The Indian capital market has witnessed phenomenal growth in the past decade and a half in terms of listed companies, number of stock exchanges, investor population and trade volumes. One of the major reasons behind this growth has been the introduction of Demat Account.
The Demat account is an account in which all shares and securities are held electronically, doing away with all the paper based certificates and slips that were prevalent during the pre liberalization period. The process of conversion of Shares into Electronic Form is referred to as Dematerialisation.
Refer Article – How to Open a Demat Account and Demat Account Charges
The following article highlights the benefits of opening a Demat Account and the Process of Dematerialisation apart from discussing the need for opening a Demat Account
Why did the need for Dematerialisation arise?
During the late eighties, the common man used to stay away from the stock market because of the sheer complexity of the paperwork involved in trading at the market. This resulted in a very low mobilization of funds in the market. Besides this, the paper based system also gave rise to a number of problems duplication of shares, fake shares, fake signatures, signature mismatches and transfer problems. Stock certificates became the major reason for rising arbitration cases and investor disputes.
When the congress government initiated financial reforms in the early nineties, stock exchanges and financial institutions realised that the paper based system were not be able to keep up with the rapid growth which the economy would witness in times to come. There was a need to bring in more investors in the market for greater mobilization of funds, which would eventually feed the economy growth of the country.
A more technologically advanced system was needed to maintain records of all the transactions. The government of India decided to bring a fully automated system for book-keeping, in order to eliminate all the risks that came along with the paper based certificates.
The depository system was introduced by the Depository Act, 1996 which helped in eliminating the paper based system and made way for the safer electronic system in which every investor made transactions using a Demat Account.
What are the Benefits of Opening a Demat account?
Demat account has brought a significant change in market practices and there are various benefits of opening a Demat Account for the companies, investors and brokers like –
- Significantly reduces the brokerage charges
- Eliminates the risks involved with physical certificates like forgery, loss, theft, damage of certificates etc.
- There is no paperwork involved, which has greatly reduced the time required to clear each transaction.
- Traders don’t need to visit the stock market again and again, as they can operate from anywhere as the system has become electronic
- Shares that arise out of splitting, mergers, consolidations are automatically credited in the Demat account
- All transactions take place through the depository participant; hence the need of communication with each and every company in which the trader holds securities is eliminated.
- The system reduces the cost incurred by the company in issuing and distributing shares due to elimination of all paperwork. It also improves the efficiency of the company’s secretarial department.
- The brokers don’t have to face forgery or delivery problems.
How does Dematerialization take place?
Whenever an investor wishes to dematerialize the securities, he or she has to fill a Demat request form (DRF) provided by the depository participant (DP) for dematerialisation of shares. The form is submitted along with the physical certificates. Each security comes with a unique International securities identification number (ISIN) & each different ISIN requires a different request form to be furnished. The process of Dematerialization involves the following steps:
- Investor submits Physical Share Certificates with the DRF to the DP.
- The depository is intimated of the request by the DP.
- The certificates are submitted to the Issuer company’s registrar
- The Dematerialization request is confirmed by the registrar
- Registrar than updates accounts after Dematerialization and informs the depository of the completion of the process
- Depository updates accounts and information is passed on to the DP
- Investor’s Demat account is updated by the DP.