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10 Reasons Why Share Dematerialisation is Gaining Popularity

Share Dematerialisation is gaining popularity due to its process of converting physical shares certificate into electronic forms for various reasons such as reduced paperwork, conveniences, reduction in risk, easier & faster transactions, global standardization during share transmission, and many more.

What is Share Dematerialisation?

Share Dematerialisation is a process that converts physical shares or share certificates and other documents into electronic format in a Demat Account. During the post-liberalization of the Indian economy in 1991, the establishment of the SEBI was held in 1992 which is marked as an important step in regulating the capital markets.

A depository is tasked with safeguarding a shareholder’s securities in electronic format. These assets may include bonds, government securities, and mutual fund units, and they are held by certified depository participants acting as an intermediary for the depository following the Depositories Act of 1996. Presently there are two depositories authorised by SEBI and permitted to function in India that is National Securities Depositories Limited and Central Depositories Services India Limited.

SEBI plays an important role in introducing share dematerialisation through enacting the Depositories Act, of 1995. Later, under the Companies Amendment Act, of 2000, it became compulsory to issue Initial Public Offerings valued at Rs 10 crore or more exclusively in dematerialisation form. Now, trading in shares cannot be done without a demat account.

What is the meaning of the Demat Account?

The concept of a demat account is important in the share dematerialisation process because opening a demat account is required for converting physical shares into electronic shares format. Therefore, individuals utilize a Demat account to manage, transfer and conduct a transaction involving securities all without the challenges related to physical certificates to make trading a safer, faster and more efficient means of handling securities. The Demat account serves as a source of managing equity, bonds and mutual fund investments and stores securities like share bonds or debentures.

Role of NSDL and CDSL in Share Dematerialisation

NSDL and CDSL play an important role in the dematerialisation of shares & debentures in India as mandated by the Depositories Act.

1. Providing Infrastructure

Both NSDL and CDSL serve as depositories, providing the important infrastructure and technology platform to facilitate the dematerialisation process.

2. Registration

The NSDL and CDSL are registered with SEBI and authorized to operate as depositories in India under the provision of the Depositories Act.

3. Depository Participants

NSDL and CDSL allow market participants such as banks, financial institutions and brokerage firms to become depository participants which also act as an intermediary between investors and depositories providing share dematerialisation services to investors.

4. Dematerialisation Request Form

The NSDL and CDSL enable investors to open a demat account and submit a dematerialisation request form for converting the physical share certificate into electronic form.

5. Verification

NSDL and CDSL oversee the verification and processing of DRFs submitted by investors through their Depository Participants to ensure compliance with the regulatory requirements.

Surge in Share Dematerialisation to Attract Investors

The surge in share dematerialisation or opening of demat accounts, totaling a new high of 150 million, indicates a trend of increased investor participation in the Indian stock market despite recent volatility.

The March 2024 quarter witnessed remarkable growth for Depository firms like CDSL and NDSL, with over 10 million new demat accounts opened, reflecting an increasing trust in capital markets, this upward trajectory in demat addition is viewed positively by market participants, not only contributes to market stability but also suggests a growing inclination towards equity investment among households.

The National Stock Exchange witnessed a consistent increase in active clients for the ninth consecutive month, reaching 40.5 million in March 2024. The top five brokers such as Zerodha Upstox, ICICI Direct, HDFC Securities, and Angel Broking hold 63.8% of total NSE active clients.

Factors such as digitization and heightened awareness about equity investing have facilitated easier account opening processes, driving the surge in demat accounts. Also, the recent rise in market, particularly in mid and small-cap segments has attracted fresh investors

Market Trends of the Demat Account

Zerodha, Upstox. Groww experienced modest growth in clients but a slight decline in market share. Zerodha experienced a modest 0.9% growth every month, which reached 73 lacs but still faced a decline of 20 basis points, Upstox reported 0.6% as a monthly increase in clients reaching 25 lacs but still faced a decline of 10 basis points in market share. Groww has a surge in active clients up to 95 lacs with a rise in market share which increased to 23.4%.

