Dematerialisation of Shares: Process, Procedure, Advantages and Disadvantages

Converting physical shares into electronic format is called dematerialisation. In layman’s language, this means converting your shares into an electronic format. It allows you to save them electronically and makes them easy to use.

Key Highlights:

• Dematerialisation is the process of converting physical share certificates into electronic holdings in a Demat account.
• This is done by filing a Dematerialisation Request Form (DRF) through a Depository Participant (DP). The shares are verified by NSDL or CDSL and credited electronically.
• SEBI and the MCA require listed companies, unlisted public companies, and certain eligible private companies to issue or hold securities in Demat form.

What is the Dematerialisation of Shares?

Dematerialisation of shares is the process of converting physical share certificates into electronic form and holding them in a Demat account. Instead of paper certificates, your ownership is recorded digitally with a depository such as NSDL or CDSL, making it easier to buy, sell, transfer, and manage shares securely.

It enables faster, paperless transactions in the securities market. Nowadays, investors must dematerialise their share certificates, meaning there will be no more physical certificates for shares held by individuals in India.

Example: Suppose Riya holds 100 physical certificates of XYZ Ltd. She may then submit them to her Depository Participant (DP) for dematerialisation. Once verified, the physical certificates would be cancelled, and electronic credits for 100 shares would be transferred to her Demat account. Henceforth, she could easily sell/transfer her shares online instead of physically holding the share certificate.

How Does Dematerialisation Work?

The dematerialisation process involves a few simple steps to convert your physical share certificates into electronic holdings. 

Here's how it works:

• Submit a Dematerialisation Request: Fill out a Dematerialisation Request Form (DRF) and submit it along with your physical share certificates to your Depository Participant (DP).
• Verification of Documents: The DP verifies your request and forwards the certificates to the company's Registrar and Transfer Agent (RTA).
• Cancellation of Physical Shares: The RTA verifies the details, cancels the physical share certificates, and confirms the request with the depository.
• Credit of Electronic Shares: Once approved, the equivalent number of shares is credited electronically to your Demat account through NSDL or CDSL.
• Confirmation: You receive a confirmation from your DP, and the shares become available in your Demat account for holding or trading.

Dematerialisation of Shares of Private Companies

The dematerialisation process for shares applicable to private firms refers to the transition of tangible share certificates into electronic form, whereby the shares are held in a Demat Account. 

The Companies (Prospectus and Allotment of Securities) Rules, 2014, as amended by the MCA, make it mandatory for eligible private companies to issue, transfer, and hold their securities in electronic form. Dematerialisation increases transparency, allows the transfer of ownership, and protects shares through electronic means.

Which Types of Companies Must Dematerialise Their Shares? 

Several share types have been made dematerialised in accordance with the rules laid down by SEBI and MCA, as dematerialisation helps increase transparency, enhance system security, and prevent fraud. Having one’s shares in Demat form will ensure quick transactions and proper record-keeping.

Listed Companies

SEBI requires all listed companies to hold and trade shares only in Demat form. Physical share certificates cannot be used to buy, sell, or transfer shares on recognised stock exchanges.

Unlisted Public Companies

Under the Companies (Prospectus and Allotment of Securities) Rules, 2018, unlisted public companies must issue, transfer, and maintain their securities in electronic form. Shareholders are also required to convert physical share certificates into Demat form before transferring shares or subscribing to new securities.

Certain Private Companies

The Demat form for issuance and holding of securities of the eligible private companies (excluding small companies and state companies) is one of the provisions of The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (Rules). The requirement is aimed at enhancing transparency, the transferability of shares and corporate governance.

Advantages of Dematerialisation of Shares

Dematerialisation has simplified the way investors hold and manage shares by replacing physical certificates with secure electronic records. It offers greater convenience, faster transactions, and improved security.

• Enhanced Security: Eliminates the risk of loss, theft, damage, or forgery of physical share certificates.
• Faster Transactions: Shares can be bought, sold, and transferred quickly without lengthy paperwork.
• Paperless Process: Reduces paperwork and streamlines investment management.
• Easy Portfolio Management: All your securities are held in a single Demat account, making them easier to track.
• Quick Corporate Benefits: Dividends, bonus shares, stock splits, and rights issues are credited directly to your Demat account.
• Reduced Settlement Risks: Electronic transfers minimise errors, delays, and disputes associated with physical certificates.

Disadvantages of Dematerialisation of Shares

The advent of dematerialisation has made it easier and safer to trade in financial markets; however, investors should be aware of its limitations.

• Costs of Maintaining a Demat Account: Investors have to pay annual maintenance charges (AMC), as well as transaction and service charges.
• Need for Technology: Investors need internet access and technology to access their holdings in the dematerialised format.
• Cybersecurity Risk: There is a risk of hacking or phishing an online account if proper security measures are not in place.
• DP-Related Problems: Any delay or issue with the Depository Participant may interfere with transactions.
• Less Accessible to Non-tech Users: Some investors who are not comfortable with online interfaces may have difficulty managing their Demat accounts.

Issues Faced with Dematerialisation

The following are some of the risks associated with dematerialisation that investors should know about:

• Document Errors in documents may cause delays in the dematerialisation process.
• Dependence on DPs. DPs are important for the proper functioning of Demat accounts.
• People without internet access or digital literacy may face issues with their Demat accounts.

Conclusion

The term dematerialisation is just another name for the process of converting stocks into electronic form rather than paper form. The system is more secure and faster, and it suits modern times better. There may be some fees and technical issues, but overall it's a more convenient system and superior to a paper stock certificate system for most people.