How to Convert Physical Shares into Demat Form?

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.

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.

According to SEBI, this 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 them to demat now. This can be done easily in a matter of two to three weeks.

What Is Dematerialisation?

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. As a user, you must provide documents to prove your identity, residence, and financial status, and fill out forms to ensure your 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.

Process of Dematerialisation

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 it is advisable to read and understand before signing.

• Document verification

The DP will verify all submitted documents and account opening forms to ensure 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.

Advantages of Converting Physical Shares into Demat Form

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.
  

Difference Between Dematerialisation and Re-Materialisation

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

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

How to Convert Physical Shares into Demat Form

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.

Read more: How to Transfer Shares from One Demat Account to Another

Are There Any Cost Implications?

There are certain fees and charges associated with converting physical shares into demat form. You need to be aware of these costs that typically include:

• Dematerialisation charges: This is the fee for the actual process of converting physical share certificates into electronic form. This varies basis the depository participant or broker involved.

• Courier charges: Some brokers or DPs may charge an additional courier fee for sending documents to the Registrar and Transfer Agent (RTA).

• Goods and Services Tax (GST): An 18% GST is applicable on the dematerialisation charges and courier fees.

• Broker charges: Some brokers may levy extra fees for processing the dematerialisation request. Thus, you should reach out to your broker to check for any such charges.

• Annual maintenance charges: After dematerialisation, maintaining a demat account incurs an annual maintenance fee.

• Transaction charges: Some brokers may also charge fees on transactions involving dematerialised shares; however, SEBI guidelines generally do not mandate charges for account opening or custody.

Thus, while there are no charges for account opening or custody, the dematerialisation process itself could involve nominal fees per certificate, courier charges, applicable GST, and ongoing annual maintenance fees for the demat account.

As an investor, you should be prepared for these costs when converting physical shares into demat form. It is recommended to check with your broker or DP for the exact fee structure applicable to you.

Common Issues When Converting Shares and Tips to Avoid Them

• Name mismatch

The name on the physical share certificate must exactly match the name on the demat account. This includes the sequence of names in case of joint holdings. If the name has changed (e.g., due to marriage), notarised documents like a marriage certificate or affidavit are required to prove identity.

• Joint holding discrepancies

If shares are jointly held, the order of names on the certificate must be the same as in the demat account. You cannot convert single-name physical shares into a joint demat account or vice versa.

• Deceased joint holder or sole holder

If any joint holder is deceased, a notarised death certificate and transmission-cum-dematerialisation form must be submitted. If the sole holder is deceased, the inheritor must approach the Registrar and Transfer Agent (RTA) with relevant documents to get shares transferred in their name before dematerialisation.

• Corporate actions not updated

If corporate actions like bonus issues, stock splits, mergers, or name changes have occurred since the issuance of the physical certificate, as a shareholder, you need to obtain updated certificates reflecting these changes from the RTA before dematerialisation.

• Unclaimed dividends and IEPF issues

Dividends unclaimed for over seven years may have been transferred to the Investor Education and Protection Fund (IEPF), and shares may also be transferred there. You need to claim these from IEPF before proceeding with the share conversion.

• Shares not registered in shareholder list

Sometimes, dematerialisation requests are rejected because the shareholder’s name does not appear in the company’s records, often due to incomplete or outdated registration.

• Forgery or damage risks with physical certificates

Physical certificates are prone to loss, damage, or forgery, which can complicate the dematerialisation process. To avoid these hassles, it is critical keep applicable legal documents like forms, affidavits, etc., handy and updated. As a shareholder, you must choose a reputed DP or broker to assist you with the process and help you avoid these common pitfalls.

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 results in more convenience for 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.

Read more: Why Should You Invest in IPOs?