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The term DEMATERIALISATION OF SECURITIES. OR "DEMAT", in India, refers to a dematerialised account for individual Indian citizens to trade in listed stocks or debentures in electronic form rather than paper, as required for investors by the Securities Exchange Board of India (SEBI). In a demat account, shares and securities are held electronically instead of the investor taking physical possession of certificates. A demat account is opened by the investor while registering with an investment broker (or sub-broker). The demat account number is quoted for all transactions to enable electronic settlements of trades to take place. Access to the demat account requires an internet password and a transaction password. Transfers or purchases of securities can then be initiated. Purchases and sales of securities on the demat account are automatically made once transactions are confirmed and completed. With the age of computers and the Depository Trust Company, securities no longer need to be in certificate form. They can be registered and transferred electronically.
THE BENEFITS OF OPENING A DEMAT A/C: Easy and convenient way to hold securities Immediate transfer of securities No stamp duty on transfer of securities Safer than paper-shares (earlier risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc. are mostly eliminated) Reduced paperwork for transfer of securities Reduced transaction cost No "odd lot" problem: even one share can be sold Change in address recorded with a DP gets registered with all companies in which investor holds securities eliminating the need to correspond with each of them separately. Transmission of securities is done by DP, eliminating the need for notifying companies. Automatic credit into demat account for shares arising out of bonus/split, consolidation/merger, etc. A single demat account can hold investments in both equity and debt instruments. Traders can work from anywhere (e.g. even from home). Benefit to the company: The depository system helps in reducing the cost of new issues due to lower printing and distribution costs. It increases the efficiency of the registrars and transfer agents and the secretarial department of a company. It provides better facilities for communication and timely service to shareholders and investors.
Benefit to the investor: The depository system reduces risks involved in holding physical certificates, e.g., loss, theft, mutilation, forgery, etc. It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors. It helps avoid bad delivery problems due to signature differences, etc. It ensures faster payment on sale of shares. No stamp duty is paid on transfer of shares. It provides more acceptability and liquidity of securities. Benefits to brokers: It reduces risks of delayed settlement. It ensures greater profit due to increase in volume of trading. It eliminates chances of forgery or bad delivery. It increases overall trading and profitability. It increases confidence in their investors.
NSDL is a public limited company incorporated under the Companies Act, 1956. Four renowned institutions participate in it. Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), National Stock Exchange of India (NSE), State Bank of India (SBI).UTI is the largest mutual fund of India and IDBI is the largest development bank, NSE is the largest stock exchange of India and SBI is the largest commercial bank of India having clearing facility. HDFC and Citibank also share in this system. NSDL is managed by Board of directors headed by a managing director. It is governed by its bye-laws and its business operations are regulated by business rules. NSDL interfaces with the investors through players or business partners. Constituents of depository compromise of clearing corporation, brokers, clearing member, registrar and transfer agents, company or issuer, stock exchange, bank depository participant and investors. All are electronically linked to the main depository for the settlement of trades and to perform a daily reconciliation of all accounts held with NSDL.
2) Central Depository Services (India) Limited (CDSL) Second agency is CDSL - Central Depository Service (India) Limited. Main functions of this agency are centralized database and accounting. Major participant in CDSL are LIC, GIC and BSE. This agency is set up with the object to keep in mind to accelerate growth of scripless trading, with major thrust of individual participation and creating competitive environment, responsible to the users interests and demands to enhance liquidity. CDSL aims to retain the entire data of the investors in the central database of CDSL. It has opted for it with the following objectives: Within time information is available to issuers/registrars and share transfer agents. Companies can monitor critical holdings, e.g., holding of FIIs and FIs, investment companies, etc., by using up the parameters through their front-end terminals. There is no other database in the system to reconcile. No additional security or storage cost of data or critical database residing at the front-end terminals with the issuers/registrars. Recover only the annual maintenance charges. CDSL signed a memorandum of understanding with NSDL for interdepository connectivity. Presently, more than half the business of depositories is handled by this agency. Role of both these agencies has become very vital after SEBIs declaration that there would be no deals in physical form and only dealing to happen in market through demat accounts.
