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For a long time, the standard way to trade stocks was to exchange actual share certificates. As a result, investors were left with a great deal of paperwork and the risk of dealing with hard copies when trading stocks.
Stock certificates were formerly the standard, but now a new option has emerged for traders. When assets started being kept in digital form, it made buying stocks easier, safer, and more convenient.
That said, today we will discuss the processes of dematerialisation of securities and rematerialisation of shares and how they differ.
Understanding dematerialisation and rematerialisation
- Dematerialisation
Dematerialisation refers to the process of transferring equity and debt instruments from their physical to digital form. This is the process of transforming paper-based certificates of shares and debentures into their digital formats.
The dematerialisation of physical certificates helps investors manage investments in shares and securities considerably easier. It lessens the possibility of fraud and forgery, which were frequent before electronic inputs were possible. Once dematerialisation takes place, the digital documents are kept in a secure location, like a depository.
Two government-run depositories in India are CDSL and NSDL.
- Rematerialisation
Rematerialisation is the method of returning dematerialised securities, including shares and debentures, to their original tangible format. If an investor has already changed their securities and debenture documents to digital formats, they have the choice of reverting them to their original paper form.
When a demat account holds one or two shares, people often choose to rematerialise them instead of paying the maintenance fee. The term refers to the steps used to transform digital assets into physical certificates.
In this process, you must complete a Remat Request Form (RRF) and present it to the Depository Participant (DP).
Dematerialisation process
An investor must file a Dematerialisation Request Form (DRF) to have their physical securities converted into digital format. The procedure is as follows:
- The demat account is the starting point for a simple and thorough procedure. To use demat services, you must work with a Depository Participant (DP).
- Include the share certificates with the completed DRF. On every certificate, write “Surrendered for Dematerialisation.”
- In addition to transferring the shares, registrars and transfer agents, the DP is responsible for forwarding the request.
- The registrar updates the DP on the status of the procedure.
- The investor will see a credit for shares in their account after the confirmation.
- It may take up to thirty days to electronically transfer a share.
Rematerialisation process
In this process, investors need to fill out a Remat Request Form (RRF) with their designated DP. Shares cannot be traded by investors while rematerialisation is underway. Following these steps will carry out the rematerialisation process:
- You need to submit the RRF to the DP.
- The DP takes all of the paperwork to the depository. In this case, the depository will notify the registrar.
- Finally, the registrar receives the paperwork from the DP.
- The registrant provides the investor with freshly printed certificates in paper form.
- The new certificates will be sent to the investor’s account with the DP after the registrar verifies the Remat request with the depository.
- There is a 30-day window for rematerialisation.
Difference between dematerialisation and rematerialisation
| Feature | Dematerialisation | Rematerialisation |
| Meaning | The process of converting physical shares into electronic form. | The process of converting electronic holdings back into physical certificates. |
| Trading form | It enables paperless trading. | It involves physical trading with paper certificates. |
| Maintenance | Handled by a depository participant (DP) such as NSDL or CDSL. | Managed by the company issuing the shares. |
| Purpose | To reduce paperwork and increase efficiency in trading. | To provide investors with physical certificates, if required. |
| Maintenance cost | There are yearly maintenance charges and transaction fees associated with demat accounts, which differ according to brokers. | There are no ongoing maintenance fees associated with physical security certifications. |
| Risks and downsides | The electronic format of these securities eliminates the possibility of their damage. | Due to its physical nature, there is a high potential for fraud, theft, loss, and forgeries. |
| Easy to carry out | If you want to trade shares, you must dematerialise them, which is a straightforward process. | An expert’s approach and a great deal of time are usually required for rematerialisation due to its complexity. |
| Individual identity | There is no distinguishing or unique identification number assigned to securities stored in demat accounts. The demat account, however, will be associated with an individual ID. | Each piece of physical security is assigned a unique identification number by the RTA, which makes referencing and tracing easier. |
Conclusion
As an investor, being well-versed in dematerialisation and rematerialisation is essential for efficient portfolio management.
By understanding their nuances, you can make informed choices about the format that best suits your investment goals and risk tolerance.
FAQs
Dematerialisation in India refers to the transition from physical share certificates to an electronic format, streamlining trading activities and enhancing market efficiency. This process is facilitated by depositories such as NSDL and CDSL, which securely hold securities in digital form. Demutualisation, on the other hand, represents a significant structural change in the stock exchange landscape, where a member-owned mutual association evolves into a shareholder-owned corporation.
Depositories play a pivotal role in the Indian financial market by holding securities in electronic form. They act as a bridge between investors and the entities issuing securities, ensuring the safekeeping and accurate recording of investments. The depositories also facilitate the seamless transfer of ownership during trading, contributing to the overall liquidity and stability of the financial markets. On the other hand, dematerialisation is the process of converting physical securities into electronic formats.
Demat shares, or dematerialised shares, are held in an electronic format within a demat account, which simplifies the process of trading, transferring, and maintaining securities. This electronic form of holding shares offers enhanced security against theft or loss, and allows for quick transactions. In contrast, physical shares are actual paper certificates that prove ownership of a company’s stock. They carry the risk of being damaged or stolen, and their transfer involves a process of physical delivery, verification, and updating of records.
Rematerialisation is the process that allows investors to convert their electronic holdings back into physical certificates. This option caters to those who prefer the tangibility and personal custody of their investment documents. While it may seem counterintuitive in the digital age, rematerialisation provides a sense of security and permanence that some investors find reassuring.
Dematerialisation’s advantages include heightened security against fraud, rapid and efficient transaction processing, and cost savings from reduced paperwork and administrative overhead. However, it also introduces challenges such as dependence on technological infrastructure, potential cybersecurity risks, and the possibility of technical glitches, which could impede access to or management of one’s investments.