A process where the securities held by an investor in physical form are cancelled and an electronic number or entry is given to the investor so that he/she can hold the securities as an electronic balance in their account is known as Dematerialisation. Simply put, Dematerialisation means the holding of securities in electronic form. For Dematerialisation, the investor has to open a Demat Account. In present times, all IPOs (Initial Public Offers) are issued in dematerialised form and more than 90% of a company’s turnover is settled by delivery in Demat Account. As per SEBI, it is compulsory for traders to trade in Demat form for some selected securities only.
Benefits of Dematerialisation
1. Holding shares in Demat form is just like a bank account, which makes it a convenient process of holding shares.
2. It reduces paperwork as the shares are held by the investors in electronic form.
3. Under Dematerialisation, a trader can convert the physical shares into electronic form, and shares in electronic form can be converted back into physical form.
4. One can even pledge or mortgage the Demat securities to get loans.
5. As the share certificate is in electronic form, there is no danger of theft, loss, or forgery.
6. It is the responsibility of a broker to credit the correct number of shares in the investor’s account.
7. One can hold securities of different companies in one Demat Account.
Working of Demat System
1. The investors have to select a Depository Participant before opening a Demat Account with depositories. A Depository Participant is an agent of Depository. A Depository Participant may be a broker, bank, or financial service company.
2. The next step is to fill out an account opening form, along with PAN card details, a photograph, etc.
3. The third step involves giving the physical share certificate to the Depository Participant along with a request form for Dematerialisation.
4. Now, if the investors have applied shares in IPO, then they have to give simple details of Demat Account and Depository Participant. The allotment of shares would be automatically credited to Demat Account.
5. If the investors want to sell shares through a broker, then they must instruct the Depository Participant to debit the account with the number of shares sold.
6. In the next step, the broker has to give instructions to his Depository Participant for the delivery of shares to the stock exchange.
7. After that, the broker receives payment and pays the person for the shares sold to him/her.
8. Lastly, it is crucial to complete all these transactions within 2 days, i.e., delivery of shares. Besides, the payment received from buyers as settlement period is T+2 days since April 2003.
The separation of ownership and control of stock exchanges from the trading rights of members is known as Demutualisation. Earlier the ownership and control of stock exchanges were in the hands of a broker, which often led to a conflict of interest between the brokers and their clients. To solve this issue, Demutualisation of the Stock Exchange was done by the Government.
Demutualisation has helped in two ways:
- First of all, it has reduced conflicts of interest between brokers and their clients.
- Secondly, it has reduced the chances of brokers using the stock exchange for their personal gain.
Whether you're preparing for your first job interview or aiming to upskill in this ever-evolving tech landscape, GeeksforGeeks Courses
are your key to success. We provide top-quality content at affordable prices, all geared towards accelerating your growth in a time-bound manner. Join the millions we've already empowered, and we're here to do the same for you. Don't miss out - check it out now!