How to convert physical shares into demat form

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  • 10 Dec 2023
How to convert physical shares into demat form

To convert physical shares into demat form, you'll need to undergo a process known as dematerialisation. This involves converting your paper share certificates into electronic form for storage in a Demat account. The Securities and Exchange Board of India (SEBI) has long insisted that all physical shares be converted to the digital format. This initiative aims to expedite and streamline the settlement process, eliminate fraud committed by share transfer agents, and pose challenges for shell companies dealing with the electronic mode.

Now, SEBI has cracked the whip. SEBI argues that electronic bookkeeping will bring transparency to the capital markets. The tax authorities will find it easier to track shareholders and identify the real beneficiaries. Keep in mind that the lack of transparency has been bothering the government for quite some time. If you still have physical share certificates, it is time to convert physical shares to demat now. This can be done easily in a matter of two to three weeks.

Key Highlights

  • Converting physical shares into demat involves depositories, issuers, beneficial owners, and depository participants.

  • Demat form offers convenience, security, cost-effectiveness, and flexibility.

  • It contrasts with re-materialisation, which converts digital securities back to physical form.

  • It requires investors to open a demat account and undergo verification.

Dematerialisation is the process of converting paper shares and securities into digital ones, making it easier and cheaper to buy, sell, transfer, and track investments. Digital securities are stored at Central Depository Services India Limited (CDSL) and National Securities Depository Limited (NSDL), registered with the Securities and Exchange Board of India (SEBI). To dematerialise physical shares, users must open a Demat account, which functions as a digital wallet for investments.

A middleman, a Depository Participant (DP), handles the conversion process. The depository then checks and cancels the physical certificates, putting the digital shares into the Demat account. Users must provide documents to prove their identity, residence, and financial status, and fill out forms to ensure their physical certificates are in good condition. Dematerialisation simplifies investor life by eliminating the hassle of dealing with paper certificates and making investment management more secure and efficient.

SEBI has mandated demat accounts for investors converting physical share certificates into digital form, reducing risk, convenience, and administrative costs. Dematerialisation starts with opening a demat account. This process involves four individuals, which are listed below.

  • Choosing a Depository Participant (DP)

Depository Participants act as intermediaries between you and the depository, assessing reputation, service quality, and fees. Financial institutions like banks and brokerage firms often provide demat account services.

  • Filling out an account opening form

The form requires personal information such as name, address, contact number, email, financial status, and occupation, and can be accessed online or at the DP's office.

  • Providing documents for verification
  1. Income proof which includes salary slips, tax returns, or bank statements.
  2. Identity proof includes passports, Aadhar card, PAN card, or driver license.
  3. Address proof includes utility bills, ration cards, or rental agreements.
  4. Proof of an active bank account is a bank statement or a cancelled cheque.

A gazetted officer, bank manager, or notary public must attest all documents.

  • Signing an agreement with the DP

The agreement outlines the terms and conditions of the demat account service, including brokerage, account maintenance, and transaction fees, and is advisable to read and understand before signing.

  • Document verification

The DP staff will verify all submitted documents and account opening forms to ensure the authenticity and accuracy of the provided information.

  • Getting your demat account number and ID

Upon verification of documents, the demat department will assign a unique demat account number and ID, which are crucial for online transactions like buying, selling, and transferring securities.

By following the above steps, you can successfully open a demat account.

Dematerialisation, or demat, is a secure storage method for shares, replacing physical certificates that can be lost, stolen, or damaged. It offers numerous advantages, which are listed below.

  • Easy and convenient transactions

A demat account lets you manage transactions electronically, eliminating the need to physically visit your broker. It allows you to convert your physical holdings into electronic format.

  • Effortless fund transfer

You can link your demat account to your bank account. This helps facilitate seamless electronic fund transfers, eliminating the need for manual cheques or cheque writing.

  • Nomination facility

Demat accounts can be operated by a nominee in your absence, ensuring transactions can be carried out even when you are unable to do so yourself.

  • Paperless convenience

Demat accounts are eco-friendly and efficient, as shares and securities are held electronically, eliminating the need for paper documentation, reducing administrative hassles and environmental benefits.

  • Access to loan facility

Dematerialised holdings can be used as collateral for loans, as banks accept securities in demat accounts, providing financial flexibility.

  • Easily trackable portfolios

A demat account simplifies portfolio monitoring, allowing you to monitor investments from anywhere, promoting better decision-making by keeping you engaged and informed about your investments, whether at home, in the office, or on the go.

