The process of converting your physical shares into an electronic (or dematerialized) form is called dematerialization.
Complicated right? Let us try and understand with a real-life example.
Often you hear stories of a son or a daughter or even grandsons or granddaughters discovering huge stock market wealth that their parents or grandparents left behind. They would find physical share certificates of stocks bought in the 90s, which in most cases, may have turned into multi-baggers. But it’s all paper money.
You need to sell those share certificates to convert them into real money. Here comes the trouble. You cannot sell physical shares in their original form. You will have to convert it into the Demat form before you sell it.
What is a Demat form? How to do this?
We have it all covered in this article.
Content:
What is Dematerialization?
The process of converting your physical shares into an electronic (or dematerialized) form is called dematerialization. Dematerialization is when you take your physical stockholding online. Why is it important? Let’s get to the background story.
In the 90s National Stock Exchange (NSE) broke the monopoly of the Bombay Stock Exchange by taking several measures to stay ahead in the game. It simplified the trading process by introducing Demat trading in 1996, doing away with the paperwork. The companies would still issue physical certificates, but gradually most investors switched to Demat trading.
Check out the Top Differences between NSE & BSE.
As things stand today, companies no longer issue physical certificates. You must have a Demat account to buy or sell a share. In 2019, the government had fixed a deadline of March 31, 2019, beyond which physical shares would turn illiquid. Thus, one cannot sell physical shares any more.
If you find out that you still hold physical shares, you must open a Demat account now. The company will take back your physical shares, destroy them and issue the equivalent number of shares in electronic form.
Learn more about a Demat Account by clicking here.
Dematerialization Process
It is a simple process:
- Open a Demat Account
- Surrender your Physical Shares
Opening a Demat Account
Before we come to the process, you must understand about depositories. The way banks hold your cash in the bank account, depositories hold your shares in the Demat account.
There are two government-registered depositories in India – Central Depositories Services India Ltd. (CDSL) and National Securities Depository Ltd. (NSDL). CDSL and NSDL, with the help of depository participants, hold your shares in electronic form.
To get a detailed understanding of Depository Participants, read this blog by clicking on the link.
To open a Demat account, you need to approach a depository participant, which acts as an intermediary between shareholders and depositories. Typically, banks, financial institutions, and broking firms operate as depository participants.
We (AliceBlue) are also a depository participant and can help you open a Demat account in just 15 minutes. All you need to do is fill out a form and submit scanned copies of proof of address and identity documents (PAN Card, Aadhar Card), along with a passport-size photograph. It’s all digital.
Learn what is a Demat Account and Open your Account in 15 Minutes Now!
Surrendering your Physical Shares
Once the account is operational, you need to follow the below steps:
- Now you need a Dematerialisation request form (DRF) to surrender your shares. Your depository participant will give it to you. Use one DRF for a single company’s shares.
- Fill up the form with details such as the account holder’s name, DP ID, Demat account number, the number of securities to be dematerialized, name of the security (as it is on the certificate), and the face value of the security, etc.
- Mention ‘Surrendered for Dematerialisation’ on each of the physical share certificates. Affix your signature at the end.
- Now, forward it to your DP. Your DP will process your request once they receive the DRF along with the surrendered share certificates.
- The request goes to the company’s appointed Registrar and Share Transfer Agent (RTA).
- RTA may approve or reject the dematerialization request.
- If approved, physical certificates are destroyed, and your Demat account gets credited with the equivalent number of shares.
- Rejection happens in cases where share certificates are mutilated, and the information is illegible. In such cases, you need fresh issuance of physical share certificates.
- The dematerialization process might take up to 30 days.
Benefits of Dematerialisation
Storing valuables in a physical form gives a sense of security – but only emotionally. What if your physical certificates are lost, get stolen, or burned? You would surely wish to have an online record of it. That’s the greatest benefit of dematerialization. There are more:
No Misuse: Unlike physical shares that can be forged, shares in the Demat account are safe. Nobody can take it away from you. It is password protected.
Ease of Access: Buying and selling shares online is a simple process. You can’t have that simplicity and flexibility with physical shares. Transferring physical shares, in any case, is impossible now.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:
Quick Summary
- Dematerialization is the process to convert your physical shares into an electronic (or dematerialized) form. Dematerialization is when you take your physical stockholding online.
- National Stock Exchange, also known as NSE, was the first to introduce Demat Account in 1996, and after that, the face of Stock Market Trading was changed entirely.
- Dematerialization Process: Moving on from the physical shares to the Dematerialized form of shares is relatively easy these days and requires basically two simple steps.
- Open a Demat Account with a Stock Broker
- Surrender your Physical Shares to your Stock Broker and they will issue an equivalent number of shares in the dematerialized form.
- The dematerialization process might take up to 30 days, click here to read and understand the complete procedure for the same.
- Talking about the benefits of dematerialization, there are tons of it but we have named the important ones.
- No Misuse
- Ease of Access