Among traditional brokers, ICICI securities witnessed a decrease in client numbers and market share while IIFL securities reported marginal growth in clients with stable market share. As per the brokerage performance, the total average daily turnover reached a 5% decline every month but despite the decline, the total average daily turnover in the brokerage performance has increased to 8% monthly. The brokerage also figured out that in March, the total volumes on the exchange surged to Rs 26.8 lac crore and increased the future by 5.7% to 23.4 Lac crore on a month-on-month basis.

Benefits of Opening a Demat Account

There are various benefits of opening a Demat Account, some of which are stated below:

1. Reduction in Risk Documents

Traditional shares were easy to be misplaced, lost, theft, and forgery due to physical paper certificates which also led to errors and delays but with a demat account, the individual can securely store all the shares electronically to eliminate these risks.

2. Efficiency Cost

Physical trading often incurs handling fees and stamp duties, which can vary unpredictability so the demat account eliminates these extra costs, leaving the individual with the transparency and upfront brokerage charges.

3. Time saving

Demat accounts streamline the process of buying and selling shares, enhance share liquidity and it will make the transfer of the shares quicker and simpler.

4. Tracking

The demat account not only reduces the hassle of tracking physical documents but also eliminates the need for manual record keeping and the demat accounts help secure all the documents digitally.

5. Diversified Investment

The demat accounts securely store a variety of investments beyond shared and include bonds, mutual funds, government securities and more.

6. Easy Accessibility

The individual can easily access the demat account anytime, anywhere by using the technology through internet access.

7. Convenience

Share Dematerialisation offers unparalleled convenience to investors. With electronic shares, investors can manage their holdings, track transactions and execute trades from anywhere with an internal connection. Eliminating the need for physical visits to brokers or registrar offices.

8. Faster Transaction

The electronic share facilitates faster transaction processing compared to physical certificates, reducing settlement times and enhancing liquidity in the market.

9. Environmental Benefits

The shift towards share dematerialisation aligns with sustainability goals by reducing the consumption of papers and minimizing the environmental footprints related to the traditional share certificate process.

10. Global Standardization

Share dematerialisation contributes to the global standardization of the securities market, aligning practices across different jurisdictions and facilitating cross-border investments.

11. Regulatory Compliance

Many regulatory authorities encourage or mandate share dematerialisation to enhance transparency, efficiency, and regulatory compliance within financial markets.

12. Advanced Technology

Advancements in Technology, such as blockchain and digital accounting, are further accelerating the adoption of dematerialisation by offering secure and immutable platforms for electronic share ownership and transfer.

Process of Share Dematerialisation

The process of dematerialisation of shares & debentures in India takes 15 to 30 days to complete, below is the breakdown of the steps involved:

1. Firstly, the individual needs to open a demat account through a depository participant often facilitated by the stockbroker.
2. Submission of a completed dematerialisation request form to the Depository Participant along with the physical share certificate for share dematerialisation.
3. If there is a share from multiple companies, the individual needs to submit a separate dematerialisation request form for each company along with the particular physical share certificate.
4. The depository participant reviews both the forms and the securities to ensure they meet the requirements.
5. Upon approval, the individual receives a dematerialisation request number as confirmation.
6. The depository participant will forward the request to the registrar and share the transfer agent of the respective company.
7. Once the share transfer agent accepts the share dematerialisation request, the physical share certificates will be converted into electronic form.
8. Finally, the share dematerialisation shares are credited to the individual’s demat account, enabling the individual to sell or transfer them as required.

Essential Criteria to Consider While Opening a Demat Account

There are essential criteria to follow while opening a demat account:

1. Reputation of Brokers

In India, brokers typically fall into categories of discount broker and full-service broker, understanding the difference between them is very important and promoting a broker with a strong reputation for reliability and adherence to regulatory standards.

2. Account Opening and AMC

Many brokerage firms in India impose annual maintenance charges in demat accounts, deducted directly from the account balance to minimize initial expenses.

