What is Dematerialisation?
The world has seen continuous technological advancements over the past few decades. Digital transformation has greatly simplified complex processes, including the way we invest. One key innovation introduced back in 1996 was dematerialisation. Dematerialization of securities not only simplified the investing process but also offered a more secure way for the storage and transfer of securities.
With the adoption of the latest technologies, the transaction of shares or securities has become much easier than ever before. Earlier, firms used to issue physical share certificates to their investors. Although it was a standard practice in the Indian share market, it had its own flaws. The dematerialisation of shares has made storing and transferring securities swift, easy, and secure.
But you might wonder: what is dematerialisation? In this blog, we will explore the meaning, process, benefits, and problems of dematerialisation.
What is Dematerialisation?
In the simplest terms, dematerialisation is the process of converting physical certificates of financial assets, such as shares, bonds, and debentures, to digital format. Unlike the traditional way of owning shares through paper certificates, you can now keep them in the form of electronic records. When investors previously owned shares, they would receive physical certificates as proof of ownership. These certificates, though valid, were often cumbersome to handle, easy to lose, and vulnerable to damage.
Dematerialisation, often known as the demat process, eliminates the risk associated with traditional ways of holding investments. This technological shift has not only simplified the process but also increased transparency as well as security. The replacement of physical documents with digital records makes the handling of assets more convenient and reliable.
Why is Dematerialization Necessary?
Investors holding on to physical securities had been standard practice in the Indian share market for a long time but were vulnerable to various problems. Technological advancements made it possible to convert these certificates into a digital format. The conventional method involved a pile of documentation for share trading. On the other hand, the dematerialisation process eliminated this hassle and made the process quick and secure. Now, by opening a demat account online, you can dematerialize your securities and enjoy the benefits of a Demat account. These points will make you understand the need for dematerialisation better:
- Cumbersome Paperwork: Maintaining a pile of share certificates is difficult as the earlier method of share transaction was solely dependent on paper certificates. It comes with the risk of theft, damage, or loss. The demat process has eliminated the risk.
- Fraud and Forgery: Manipulation of share certificates is another problem, as anyone could forge duplicate papers or certificates and pretend to be the investor. The digital records of securities have eradicated this possibility.
- Delayed Settlements: Share transactions are swift and straightforward due to dematerialized securities, as going through the paperwork involved in the physical certificates increases your dependency on human intervention, leading to delays.
- Higher Costs: Physical documents require paper, administrative costs, and expenses on storage. With demat accounts, you can store all your shares or securities in digital form without the mentioned risks.
Process of Dematerialisation
In the beginning, the dematerialisation process might seem a little complex for investors habitual of paper certificates. However, once done, it is the simplest way to manage your assets. You only need to understand the process, and here is how you can do it:
- Open an Account: The first and foremost thing is to open an online demat and trading account with a registered depository participant. Choose a DP based on your research and preferences, and open a demat account online.
- Fill out a Dematerialisation Request Form: If you are starting your investment journey, then with a trading account, you can directly place the orders on the exchange and the securities get credited or debited from your Demat account. On the other hand, if you already own physical certificates, you will be required to fill out a Dematerialisation Request Form (DRF) and submit it to the depository participant. Also, physical certificates need to be submitted that you want to convert.
- Verification Process: Once you have submitted the necessary documents and made the request, wait till the verification process is completed. The depository participant verifies your application and then sends it to the concerned issuer or RTA and informs the depositories.
- Conversion to Electronic Format: After completing the above step, the issue or RTA informs the depository, which converts the physical certificates into dematerialised securities and credits them into your demat account.
- Confirmation: As a standard procedure, you get a notification of confirmation after the process is done. Once you get the confirmation, you can manage and track your assets through the digital platforms provided by the DP.
The dematerialisation of shares has made the management of portfolios easier than ever before. You do not need to visit offices or wait for the lengthy paperwork. By using your smartphone only, you can conveniently manage your portfolio.
Benefits of Dematerialisation
The dematerialization process has transformed how the financial markets work. With the emergence of digital platforms, investing in stocks is now more convenient, quick, and safe. It has also impacted the economy as a whole, as the number of investors has grown in the past few years. Let us have a look at some of the benefits of dematerialization:
- Quick Settlement of Transactions: In this fast-paced world, convenience is the key as time becomes a crucial aspect of any service. One of the biggest advantages of the dematerialization process is that it offers quicker settlement of transactions.
- Safety and Security: Another feature of the dematerialised shares is safety. Unlike physical certificates, which are prone to damage, theft, and loss, digital records are immune to such threats.
- Cost Effective: As mentioned earlier, the dematerialisation of shares is much more cost-effective than issuing paper certificates.
- Reduces Paperwork: The conventional methods of buying and selling involved extensive paperwork. On the contrary, digital transactions require minimal paperwork and are done in a matter of seconds. This efficiency has improved market liquidity and made trading more convenient for investors.
- Transparent Transactions: The physical papers are also vulnerable to fraud and forgery. By duplicating the documents or hiding some crucial information, the transactions can be manipulated easily. With the help of an online demat account, you can protect your investments from such threats. Thus, the transactions are more transparent and reliable.
Potential Drawbacks of Dematerialisation
Every process has its shortcomings, and this one is not an exception. Along with several advantages it offers, there are some limitations as well. Since the demat account stores securities in the digital format, technical glitches can affect it. A significant number of people are still not comfortable with new technologies. Those investors might find it a little difficult to initially shift from the practice of holding physical share certificates to digital securities.
However, these challenges are few which can be handled easily with increased awareness among the general public. So, instead of stepping away from the technology, investors must embrace it.
Conclusion
The dematerialisation of shares has made the investment experience of numerous investors hassle-free and safer. It has transformed the way financial markets operate. Consequently, investing in shares is now more accessible, secure, and efficient. The ease of transaction, security, and speed of settlement of the transactions are the benefits of dematerialisation that clearly outweigh its drawbacks.
Frequently Asked Questions (FAQs)
What is dematerialisation, and how does it work?
Dematerialisation is the process of converting physical certificates of financial assets, like shares and bonds, into electronic form. This process involves creating a Demat account and submitting physical certificates for conversion to the DPs for verification.
What benefits does dematerialisation offer to investors?
Dematerialisation offers simplified transactions, increased security, cost savings by reducing paperwork, faster processing times, and more transparent records, making it easier for investors to manage their portfolios online.
Are there any drawbacks to dematerialisation?
Some challenges include technical issues due to the digital nature of demat accounts and difficulties for those less familiar with the latest technologies. However, these can typically be managed with proper guidance.
Why is dematerialisation necessary today?
It addresses the challenges of handling physical certificates, such as the risk of loss, theft, forgery and delays in settlement. Dematerialization of securities simplifies storage, increases security, and enhances transaction efficiency, making it crucial in modern trading.
Can investors still trade with physical share certificates?
While investors can still hold physical certificates, SEBI has made it mandatory to convert them to demat form before making any transactions.
