Recovery of Shares

What is the Procedure for Conversion of Physical Shares to DEMAT

The concept of dematerialization was introduced through the Depositories Act 1996^[1]. However, it gained momentum in  2018 after the notification of SEBI dated 28.03.2018 banning the transfer of shares in physical form by the companies irrespective of them being listed, delisted or unlisted except in the case of transmission of shares, which came into effect from 1st April 2019. This compelled the companies as well as the individuals to opt for the conversion of physical shares to DEMAT

The article discusses the procedure for converting physical shares to DEMAT to clarify the process and enable safe and secure transactions.

What is a DEMAT? 

DEMAT, also referred to as Dematerialisation, is the process of electronically holding physical shares, bonds, and mutual funds.

What is the Need for Conversion of Physical Shares to DEMAT?

The need for conversion of physical shares to DEMAT is due to the drawbacks of the physical shares, which are 

• The need to keep the physical share certificates securely due to the risk of theft, destruction or misplacement of the same 
• The time-consuming transactions in case of physical share certificate which can be completed quickly with the help of Demat account 
• The attraction of stamp duty payments on the physical shares, which is avoidable in the case of dematerialized shares 

What are the types of DEMAT Accounts? 

The types of DEMAT Accounts are listed below –

Regular Account 

The citizens of India open regular accounts. This account is provided by the National Securities Depositories Limited (NSDL) and Central Depositories Services India Ltd through intermediaries like depository participants, stock brokers etc. The charges for the account are based on the terms and conditions set by the depository participant. This account aims to accelerate the process of the transfer of shares and simplify trading operations.

Repartriable Account 

This account is suitable for the NRIs willing to invest in the Indian share market worldwide. The account would be helpful for the NRIs during the transfer of funds to several countries, provided that the account is associated with an NRE bank account. Further, the NRIs willing to open such an account must adhere to the FEMA Act and other relevant legislation.

The essential documents required for NRIs are PAN Card, Visa, Passport, Overseas address proof like rental/lease agreement, utility bills, passport size photograph and a cancelled cheque of NRE/NRO account attested at the Indian Embassy of the country where the NRI resides.

Non-Repartriable Account

The non-repatriable account is also for the NRIs; however, it does not allow the transfer of funds abroad and also mandates having an NRO account which must be linked to the bank account of the NRI. 

Who are the key Players in the Conversion of Physical Shares to DEMAT?

The whole process involves four key places, which are –

Issuer- it refers to the company that floats the shares  

Depository – There are two depositories in India, namely the National Securities Depositories Ltd (NSDL) and Central Depository Services Limited (CDSL). These entities hold financial securities like bonds, debentures, shares etc.

Depository Participant – it is an intermediary registered under SEBI that acts as a bridge between the investors and the depository.

Beneficial owner – the person who holds the shares in the physical form is the shareholder.

What are the documents required for the Conversion of Physical shares to DEMAT? 

The following documents are required for the conversion of physical shares to DEMAT. 

• Identity proof such as Aadhar Card, PAN Card, voter id, driving licence etc 
• Residence proof such as lease deed or rent agreement, electricity or telephone bills 
• The passbook or bank statement is not older than 3 months. 
• Original copy of the physical share certificate, 

• It must be noted that the share certificate must be in good condition in terms of legibility and otherwise. 
• Request form filled in the prescribed manner. The applicant is required to fill out separate forms in case of holding shares of different companies.
• The applicant must ensure to deface each page of the share certificate by mentioning Surrendered for Dematerialization.
• Acknowledgement slip in respect of the surrender of shares 

Key considerations prior to the Conversion of Physical Shares to DEMAT 

• A company must revise its Article of Association by a special resolution in the general meeting, allowing the issue of shares in electronic form before initiating the dematerialization process.
• After passing the board resolution, the company must register itself with NSDL and CDSL per the criteria prescribed by these depositories.
• The next step is to issue a 12-digit unique ISIN number to identify shares, debentures, stocks etc.
• The company can access the depository services only through a registered intermediary, and if the issuer is willing to transfer the shares, there must be an arrangement for Demat connectivity from depositories.

What is the Process of Conversion of Physical shares to the DEMAT account? 

The process of conversion of physical shares to DEMAT can be broadly classified into 

• Opening of DEMAT Account and 
• Request for Dematerialization of Shares

Opening a beneficiary account with a Depository Participant (DP)

The first step for converting physical shares to DEMAT is opening an account with a depository participant duly registered with SEBI. The depository participant acts as an intermediary between the shareholder and the depository. The Demat account can be opened by completing the following steps. 