Investor
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DP
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R&T Agent
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NSDL/ CDSL
1) Client/ Investor submits the DRF (Demat Request Form) and physical certificates to DP. DP checks whether the securities are available for demat. Client defaces the certificate by stamping ' Surrendered for Dematerialization'. DP punches two holes on the name of the company and draws two parallel lines across the face of the certificate. 2) DP enters the demat request in his system to be sent to NSDL/CDSL.
2A) DP dispatches the physical certificates along with the DRF to the R&T Agent. 3) NSDL/CDSL records the details of the electronic request in the system and forwards the request to the R&T Agent. 4) R&T Agent, on receiving the physical documents and the electronic request, verifies and checks them. Once the R&T Agent is satisfied, dematerialization of the concerned securities is electronically confirmed to NSDL/CDSL. 5) NSDL/CDSL credits the dematerialized securities to the beneficiary account of the investor and intimates the DP electronically. The DP issues a statement of transaction to the client.
are listed that the company's shares are eligible for dematerialisation. The shareholders should also be informed that the company's shares can be held in dematerialised form. This can also be done by issuing an advertisement in newspapers or by way of a mention in the Annual Report of the Company.
(d) Sends the DRF and Share Certificates to the company by courier. The role of DP comes to an end with this but he must send a reminder in case credit of shares is not received in demat account of investors within a month. 7. The depository electronically downloads the particulars of demat request, received from DP and sends to the electronic Registrar of the company so that these shares could be dematerialized. Ultimately, the company or its RTA, as the case may be, receives two kinds of communications: (a) DRF and Physical Share Certificates from DP. (b) Electronic Download of Demat Request from depository through electronic Registrar.
requests is generated which should be checked thoroughly to ensure that only those shares for which Share Certificates have been received are dematerialised. 9. After ensuring that all corrections pointed out during checking of check list have been made out, updation is done in computer as a result of which the shares are transferred from the Folios of various shareholders, who have surrendered their shares for demat, to NSDL/CDSL Folio as the case may be. Hence, the Register of Members gets updated. 10. In the end a report is generated which contains the details of DRNs, which have been dematerialised in company's records as well as DRNs, which have been rejected on account of some objection. The report is forwarded to the company's electronic Registrar which in turn uploads the data of confirmed demat requests to depository for credit of shares in demat account of shareholders. Similarly the DRNs rejected are also uploaded to depository so that an intimation regarding rejection of demat requests is sent to DPs. Once the DRNs are either accepted or rejected for dematerialisation these are removed from pending list of company. 11. The DRFs & Share Certificates, which are rejected due to any objection should be returned to respective DP so that the same can be lodged again after generating a fresh DRN and rectification of objection. 12. The company should furnish the data of shares dematerialised comprising of Folio No., Name of Shareholder, No. of Shares, Distinctive No. of Shares to Stock Exchanges as per SEBI (Depository and Participant) Regulations, 1996 to enable Stock Exchange to update
their database. A certificate to this effect should also be sent to the Depositories. 13. Depositories, then confirm the dematerialisation of shares to DP. 14. DP, then credit the holding of shares into account, electronically. 15. Dematerialisation will normally take about 30 days. 16. Partly paid up shares and fully paid up shares are identified by separate ISINs (International Securities Identification Number). These are also traded separately at the Stock Exchanges. The company issues call notices to the beneficial holders of partly paid up securities in the electronic form. The details of such beneficial holders will be provided to the RTA/Company by the Depositories. After the call money realisation, RTA/Company will electronically convert the partly-paid up shares to fully paid up shares
FEES INVOLVED:
There are four major charges usually levied on a demat account: account opening fee, annual maintenance fee, custodian fee and transaction fee. Charges for all fees vary from DP to DP. Account-opening fee: Depending on the DP, there may or may not be an opening account fee. Private banks, such as HDFC Bank and AXIS Bank, do not have one. However, players such as ICICI Bank, Globe Capital, Karvy Consultants, Bajaj Capital Limited and State Bank of India do impose an opening fee. Most players levy this when re-opening a demat account. However, the Stock Holding Corporation offers a lifetime account opening fee, which allows the investor to hold on to his/her demat account for a long period. The fee is also refundable. Annual maintenance fee: This is also known as folio maintenance charges, and is generally levied in advance. Custodian fee: This fee is charged yearly and depends on the number of securities (i.e. ISINs) held in the account. It generally ranges between Rs 0.5 to Rs 1 per ISIN per month. DPs will not charge a custody fee for an ISIN on which the companies have paid one-time custody charges to the depository.
