Understanding Dematerialization: Transitioning from Physical to Electronic Share Certificates

Dematerialization is the process of converting an investor’s physical certificates into electronic form, eliminating the need for physical share certificates and streamlining share trading and ownership. These electronic shares and securities are maintained in a Demat Account.

A Depository Participant (DP) acts as an intermediary between the depository and investors. The relationship between DPs and the depository is governed by an agreement under the Depositories Act. Dematerialization essentially transitions stock certificates from physical to digital form.

Depository

A depository holds investors’ securities (such as shares, debentures, bonds, government securities, mutual fund units, etc.) in electronic form at the request of the investors through a registered DP. It also provides services related to securities transactions. In India, the two registered depositories are the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL).

Depository Participant (DP)

A DP is an agent of the depository that interfaces with investors to provide depository services. Various financial institutions and entities, including public financial institutions, scheduled commercial banks, foreign banks operating in India with Reserve Bank of India approval, state financial corporations, custodians, stockbrokers, clearing corporations/houses, NBFCs, and Registrar to an Issue or Share Transfer Agents can register as DPs. While banking services are accessed through branches, depository services are accessed through DPs.

Registrar and Share Transfer Agent (RTA)

RTAs are institutions that register and maintain detailed records of investor transactions for mutual fund houses. They assist businesses with share registry bookkeeping and share transfer operations in electronic form. RTAs play a crucial role in the share transfer process and documentation for investors and mutual fund houses. They ensure background documentation is maintained accurately to support fund house and investor data requirements.

Mandatory Dematerialization Applicability

Mandatory dematerialization applies to:

• Every public company.
• Every private company, excluding small and government companies.
• Private companies (excluding small companies as of March 31, 2023) must comply with mandatory dematerialization of securities within 18 months from the end of FY 2022-2023, i.e., by September 30, 2024.

Steps in Dematerialization of Shares

1. Decide Depository: Choose between NSDL and/or CDSL based on where shareholders have a Demat account.
2. ISIN Generation: Complete documentation for the chosen depository and submit it to the RTA for further submission.
3. Open Demat Account: If shareholders lack a Demat account, they should contact a DP to open one.
4. Shareholders’ Data and Signature: Share data and specimen signatures with the RTA for system updating.
5. Dematerialization Request Form (DRF): Shareholders submit DRF with KYC and original share certificates to DP.
6. Submission to RTA: DP sends the DRF, KYC, and share certificates to RTA for conversion.

Steps in Dematerialization of Physical Shares

1. Open Demat Account: Open a Demat account with a registered DP affiliated with NSDL or CDSL.
2. Collect DRF: Obtain a DRF from your DP to request conversion of physical share certificates into electronic form.
3. Fill DRF: Accurately fill out the DRF with necessary details.
4. Submit Documents: Submit the filled DRF and physical share certificates to your DP.
5. Verification by DP: DP verifies the documents and forwards them to the RTA.
6. Verification by RTA: RTA verifies the authenticity of physical share certificates and matches them with the DRF details.
7. Dematerialization Process: Once verified, the RTA initiates the dematerialization process, canceling the physical certificates and crediting electronic shares to the Demat account.
8. Confirmation: Receive confirmation from your DP once the process is complete.
9. Check Demat Account: Log in to your Demat account to verify the credited shares.
10. Update Records: Maintain records of dematerialized shares and update your investment portfolio.
11. Liaison with RTA: Contact the RTA for any issues or queries related to your shares.
12. Regular Monitoring: Regularly monitor your Demat account for changes in shareholding and corporate actions.

Conclusion

Registrars and share transfer agents ensure efficient processes and play a crucial role in dematerialization and digitization. RTAs act as intermediaries between issuers and depositories to facilitate services like corporate actions, initial public offerings, dematerialization, and rematerialization.