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Dematerialization of shares

News By/Courtesy: Priyanka Patnaik | 21 May 2020 9:45am IST
Business & Stock

Indian capital market has seen an unprecedented boom in its activity in the last 15 years in terms of several stock exchanges, listed companies, trade volumes, market intermediaries, investor population, etc. However, this surge in activity has brought with it numerous problems that threaten the very survival of the capital markets in the long run, most of which are due to the large volume of paperwork involved and paper-based trading, clearing, and settlement.
Dematerialization 
Dematerialization (DEMAT) is the move from physical certificates to electronic bookkeeping. Actual stock certificates are then removed and retired from circulation in exchange for electronic recording. the idea is to simplify the entire process of buying, selling, transferring, and holding shares and also about making it cost-effective and foolproof.
Dematerialization is done at the request of the investor. Investors will first have to open an account with a DP (Depository Participant) and then request for dematerialization of certificates through the DP.
Historical development 
The Securities and Exchange Board of India (SEBI), in its pursuit, to make Indian capital market safe, transparent and disclosure oriented, has been pursuing to reform so that the Indian capital market match with the standards of developed capital markets of the world. The introduction of trading in DEMAT form of securities was at the top of SEBI's agenda.
The enactment of the Depositories Act in 1996 made by the Government of India, to ensure the free transferability of securities with speed, accuracy, and security lead to orderly growth and development of the Indian capital market.
Depositories Act in August 1996 that superseded ordinances issued by the government earlier. The Act permits multiple depositories to operate in the country. This will remain as one of the landmark developments in creating new technology to transact in financial instruments. SEBI passed Depositories &Participants Regulations in May 1996 to enable depositories to start and operate.
National Securities Depository Ltd (NSDL) was the first to get itself incorporated in June 1996 and to start its business. Subsequently, Central Depository Services Ltd (CDSL) also became operational in March 1999. Currently only these two depositories are operating in the country.
Procedure 
If the company wants to dematerialize its physical shares it has to follow certain procedures laid down by depositories like NSDL and CDSL. The general steps involved in the process are as follows
  1. The company should pass a special resolution at a general meeting to insert the articles relating to the dematerialization of shares.
  2. After getting it approved by the board of directors, the company must sign agreements with depositories, NSDL, and CSDL. SEBI has stated that if the company wishes to provide DEMAT facility to its investors it must sign agreements with both depositories.
  3. A company must have electronic connectivity with the depositories to dematerialize its shares. The connectivity can be established through computer hardware, software, and other equipment or through a Registrar which has got the required infrastructure. In case a company opts for an outside Registrar, the agreement mentioned above will be tri-partite.
  4. Once the company is admitted to the depository system, an ISIN (International Securities Identification Number) is allotted by the depository. This number is unique for each security of the company that is admitted to the depository.
  5. After establishing the electronic connectivity, Depositories inform the name and ISIN of the company to the Participant.
  6. The company should inform the Stock Exchanges, where its shares are listed so that they are eligible for dematerialization. The shareholders should also be informed about the company's shares can be dematerialized. This can also be done by issuing an advertisement in newspapers or byway of a mention in the Annual Report of the Company.

Section Editor: Pushpit Singh | 21 May 2020 18:38pm IST


Tags : #dematerizationofshares

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