  • Simplified corporate benefits

Demat accounts simplify corporate benefits like dividends, interest, and refunds by directly crediting them into the account, eliminating the need for manual processing. Other corporate actions like stock splits, bonus shares, and rights shares are also seamlessly updated in your demat account.

  • Versatility for multiple purposes

Demat accounts offer a versatile solution for managing various investments, including shares, debt instruments, mutual fund units, government bonds, and ETFs, making them a convenient and efficient way to manage various types of investments.

Dematerialisation enhances security, convenience, efficiency, and versatility in handling securities compared to physical certificates. Looking at the benefits allows the investors to navigate the difficulties of the stock market more effectively in the digital age.

The table below presents the difference between the dematerialisation and rematerialisation.

Aspect Dematerialisation Rematerialisation
Conversion Process
Conversion of physical securities into digital format.
Conversion of digitally held securities into physical format.
Cost and Fees
Demat accounts may involve annual maintenance charges and transaction fees determined by the broker.
Physical securities do not entail maintenance charges.
Security Risk
Securities in digital form mitigate risks of misplacement.
Physical form poses risks of fraud, theft, misplacement, and forgery.
Identification Number
Demat accounts do not assign distinct identification numbers to securities.
Physical securities come with unique identification numbers issued by the RTA.
Transaction Method
All transactions are conducted electronically.
Transactions are conducted physically.
Maintenance Responsibility
Depository participants such as NSDL or CDSL maintain the Demat account.
The company of the security aids in maintaining the account.
Process Complexity
Dematerialisation involves straightforward steps and is obligatory for share trading.
Rematerialisation can be intricate, requiring expert guidance and significant time.

Each process has its unique identification and mode of transaction. Dematerialisation is generally easier to execute compared to rematerialisation.

Here is a step-by-step guide on how to convert physical shares into demat.

1. Open a beneficiary account with a Depository Participant (DP):

The first step is to open a demat account with a DP. A DP is an intermediary between you and the depositor. The DP is necessarily registered with SEBI. You could open a demat account even with your bank, which can also function as a DP. Ensure that the names in the demat account and the physical share certificates match.

2. Fill out the request form:

Fill out a dematerialisation request form once your demat account is opened. Take your physical shares with you and surrender them to your DP while filling out the form. Do not forget to write ‘Surrendered for dematerialisation’ on every share certificate.

3. Submit documents:

Once you submit all the documents, your DP will send an email or SMS to the Registrar and Transfer (R&T) agent. The R&T agents have been entrusted with the job of maintaining your records.

4. Dematerialisation registration:

A dematerialisation registration number will be generated. This will be fed into your dematerialisation request form and sent to the T&R agent with your original share certificates.

5. Validity check:

The T&R agent will check the authenticity of the documents you have submitted.

6. Name change:

The process to replace your name with your DP’s name begins now. Also, the number of shares getting dematerialised will be recorded in the Register of Members’ account. The Register of Members is the repository that stores the details of the shareholders.

7. Acknowledgement:

Once this process is completed, an acknowledgement is generated from the Register of Members saying the requisite changes have been made. The number will be forwarded to your DP.

8. Shares credited:

Your dematerialised shares will get credited into your demat account.

Conclusion

The market watchdog believes that electronic bookkeeping is far easier and reduces the risk of forgery. Moreover, it will boost investor confidence and bring much-needed transparency into the securities market. So, this is the right time to open your demat account. Many people believe that converting physical shares into demat is a cumbersome process. But that is not true. The process is fairly simple and can be completed within two to three weeks. Once the shares are dematerialised, it would result in more convenience for the investors. The buying and selling of shares could then be done in seconds. The demat form also guards against any physical damage to the shares.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI prescribed Combined Risk Disclosure Document prior to investing. Brokerage will not exceed SEBI prescribed limit.

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India's Securities and Exchange Board (SEBI) has mandated the dematerialisation of physical shares for trading purposes which aims to streamline the trading processes and improve market transparency.

Physical form shares are paper-based certificates issued by companies to shareholders, indicating ownership of a specific number of shares. Traditionally, investors held these certificates as proof of ownership. However technology advances and regulatory changes are shifting towards electronic or demat form shares.

Dematerialisation converts physical share certificates into electronic or demat form, requiring opening a demat account with a Depository Participant. Submitting physical certificates and required documentation, electronic shares are credited to the demat account, allowing electronic trading.

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