Dematerialization Demat Meaning Shares Process Benefits

Dematerialization (DEMAT) Meaning

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Dematerialization (DEMAT) (wallstreetmojo.com)

This indirect holding system substitutes the paper form of bookkeeping with trading institutions holding all assets and securities ownership details in electronic format. Once the details are electronically stored, the original physical forms of stock certificates are removed from the records. The trading institutions prefer this form of bookkeeping as it tends to be the most efficient and safe form of tracking, tracing, storing, and retrieving records.

Key Takeaways

Dematerialization (DEMAT) refers to the process of transforming paper shares into electronic form.It addresses risks associated with holding paper securities like delays in transfers, forgeries, and loss of certificates.Digital securities are safer and more convenient to handle. The DEMAT account keeps track of all the shares held in digital format.For dematerialization of shares, investors must submit a DEMAT Request Form along with the physical stock certificates to a depository participant.The depository helps register the securities and transfer them electronically. Most brokers and banks are its participants.

Dematerialization Explained

In the context of finance and stocks, dematerialization refers to the movement from paper recordkeeping to the electronic form for more secure, flexible, and convenient bookkeeping. It applies to stocks, mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more, bonds, and other investmentsInvestmentsInvestments are typically assets bought at present with the expectation of higher returns in the future. Its consumption is foregone now for benefits that investors can reap from it later.read more. Thus, a DEMAT account holds all financial instruments converted into digital form.

Dematerialization came into being to keep track of securities issued in the form of physical certificates. Paper stocks carry certain inherent risksInherent RisksInherent Risk is the probability of a defect in the financial statement due to error, omission or misstatement identified during a financial audit. Such a risk arises because of certain factors which are beyond the internal control of the organization.read more like getting lost or misplaced. Also, they cause delays in transactions due to the need to physically transfer security certificates. Therefore, trading institutions moved towards dematerialization. It addressed all these issues effectively.

Thus, the digitization of securities ensures that securities are free from forgeries and other risks associated with holding them in their physical forms. Besides, this switch to the digital holding of securities certificates enabled automatic and instant updates to DEMAT accounts. As a result, digital securities transformed the landscape of securities trading and made it safer and faster.

Thus, DEMAT helps investors or traders hold their securities in electronic format without carrying the same in a certificate form. The computer systems and the DTC register the securities and transfer them electronically. The Direct Registration System (DRS) under DTC allows shareholders Shareholders A shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read moreto make multiple transactions using online portals without any hassle.

Process of Dematerialization

Nowadays, companies rarely issue physical stock certificates. However, investors own certificates issued to them many years ago. So, as soon as these investors decide to digitalize their securities, they must follow a series of steps.

Step #1 – Open a DEMAT account

To open this trading account, investors need to select a depository participant offering the dematerialization services. Once a suitable service provider is found, they can open the DEMAT account.

Step #2 – Fill in the Request Form

To activate the DEMAT account, investors must fill out a Dematerialization Request Form (DRF). This form is available with the depository participant. The traders should fill in the form and deposit the same along with their physical certificates. The certificate must state “Surrendered for Dematerialization.”

Step #3 – Verification of Details and Certificates

Post-submission, the depository participant verifies the details in the application and the certificates. Finally, it forwards them to the company and transfer agents through the depository.

Step #4 – Application Approval

As soon as the request is approved, the paper or physical format is destroyed, and the electronic form is activated. An electric notification is sent regarding the same to the users immediately.

Step #5 – Final Confirmation & Activation

The depository confirms the depository participant of the dematerialization of shares. The shares of the traders are instantly transferred to their DEMAT account for further necessary actions.

Benefits

Like everything handled electronically, dematerialization also speeds up trading. Apart from quickening the storage and retrieval processes, there are other benefits too. Let’s discuss them.

#1 – Security

When securities are held in paper or physical format, there are chances of them being misplaced or lost. With the help of dematerialization (DEMAT), the details of the securities are held online and are ready for retrieval whenever required. Such digitized forms of trading information are safe and secure as there is no risk of forgeries at all.

#2 – Speed

For the paper forms of financial trades, be it mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more, bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more, or government securities, traders had to wait longer to process a transaction. On the other hand, dematerialization has made trading faster, allowing traders to buy, sell, and transfer assets just in a few clicks without any hassle or delay.

#3 – Cost

The cost of trading reduces with the use of the electronic format of holding securities. The number of resources involved is less as all it needs is a good technology rather than lots of papers for recordkeeping. Thus, when trading resources required are limited, the cost of order execution automatically diminishes. Plus, there is no processing fee involved in the process.

#4 – Smooth

When investors hold all securities electronically, handling data and updating the same from time to time is far swifter than the information stored in a physical format. The DEMAT account automatically updates all transaction-related data. Hence, the process is way better and smoother. Dematerialization saves a lot of time and effort.