Swati(1)3rd Sem

8/4/2019 Swati(1)3rd Sem

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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. Prior to dematerialisation the Indian stock markets have faced

several problems like delay in the transfer of certificates,

forgery of certificates etc. Dematerialisation helps to overcome

these problems as well as reduces the transaction time ascom ared to the h sical se ment.



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 theDepository through a Depository Participant.



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 safekeeping of funds and securities respectively.



Procedure for converting the

physical shares into electronic form To convert the shares into electronic form the investor

should open an account with any of the depository participants. For opening an account the investor hasto fill up the account opening form. An accountnumber (client ID) will be allotted after signing theagreement which defines the rights and duties of theDP and the investor wishing to open the account. Theclient ID along with the DP ID gives a uniqueidentification in the depository system. Any number of depository accounts can be opened.



After opening an account with the DP the investor shouldsurrender the physical certificates held in his name to adepository participant. These certificates will be sent to the

respective companies where they will be cancelled afterdematerialization and will credit the investors account withthe DP. The securities on dematerialisation will appear asbalances in the depository account. These balances can betransferred like the shares held in physical form.

Dematerialised shares are in the fungible form and do nothave any distinctive or certificate numbers .The securitiesin the demat can again be converted into physicalform which is called as rematerialisation.



Problems of Dematerialisation. Prior to dematerialization there was almost a gap of three months

between application date and listing of shares .Dematerialisation hasreduced this gap to a great extent. But quick money brings with itself ahost of problems. Current regulations prohibit multiple bids orapplications by a single person.But the investors open multiple demataccounts and make multiple applications to subscribe to IPO's in thehope of getting allotment.

The recent IPO allotment scam proves that even a highly automatedsystem is not the solution to prevent malpractices, if there is laxity. Thescam of Yes bank and IDFC reveal that the investor banker has failed to

weed out multiple applications either direct or benami. Not only theinvestor banker the DP and the depository failed to detect the largenumber of demat accounts opened with the same address but differentnames. Lack of coordination between banks, DP's, brokersdepositories, registrars and investment bankers and clarity of theirroles has given rise to such problems.



benefits of having a demat

account 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.

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.

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.



The concept of an “odd lot” in respect of dematerialized shares

stands abolished, i.e. in the demat mode, market lot becomes

one share.

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.

No, there is no need for a Transfer deed in order to get your

share certificates dematerialised



Remedial measures* To prevent the sprouting of fictitious demat accounts at DP's the allotment of shares should be checked thoroughly.

*The concerned DP should strictly enforce the Know your client (KYC) normsrather than relying on bank documents and verification of brokers.

* DP's should be asked to give monthly figure of accounts opened for thepublic.

* Coordination and Clear definition of roles is important to weed out

manipulations.Though dematerialisation has several benefits the recent scam has thepotential to adversely affect the confidence of retail investors in the capitalmarket .To reap the benefits of dematerialisation SEBI, as a regulator has toplace a system that is alert and vigilant against unjust gains.

Swati(1)3rd Sem

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