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The stock market in India has constantly been evolving, with fintech and other trends making the country’s financial system more potent. Among the many changes, some noteworthy ones are electronic trading replacing the outcry system, the rolling settlement system replacing the account settlement and the concept of demat replacing physical shares.
Today’s article focuses on the change from physical holding of shares to demat holding. We will also cover the steps on how to dematerialise physical shares.
What is demat?
Demat is the short of dematerialisation. It is the process of holding shares in an electronic form.
When your buy order to purchase stocks is settled, do you get the delivery of shares at your doorstep? The answer is no. So, the next obvious question is, where else do you get the delivery of these shares?
That is where the necessity of demat arises. The Securities and Exchange Board of India (SEBI) states that traders and investors in India must receive and maintain their shares in an electronic form. This is where owning a demat account becomes essential.
Opening a demat account with a broker is the foremost step to trade in India. Shares bought are stored electronically in the demat account until the trader executes a sell order.
The evolution of physical shares to demat
However, demat shares were not in practice earlier. There was a time when share certificates were delivered at the trader’s doorstep.
During the initial days of stock trading in India, traders had to be physically present on the stock exchange’s trading floors. They had to use hand and verbal signals to place orders. The traders buying shares would then receive a physical copy of the certificate indicating the name of the stock and the number of units held.
It was not until the early 1990s that the market saw a change in these practices. When the NSE was established, it pioneered the introduction of electronic trading through ECN (Electronic Communication Network) platforms in India.
The government and the market regulator began working towards introducing demat shares in 1991. They established two depositories to hold shares in electronic forms. The National Securities Depository Limited (NSDL) was established in 1996 to hold shares traded on the National Stock Exchange. Following this, the Central Depository Services Limited (CDSL) was introduced in 1999 to hold the shares traded on the Bombay Stock Exchange.
Brokerage firms, also called depository participants, tie up with these two depositories to provide demat service to traders through opening a demat account.
How to transfer physical shares to a demat account?
Now that we understand dematerialisation, let’s go through how to dematerialise shares.
Today, every trade automatically results in demat shares since all stock exchanges and brokers in the country follow the same process. However, if you have physical shares resulting from your old trades, you can dematerialise them by following these steps:
- Open a demat account with a reputed brokerage firm. Compare the services and associated costs of all the brokers before zeroing down on one broker. The account holder’s documents will be required to run KYC checks. Upon successful verification of them, your account will be active.
- Ask your broker, who is also a depository participant, to provide you with a “Dematerialisation Request Form” or DRF. Fill in the required details of the shares you hold physically, and also mention on the form that the shares are “surrendered for dematerialisation”.
- Submit any other documents your broker may require and wait for the verification. Once verified, you will receive an online request to convert your shares to a demat format.
- Once you receive a confirmation that the shares have been converted successfully, your physical copy will be destroyed.
Advantages of converting physical share certificate to demat
- Since shares in the demat account are in an electronic form, the risk of damage or theft is mitigated.
- Transferring shares between traders becomes simple and convenient as they do not have to be delivered physically.
Bottomline
Holding a demat account and shares in an electronic format is the rule of the day. Hence, opening a demat account is fundamental to every stock market trader.
Shares in a physical form have no value today, and must compulsorily be converted to a demat form. Hence, understanding how to convert physical shares to demat is essential for traders and investors to be successful in their stock market journey.
FAQs
The first step to cash physical shares is to convert them to a demat form. Once converted, you can place a sell order on the stock exchange through your trading account.
No. In 2023, the SEBI made it mandatory for investors to hold all their shares in an electronic form. Any share held in a physical form will not have any monetary value.
The main disadvantage of holding shares in a demat form is the charges associated with having a demat account. A demat account can be quite expensive since it has multiple costs, like, brokerage fees, annual maintenance charges, etc.
Any Indian citizen, including NRIs, who wants to trade on the Indian stock markets can open their demat accounts. However, if the trader is a minor (below 18 years of age) or of an unsound mind, the account must be supervised by a parent or guardian.
Traders can have multiple demat accounts. The only condition is that they cannot have more than one with the same broker. So, you can have multiple accounts but with different brokers.
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