Nowadays, everybody knows about the DEMAT account, but the logic behind the creation of DEMAT account is not known to many. In this article, we will tell you about the dematerialization procedure, its advantages and its connection with fungibility.
What is dematerialisation?
Dematerialisation is a process by which the paper certificates of an investor are taken back by the company/registrar and subsequently destroyed. Thereafter an equivalent number of securities are credited in electronic holdings of that investor. The depository works as an aid to dematerialise securities and eliminate paper from the market. This helps in faster online derivative trading Carry forward and settlement transactions become a lot easier, the net result being an increase in the volume of trade being carried out in the market.
The depository system is beneficial to the issuer, the investor, the broker and the equity market. Electronic holding has made it pretty simple to carry the shares and actually helps in making the market, paper less. So if you are still holding paper shares, then it’s high time to switch to a DEMAT account and safeguard your shares from the prospect of fire, loss, theft and unauthorized access.
Procedure for dematerialisation
In order to dematerialise his securities, the owner after entering into an agreement with a participant, hands over the securities to the DP. A dematerialisation request has to come from the person in whose name the shares are held, alongwith the share certificates to be dematerialised, by writing ‘surrendered for confirmation of dematerialization. After necessary verification of documents by the company, a confirmation is sent for dematerialisation to depository, which depository confirms to the participants who credits the investor’s account with the requisite number of shares. It takes almost 15 days for the entire process to complete.
Dematerialisation and fungibility
Normally the company is bound to issue share certificates to shareholders. By dematerialising the shares, the company is not bound to issue any certificates; shares exist only as book entries against investor’s name. Shareholdings are represented by account balances and account statement. This means that shares, like currency, are ‘fungible’ meaning ‘exchangeable for any other’. So we can say that, dematerialisation is the process wherein the physical securities are not created at all. However, if the investor wants a physical certificate, a certificate will be printed against specific request. The ordinance has envisaged the ‘dematerialisation’ route.
Dematerialization has ushered a revolution in the retail market as it has helped promote paper-less trading and helped provide gainful employment and a steady stream of income to a large number of investors who otherwise were not able to take part the equity trading phenomenon. Even companies have gained immensely with the dematerialization process as they have been able to access a larger pool of investors in smaller towns who otherwise remained inaccessible to them.
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