Before the digital era, investing or trading of shares was completely physical. Once the shares were purchased, the investor needed physical share certificates, which acted as proof of ownership. However, there were numerous challenges when it came to handling the physical share certificates. There were significant risks of fraud, theft, or even misplacing the share certificates. Additionally, the process of settling transactions with physical certificates was more complicated and time consuming. The Securities and Exchange Board of India (SEBI) had a vision to transform the trading environment into a digital environment. To support this vision, the dematerialization of physical shares into an electronic format was necessary. Dematerialization facilitated a smooth, seamless, and secure environment for investing and trading.
Let’s take a look at how the dematerialization process works by understanding what a Demat account is and the role of a depository participant (DP). Demat Account: A demat (dematerialized) account is an account which holds securities in an electronic format. An investor opens a Demat account with a registered depository participant. Depository Participant: A depository participant is an intermediary that acts as a link between investors and a depository like the NSDL or CDSL. The depositories play a crucial role in the storage of securities in an electronic format.
To dematerialize shares, an investor needs to open a demat account with a registered DP. For the conversion of physical shares into an electronic format, the investor is required to fill out a dematerialization request form (DRF). The form can be obtained from the DP and submitted with the original share certificates. The DP then forwards the share certificates and dematerialization request to the company and registrar and transfer agents (RTA). Once the DP confirms the process of dematerialization of the shares, the physical shares are immobilised and can no longer be traded physically. The depository then verifies and confirms the completion of the dematerialization process to the DP, and the shares and securities are displayed digitally in the investor’s Demat account.
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