Free Press Journal

All about dematerialization

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There was a time when investors in stocks were saddled with outdated systems and procedures dealing with transactions in stocks. Bad deliveries, objections, loss, theft or mutilation of share certificates, not to speak of forgery were only some of the traumas that an investor had to face in his treacherous journey through the stock market. Transfer of shares simply took ages. Destruction due to fire, floods and cyclone meant financial disaster for shareholders.

Panacea

Dematerilisation or demat (in short) is the panacea to all the above mentioned evils. In simple terms demat means converting physical securities in an electronic (invisible) form. These securities are held on behalf of the investors by an organisation called a Depository. The National Securities Depository Limited (NSDL) started its operations in October ’96 and the Central Depository Services (India) Limited (CDSL) in July ’99 under the Depository Act, 1996.


A Depository interfaces with its investors through its agents called the Depository Participants (DPs). The investor has to open one or more accounts with one or more DPs. The DP maintains his account and intimates its position to him periodically.

Shares, scrips, stocks, bonds debentures, debenture stock or other marketable securities of similar nature of any incorporated company or body corporate including underlying shares of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securitised debt, money market instruments and unlisted securities are the securities available for dematerialisation. Dematerialisation normally takes about 30 days.

To draw an analogy, a depository is just like a bank head office and a DP is like its branch. Taking the analogy further, when you say that you have Rs 5 lakh in a bank account, what you actually mean is that your account has Rs 5 lakh as evinced by your passbook.

Similarly, a DP issues an account statement periodically reflecting your shareholding along with any purchases or sales effected by you. So basically a DP is like a bank account for shares.

A depository is not merely a custodian, but is in fact also the registered owner of the share or security and it is the depository whose name is entered in the register of the issuing company. The investor becomes the beneficial owner, whose name is recorded in the books of the depository. In other words, Depository is like a bank for your shares. The only difference is that the bank uses your money to earn its income, a part of which is passed on to you by way of interest whereas a DP merely maintains account of your securities against a fee charged to you.

When you open an account, the DP supplies you with a debit instruction booklet (= cheque book). In place of signing the transfer deed and delivering the physical share certificates to your broker, you will issue debit instructions to the DP via your broker.

Depository system has nothing to do with monetary transactions. When you purchase shares, you would pay the cash to your broker and get credit of the shares (=delivery of shares with transfer deeds) in your DP account and vice versa.

Benefits like dividends, rights, bonuses, etc., are disbursed on the basis of information supplied by the DP to the company. On the other hand, non-monetary benefits such as rights and bonuses would be allotted by the DP based on inputs from the company.

The benefits of participation in a depository are —

  • Immediate transfer of securities; no need to fill up transfer deeds and lodging shares with each company separately.
  • No heavy stamp duty on transfer of securities.
  • Elimination of risks associated with bad delivery, fake securities, theft, mutilation, fire and floods, loss in transit, etc.
  • Reduction in paperwork and consequential transaction costs.
  • Changes in nomination, address, etc., across the board.
  • Convenient method of consolidation of folios/accounts.
  • Holding investments in all securities in a single account.
  • Automatic credit into demat account arising out of all the corporate actions such as payment of dividends, bonus, split or consolidation or merger, buy back etc.

Miscellaneous

You can open any number of accounts with a single DP or different DPs just like you can have more than one bank account. There is no minimum balance requirement and consequently you can have no securities in your account. Demat shares being fungible in nature the distinctive numbers and certificate numbers have no place in this environment. The concept of odd lots has vanished.

It is even possible to pledge dematerialised securities. These are tagged by the DP as ‘no transaction is allowed’. Even after the securities are pledged, you continue to remain the beneficiary holder of these securities and will receive benefits of corporate actions such as dividends, rights, bonuses etc..

In the unlikely event of a DP going bankrupt, the creditors of the DP have no access to the holdings of the clients of the DP. The investors can transfer their holdings to another DP.

DPs levy charges on services such as demat of physical shares, account maintenance, debit transactions, rematerialisation of shares and account closure. These charges drastically differ from DP to DP. If you have low volumes you should select a DP that charges a moderate annual maintenance fee and levies transaction charges on a per cent basis and not on a fixed basis. On the other hand, for an active investor, the transaction charge is a key cost component.  Sebi has issued a circular w.e.f. 9.1.06, directing all the DPs to waive charges for shifting his demat account from one to another.  If you are internet savvy you can save cost by opting for (i) issue online instructions to debit your account (ii) receive transaction statements by e-mail.

You must hold a PAN for having a Demat account.

Nomination

A single holder or all the joint holders may sign the nomination form. The nomination registered in an account of a DP will override the nomination registered with the companies covering the dematted shares held by it. A minor can also be nominated but the name and address of the guardian has to be given.

Number of joint holders

Long ago, the Companies Act was modified to restrict the joint holders to a maximum of three. Therefore, those who continue to have securities in four or more joint names, will have to send the security to the registrars for deleting some names before dematting.

Death of a joint holder

If the first account holder has expired, it is necessary to open another account and transfer all the holdings from the old account to new one. The holders of the new account need not be the same as the surviving members of the old one. If the 2nd or the 3rd account holder has expired, his name can be deleted from the old account itself. Fresh nomination may be made if necessary.

To sum

Most investors would have got their shares dematted by now. Needless to say, if you have any physical share certificates, it is very important that you get them dematted immediately. Most brokers will not sell shares for you (buying is out of question), if the same are not in digital (demat) form. If you have any questions or need any clarifications on this topic, you are more than welcome to write in.

The authors may be contacted at wonderlandconsultants@yahoo.com