Demat Accounts: How does dematerialisation benefit investors? MintGenie explains

Dematerialisation: The transition from physical share trading on exchange floors, conducted via open outcry systems, to the seamless execution of transactions through mobile trading platforms represents a notable transformation in the stock market.

This regularly updated new feature promises time-saving convenience for users. While we currently conduct digital trading of stocks and other major asset classes, the groundwork for this advancement was laid back in 1996. The process of converting physical shares into the electronic form is called dematerialisation. 

In this article, let's delve into what a demat account is and how dematerialisation benefits investors and the advantages it offers over traditional paper-based transactions.

What is a Demat Account?

A dematerialised (demat) account serves as a digital repository for the financial securities purchased by an investor, holding them in electronic form. This account streamlines the storage and administration of financial securities, offering ease of use and accessibility to investors.

The eligibility criteria for opening a demat account in India are quite flexible. For example, there is no minimum age requirement for investors interested in trading and opening a demat account. Minors can also have a demat account established on their behalf by their parents or legal guardians.

Possessing a demat account is crucial for individuals intending to participate in the Indian stock market.

Understanding Dematerialisation

With the liberalisation of the Indian economy during the 1990s, the Indian capital market underwent a remarkable expansion in business volumes. A substantial increase was witnessed in the capital raised through new issue markets, accompanied by a surge in the number of new issues. Trading volumes on stock exchanges grew exponentially, and the markets were institutionalised with the entry of foreign institutional investors (FIIs) and mutual funds.

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However, that growth had not been adequately supported by the necessary infrastructure to manage the escalating paperwork volume in the market. A significant drawback in the Indian capital market had been the reliance on paper-based settlement of transactions, which involved the physical movement of share certificates.

The persistence of paper settlements posed significant obstacles to the efficiency of the Indian capital market. Consequently, India addressed this issue by establishing a new depository system through the Depositories Act of 1996. Guidelines for implementing this act were formulated by the Securities and Exchange Board of India (SEBI).

The Depositories Act laid the foundation for the establishment of the country's first depository - National Securities Depository Limited, and later, in 1999, Central Depository Services Limited (CDSL) was also incorporated. 

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The depository system enabled investors to convert their physical shares into electronic form. This process, known as dematerialisation, involved converting physical certificates into an equivalent number of securities in electronic form.

Benefits of shares held in electronic form

Shares held in electronic form, or dematerialised form, offer investors a range of benefits. Firstly, they provide unparalleled convenience, as investors can access and manage their shares through a demat account without the hassle of physical certificates. Additionally, the risk of loss, theft, or damage to shares is significantly reduced, enhancing the security of investments. Electronic shares also facilitate faster transaction processes, leading to quicker settlement and transfer times.

Furthermore, investors can easily monitor their shareholdings and portfolio performance in real time through online platforms.

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According to data from BSE and NSE, almost all transactions, accounting for 99.9%, are carried out electronically. This minimises the chances of errors and enables young Indians to trade conveniently using their mobile devices. Looking forward, investments in stocks are expected to rise as investors increasingly recognise stocks as a prime asset class for surpassing inflation.

FAQs

Is dematerialisation of securities compulsory?

Yes. As per the SEBI mandate, it is compulsory to convert physical shares to demat.

What happens to the physical certificates after they are dematerialised?

After dematerialisation, physical certificates may be retained or destroyed by the issuer or RTA.

What is rematerialisation (remat)?

Rematerialisation is the process of converting securities held in electronic form in a demat account back into physical certificate form.

Are there any charges for converting physical shares into demat?

Yes, there may be charges associated with dematerialising physical shares, including processing fees charged by the Depository Participant (DP) and other applicable charges as per the DP's fee structure.

Explain a Registrar and a Transfer Agent (RTA)

An RTA is an agent of the issuer. RTA acts as an intermediary between the issuer and depository for providing services such as dematerialisation, rematerialisation, initial public offers (IPOs), and corporate actions.