Transaction fee: The transaction fee is charged for crediting/debiting securities to and from the account on a monthly basis. While some DPs, such as SBI, charge a flat fee per transaction, HDFC Bank and ICICI Bank peg the fee to the transaction value, which is subject to a minimum amount. The fee also differs based on the kind of transaction (buying or selling). Some DPs charge only for debiting the securities, while others charge for both. Some DPs also charge the investor even if the instruction to buy/sell fails or is rejected. In addition, service tax is also charged by the DPs. In addition to the other fees, the DP also charges a fee for converting the shares from the physical to the electronic form or vice-versa. This fee varies for both demat (physical-to-electronic) and remat (electronicto-physical) requests. For demat transactions, some DPs charge a flat fee per request in addition to the variable fee per certificate, while others charge only the variable fee. For instance, Stock Holding Corporation has charged Rs 25 as the request fee and Rs 3 per certificate as the variable fee. However, SBI has charged only the variable fee, as Rs 3 per certificate. Remat requests also have charges akin to that of demat. However, variable charges for remat are generally higher than demat. Some of the additional features (usually offered by banks) are as follows. Some DPs offer a frequent-trader account, where they charge frequent traders at lower rates than the standard charges. Demat account holders are generally required to pay the DP an advance fee for each account that will be adjusted against the various service charges. The account holder needs to raise the balance when it falls below a certain amount prescribed by the DP. However, if the holders also hold a savings account with the DP, they can provide a debit authorisation to the DP for paying this charge. Finally, once choosing a
DP, it would be prudent to keep all accounts with that DP, so that tracking of capital gains liability is easier. This is because when calculating capital gains tax, the period of holding will be determined by the DP, and different DPs follow different methods. For instance, ICICI Bank uses the first in first out (FIFO) method to compute the period of holding. The proof of the cost of acquisition will be the contract note. The computation of capital gains is done account-wise.
SEBI GUIDELINES: SEBI has taken various policy initiatives to popularize the demat concept. One of them is delivery of demat shares compulsorily for institutional investors and OCBs. However, these investors have been allowed to buy shares in physical form, get them transferred in their names and thereupon get them dematerialized. The implementation of the guidelines is subject to the condition that the company shall get a certificate of practice that the company has followed the procedure mentioned in the scheme and to affect that: The company has followed the necessary procedures for effecting the original transfer; The register of members of the company was, accordingly, amended and the shares were transferred in favour of the transferee; The company has adequate procedures and has satisfied itself that the transferee and the entity requesting dematerialization are one and the same and before confirming the dematerialization request; company has further amended its register of members to indicate the transfer from the transferee to any agency; The company has defaced and cancelled/mutilated all the certificates. The company has adequate system to ensure that the investor does not lose his corporate benefits on account of the transfer entries in favour of the agency.
Holdings in those securities that have not yet been admitted for dematerialisation by NSDL cannot be dematerialised. List of securities admitted for dematerialisation should be verified before defacing the securities. Holdings in street name cannot be dematerialised. The combination of names of holders as printed on the physical certificate should be identical with the names initiating the dematerialisation request. Separate dematerialisation requests will have to be filled for locked-in and free holdings. Separate dematerialisation requests will have to be filled for holdings locked-in for different reasons. Separate dematerialisation requests will have to be filled for fully paid up and partly paid-up holdings. Separate dematerialisation requests will have to be filled for holdings in the different ISINs of a company.
RE-MATERIALIZATION : Rematerialisation is a process, by which a client can get his electronic holdings converted back into the physical holdings, i.e., he can get back the physical form of share certificates. To get the certificate back, he has to fill up a remat request form and submit it to its depository with whom he has an account. The new certificates may not necessarily bear the same folio or distinctive numbers as previously existed. The facility to rematerialise again is offered to all those scrips which are eligible for demat in the depositories` list of securities available for
dematerialisation.The whole process of rematerialisation is completed within 30 days from the receipt of request.
