FAQ ON DEMATERIALISATION OF SHARES
Trading in the shares of the Company is compulsory in dematerialized form for all investors. The Company has, therefore, enlisted its shares with both the depositories, viz, NSDL and CDSL. This means that you have now have the option to hold and trade in the shares of the Company in electronic form.
While most of you may be familiar with how a Depository functions, given below is a brief outline, in question and answer format, which we hope will be useful to you.
What is Dematerialisation?
Dematerialisation (“Demat” in short form) signifies conversion of a share certificate from its physical form to electronic form for the same number of holding which is credited to your demat account which you open with a Depository Participant (DP).
Dematerialisation is a process by which the physical share certificates of an investor are taken back by the Company and an equivalent number of securities are credited in electronic form at the request of the investor. An investor will have to first open an account with a Depository Participant and then request for the dematerialisation of his share certificates through the Depository Participant so that the dematerialised holdings can be credited into that account. This is very similar to opening a Bank Account.
Dematerialisation of shares is optional and an investor can still hold shares in physical form. However, he / she has to demat the shares if he / she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares, he / she will get delivery of the shares in demat form.
What is a Depository?
A Depository (NSDL & CDSL) is an organisation like a Central Bank where the securities of a shareholder are held in the electronic form at the request of the shareholder through the medium of a Depository Participant.
If an investor wants to utilise the services offered by a Depository, the investor has to open an account with the Depository through a Depository Participant.
So is a depository just another form of a custodial service, the only difference being that the securities are held in an electronic form?
No, the two are different. The Depository can legally transfer beneficial ownership which a custodian cannot. The main objective of a Depository is to minimize the paper work involved with the ownership, trading and transfer of securities.
Who is a Depository Participant?
Similar to the brokers who trade on your behalf in and outside the Stock Exchange; a Depository Participant (DP) is your representative (agent) in the depository system providing the link between the Company and you through the Depository. Your Depository Participant will maintain your securities account balances and intimate to you the status of your holding from time to time. According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers etc. can become participants in the depository. A DP is one with whom you need to open an account to deal in electronic form. While the Depository can be compared to a Bank, DP is like a branch of your bank with whom you can have an account.
How does the Depository System operate?
The Depository System functions very much like the banking system. A bank holds funds in accounts whereas a Depository holds securities in accounts for its clients. A Bank transfers funds between accounts whereas a Depository transfers securities between accounts. In both systems, the transfer of funds or securities happens without the actual handling of funds or securities. Both the Banks and the Depository are accountable for the safe keeping of funds and securities respectively.
What are the benefits of having a demat account?
a) Trading in the shares of the Company is now under the compulsory demat segment.With SEBI making demat mandatory on most of the traded scrips, electronic transaction will be the only way everyone will trade.
b) No stamp duty for transfer of securities in the electronic form. In case of transfer of physical shares, stamp duty of 0.5 percent is payable on the market value of shares being transferred.
c) All risks associated with physical certificates such as delays, loss, in transit, theft, mutilation, bad deliveries, etc. eliminated. Your shares can be kept in the “Frozen Mode” by your Depository Participant under your specific instructions.
d) The concept of an “odd lot” in respect of dematerialized shares stands abolished, i.e. in the demat mode, market lot becomes one share.
e) Dematerialised securities are most preferred by banks and other financiers for providing credit facility against securities. Generally, demat securities attract lower margin and lower rates of interest compared to physical securities.
f) Even in the electronic mode of trading, the payment mechanism (usually through a broker) between the buyer and seller continues to be as before. Also the usual brokerage charges would have to be incurred. However, after the settlement, pay in and pay out are on the same day for scripless trading which means you get your securities as well as cash immediately.
g) Shares bought or sold are transferred in your name on the very next day of pay out. In case of physical shares, transfer of ownership takes 30 days or sometimes even more.
h) No courier / postal charges for sending share certificates / transfer deeds.
i) Facility for freezing / locking of investor accounts, which enables you to make your account non-operational, for instance if you are abroad.
j) Facility to pledge and hypothecate your securities available.
k) As the Depository System becomes popular, brokers will be increasingly reluctant to deal with physical shares.
l) Investors prefer to buy shares which are already in dematerialised form.
Why should investors prefer to buy shares in the depository mode?
When you buy shares already in the depository mode, you will become the owner of those shares in the depository within a day of the settlement being completed. You will not have to apply to the Company for registering the shares in your name. Thus, there will be no possibility of loss or theft when the share certificates are posted to the Company. You will have no fear that any fake or stolen shares may have been delivered to you.
Why should brokers become reluctant to deal with physical shares?
Apart from the risk arising out of having to deal with the paper work and keeping account of the share certificates, the brokers are exposed to the risk of bad deliveries in the present system. It may take upto one year for the broker to discover that such a risk exists. As against this in the depository mode the broker will be free from the worries of bad deliveries. The broker's only risk will be that the investor does not own the shares which the investor has sold. But this will be known within the settlement period (10-15 days). The broker will thus prefer to sell securities that are in the depository mode.