3. Trading Platform

Choose a broker’s offerings intuitive trading platform, including mobile apps and internet connectivity for seamless trading.

4. Research Analysis

Evaluate brokers based on the research reports, market analysis tools and educational resources they provide which can help beginners make well-informed investment choices.

5. Brokerage Fees

Compare brokerage fees, including transaction charges, brokerage rates and other fees to ensure they are competitive and transparent.

6. Security Measures

Ensure the broker employs robust security measures to safeguard personal and financial information, including two-factor authentication and encryption protocols.

7. Ease of Account Management

Look for brokers offering seamless account management features, such as online account access, fund transfer options and easy tracking of portfolio holdings.

Recent Amendment in Share Dematerialisation in India

The Ministry of Corporate Affairs in October 2023 introduced the company’s (prospectus and allotment of securities) second amendment rules, 2023 which inserted rule 9B into the existing companies’ prospectus and allotment of securities rules, 2015.

Therefore, according to Rule 9B, private companies that do not qualify as small companies as of March 31, 2023, must ensure that all their shares are in dematerialized form by September 30, 2024.

In the case of private companies that would no longer qualify as small companies under the Companies Act of 2013, the requirement to share dematerialisation becomes applicable within 18 months from the end of the financial year in which they cease to be small companies whose paid-up share capital is of Rs 40,000,000 or less and turnover not exceeding Rs 400,000,000 in the previous year.

Also, if the company is a holding or subsidiary company of a corporate body then it will not be considered a small company instead meeting the criteria.  The aim of issuing this amendment is to reduce the challenges in doing business, curb benami transactions, reduce fraud or forgery, streamline the process of trading and be cost-effective.

Penalty of Non-Compliance in Share Dematerialisation

The failure to comply with the requirement to share dematerialisation by September 30, 2024, will result in the following consequences:

• The company will be prohibited from issuing or allotting any type of securities or shares.
• Shareholders will be unable to transfer or subscribe to any type of securities.
• For each day the penalty for violation is Rs 10,000 plus Rs 1,000 for continuous violations with a maximum limit of Rs 200,000.
• Every officer of the company in default will hold a penalty of Rs 10,000 plus Rs 1,000 with a maximum limit of Rs 50,000.

Percentage of Indian Population in the Stock Market

In 2020, a remarkable surge in retail investors participating in the Indian Stock market, a trend previously dominated by a dedicated group of investors including foreign and domestic institutional investors. While traditional investment avenues like gold and real estate have long been popular due to their historical appreciation, the pandemic shutdown led individuals to explore alternative options including the stock market.

The surge in share dematerialisation or opening of demat accounts, totaling a new high of 150 million. Despite this surge only a small percentage of households actively invest in the stock market, lagging behind countries like the United States, the UK and China. Also, despite its inherent risk, the stock market offers potential returns that beat inflation rates and fixed deposit interest rates, making it an attractive option for long-term wealth.

What are the differences between Dematerialisation and Re-materialisation?  

The primary difference between shares dematerialisation and re-materialisation lies in the safety, efficiency and convenience of the securities, below are the some of the difference stated in detail:  

1. Dematerialisation is the conversion of physical share certificate into electronic form and Re-materialisation is the conversion of electronic shares certificate into physical shares certificate.  
2. Dematerialisation helps in trading the shares electronically through a demat account but in re-materlisation the shares will not be able to be traded electronically.  
3. However, the SEBI has restricted the trading of re-materialised shares to enhance efficiency and security but made the provision of mandatory transfer of physical share certificate into electronic form through dematerialisation. 
4. Also, share dematerialisation doesn’t incur maintenance charges for individual investors but in the re-materialisation, there is a maintenance charge which is incurred to store shares in physical forms.  

Conclusion

The surge in share dematerialisation reflects a growing trend of investor participation in the Indian stock market, driven by various factors like digitization and increased awareness about investment. Despite this surge, only a small percentage of Indian households actively engage in stock market investments, indicating ample room for growth where share dematerialisation has played a major role in today’s time which led to an increase in the increase of investment.

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