DISADVANTAGES OF DEMAT:
Trading in securities may become uncontrolled in case of dematerialized securities. It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors. The role of key market players in case of dematerialized securities, such as stock-brokers, needs to be supervised as they have the capability of manipulating the market. Multiple regulatory frameworks have to be confirmed to, including the Depositories Act, Regulations and the various Bye Laws of various depositories. Additionally, agreements are entered at various levels in the process of dematerialization. These may cause anxiety to the investor desirous of simplicity in terms of transactions in dematerialized securities. However, the advantages of dematerialization outweigh its disadvantages and the changes ushered in by SEBI and the Central Government in terms of compulsory dematerialization of securities is important for developing the securities market to a degree of advancement. Freely traded securities are an essential component of such an advanced market and dematerialization addresses such issues and is a step towards the advancement of the market.
are a phenomenon of a short term in nature due to any event in the capital markets. Non-demat (control group) companies, in fact, mostly posted negative returns in the study period. - Volatility and returns go hand-in-hand. Higher volatility sometimes brings higher positive returns. In the study period, volatility as a whole (index) slightly increased and concurrently the companies studied also had higher volatility. - On the whole, dematerialisation played a very positive role in further modernisation of Indian capital market by providing higher liquidity, higher returns and lower volatility. - The findings are based on the assumptions of CAPM in a given market, therefore, the findings have same criticism as for the underlying model.
I 1) Is dematerialisation compulsory? According to Depositories Act, 1996, an investor has the option to hold shares in either physical or electronic form. However SEBI has notified a list of securities where the transactions will take place only in electronic mode for all investors. Hence if you wish to buy or sell securities which fall in the SEBI notified list of securities, then you would have to do so in the electronic mode only.
2) Is a transfer deed required for dematerialising certificates? No, There is no need for a transfer deed. The certificates have to be accompanied by a Dematerialisation Request form (DRF), which can be obtained from the DP. 3) Can I dematerialise any share certificate? You can dematerialise only those share certificates that are already registered in your name. Moreever the securities must belong to the list of securities admitted for dematerialisation at CDSL. Securities held in street name (third party shares) cannot be dematerialised. 4) What is Transposition cum Demat ? Changing of position of joint holders in the sequence of names is called Transposition. If the same set of joint holders held securities with different sequence of names, these joint holders were earlier required to open different depository accounts. With the introduction of Transposition cum Demat facility by CDSL, you can dematerialise all shares in more than one sequence in the same single account. 5) Can I dematerialise shares sent for transfer? SEBI has laid down a separate procedure for simultaneous transfer and demat. After the Issuer / Registrar has transferred the shares in
your name they will request you to let them know whether you wish to receive them in demat mode. In case you wish to opt for demat mode, you will inform your BO ID (ie. your securities account number) and the securities shall be credited to your securities account. This facility is offered only for those scrips for which the Issuer Company has agreed to do simultaneous demat and transfer. 6) Can odd lot shares be dematerialised? Yes, odd lot shares can also be dematerialised 7) Do demat shares have distinctive or certificate numbers? Dematerialised shares do not have any distinctive or certificate numbers. The securities will be fungible which means that each of the holdings of a particular security will be identical and interchangeable, as they will not have unique characteristics such as distinctive numbers or certificate numbers. 8) Can my electronic holdings be converted back to certificates? Yes, your electronic holdings can be converted back into certificates through the process of Rematerialisation.
9) What is ISIN? Is it compulsory to mention the ISIN number of the company while filling up the DRF? ISIN stands for International Securities Identification Number. An ISIN is a code, which uniquely identifies specific securities; issuers and is allotted by SEBI. The ISIN name and number should be mentioned in the DRF. This, to a certain extent, ensures that the security mentioned in the DRF is the same as the one the investor intends to dematerialise.
TABLE OF CONTENTS
SR.NO. 1 2 3 4 5 6 7 8 9 10 11 12 TOPIC Meaning of demat Need for Demat A/C Requisites necessary for demat Object of demat What is DEPOSITORY ? What is DEPOSITORY PARTICIPANT ? NSDL/CDSL & its role Securities that can be dematerialized Demat Request Form Steps in demat process Its procedure SEBI guidelines