What is Dematerialization?
Dematerialization is the process of converting the physical stock certificates into electronic data stored by the government registers. This process is basically how Demat Account works by taking back the paper documents of the company shares from the traders and then crediting the user with the same number of stocks in their Demat Accounts via the depository participants.
This is mainly done to keep a standardized record of the stock ownerships and increase the security of the available shares. With the reduced paper trail, chances of forgery and scams are lessened.
With Dematerialization, stocks get converted to electronic data and are stored in the depository registers
The Dematerialization of physical stocks began in India in December 1996 in the NSE. Since then the number of Demat stocks has only been increasing. Now in some forms of trading, no other method is even allowed for trading.
Therefore it is essential to know how Demat Account works and get a step by step idea of Dematerializing existing physical stocks and assets.
Process of Dematerialization
Before understanding the Dematerialization process undertaken by an investor, or even before knowing how Demat Account works, it is better to know how the companies shift their physical stocks to electronic equivalents. Only after a company has switched its mode of trade, can traders deal with the company stocks in online stock markets.
Therefore, the steps for Dematerializing trading for a company are as follows.
- The company needs to redefine the Article of Association for trading in electronic shares from physical ones. A public deceleration is to be made by the enterprise declaring the dematerialization of its stocks to the electronic platform.
- Then the companies have to register with the depositories and get unique codes for each of their stocks. This code is called the international securities identification number. The transfer of stocks is not conducted directly by the company. This process is recorded by the registrars and regulated by the transfer agents both individuals appointed by the depositories for smooth completion of the process.
- After completion of these procedures, the company is ready to trade with investors in electronic shares.
This is the procedure of how Demat Account works in acquiring the stocks by the dematerialization of shares in the case of institutions.
For individual investors
The following steps should be followed by the traders while Dematerialization.
- Depository participants are the firms, be it a bank or brokerage service provider who helps investors open Demat Accounts in the depositories. To know more about demat Accounts and how Demat Account works, traders should clear their doubts with the Depository participants. Therefore an investor is to fill out a Demat Request form available with their choice of depository participants and submit along with it the physical certificates of the shares owned. “Surrendered for Dematerialization” should be clearly mentioned on each of the submitted stock certificates to avoid loss of shares.
- The next steps are to be carried out by the depository participants. The DP must generate a request for the dematerialization of stocks to the company the stocks belong to. Simultaneously, it should contact the registrars and transfer agents in the depository. Both these officers help in maintaining accurate records of the transactions taking place and also help in the transfer of assets from one Demat Account to the other.
- Upon successful approval of the dematerialization request, the physical share certificates are destroyed and confirmation of dematerialization is sent to the depository by the company.
- The depository subsequently confirms the Dematerialization procedure to the depository participants and in turn the investors via notifications. The traders will find their Demat Accounts credited with an equivalent number of shares. That is how Demat Account works under the Dematerialization of stocks.
- The procedure of dematerializing takes about half a month to a full month from the date of submission of the initial Demat Request form. Still, in case of any delays, the clients should contact their depository participants for further details about the dematerialization procedure.
- The prerequisite for all these procedures is a Demat Account. Users without a Demat Account cannot dematerialize their stocks and therefore those may get invalid in the long run. Selecting a proper depository participant for your Demat Account can help to conduct the dematerialization process securely and swiftly.
Physical stocks do not last long as the documentation can get destroyed easily deleting the proof of ownership. Though it appears a bit cumbersome, the process of dematerializing existing physical stocks can benefit the traders greatly in the long run. Firstly, the traders become free to trade in odd lots or any number of shares they desire. Doing so enables them to make large exchanges with the security of depository transfer agents. Next, as the ownership proof of shares physically do not travel places, they remain secured and trade actions can be taken very fast.
Therefore, this is one of the most effective ways of how Demat Account works. Dematerialization increases the potential of stocks in trade and can help traders earn easily. If the above procedures are followed properly, within a few weeks only, users can benefit from the online Demat Accounts without the risk of losing any stock or other kinds of assets.