats, complexity, and extra costs. Dematerialisation has, in general, changed how assets are exchanged and made it a crucial step towards improving the efficiency and transparency of the financial markets.