Filing the application form for opening of DEMAT Account – 

The applicant is required to fill out the application form with the Depository Participant in the prescribed manner.

Providing the essential documents for KYC Verification 

The next step is the submission of the necessary documentation for the opening of the account.

Signing an agreement with the depository participant 

After providing the essential documents, the applicant must sign 

the agreement with the DP, along with the payment of requisite charges. The agreement comprises the duties of both the parties, the applicant and the depository agent.

Verification of Documents by the Depository Participant 

The depository participant shall verify the documents submitted by the applicant to check the adequacy and accuracy of the documents.

Issue of Demat Account Number 

Upon the depository’s successful verification of the documents, the participant’s application for the opening of an account shall be approved, and the applicant shall be provided with a unique Demat account no. for the conversion of physical shares to DEMAT.

Surrender of Physical Share Certificate 

Upon successfully opening the DEMAT account, the next step is surrendering the physical share certificate. The elaborated procedure for the same is explained below –

Seeking the Request Form 

The applicant must seek the DRF request from the Depository participant to surrender the share certificate.

Submission of Request Form 

The applicant must submit the form after mentioning the required details along with his signature and attaching the physical share certificate with the form. 

Verification of DRF by the Depository Participant 

After the submission of the form, the form shall be verified by the depository participant to ensure the absence of any discrepancies. 

Approval by Registrar and Share Transfer Agent 

After the successful verification of the request form by the depository agent, the form shall be forwarded to the RTA by the DP for final approval. 

Transfer of Shares in Demat Account

Suppose the Registrar and Share Tranter agent approves the request. The physical share certificates of the shareholders shall be destroyed, and the amount of the shares shall be transferred to the DEMAT account of the shareholder.

What are the advantages of DEMAT? 

There are numerous advantages of dematerialization, some of which are enlisted below.

Convenience

Demat facilities in the electronic settlement of transactions eliminate the problem of the physical presence of the shareholder during the transaction, as he can do the same via any electronic device. 

Easy Fund Transfer 

Linking the Demat account with the bank account allows the transfer of funds electronically without the hassle of manually drawing the cheque this regard which makes the fund transfer quite convenient and safe. 

Safety

The DEMAT account help in a safe and secure alternative for transactions that eliminate the risk of destruction, theft or misplacement of the shares, unlike in physical shares.

Facility of Nomination 

 A Demat account allows choosing a nominee to handle the Demat account in case of any inability on the part of the account holder. This helps to avoid the misuse of the shares of the shareholder in the best way possible.

Paperless

 One of the significant benefits of using a Demat account is eliminating the need for paper, as the shares are held in electronic form. This has also proven to reduce companies’ administrative costs and promote a sustainable environment.

Loan Facility 

The Demat account allows the account holder to avail loan against the dematerialized shares, and they can even be kept as collateral for the loan, making it an excellent option for availing loans.

Monitoring

 A Demat account enables the monitoring of the portfolio from anywhere. this flexibility improves the chances of 

earning profits by the shareholder due to increased participation and interest of the shareholder 

Receiving Corporate Benefits with Ease 

 Demat account eases the process of receiving various corporate benefits like interest, refunds, dividends etc. All the benefit amount gets directly credited into the Demat account. Moreover, other benefits like stock split, bonus shares, rights shares, etc., get directly updated into the Demat account.

Elimination of the Problem of Odd Lots

Prior to the introduction of a Demat account, the shares and securities could be traded in a specified quantity only specified quantity, making it impossible to sell the desired number of shares by the shareholders, which are eliminated with the introduction of dematerialization, which allows the sale of the desired quantity of shares. 

Serves Multiple Purpose 

 The demand account enables the holding of shares and debentures together with purchasing and selling mutual funds, government bonds, exchange-traded funds, etc.

How is Dematerialisation different from Rematirialisation? 

The 2 concepts can be differentiated on the following parameters. 

• Dematerialization involves the conversion of physical shares into electronic form. On the other hand, rematerialization refers to the conversion of electronic shares back to their physical form, the process of which can be completed within 30 days after the request of the same. 
• Materialized shares are illiquid and hence cannot be traded, which is not the case in dematerialized shares.
• The dematerialized shares have a unique ISIN, while the re-materialized shares are categorized through numbers.
• The shares are held in physical form, but this can threaten the shares’ safety.
• The rematerialization invokes a threat of theft or destruction of the shares due to them being held physically. On the other hand, any such risk is relatively low in the case of dematerialization.

Conclusion 

The procedure of conversion of physical shares to DEMAT has always been misinterpreted as a complex and tedious task. On the contrary, the whole process is quite simple. It focuses on safeguarding the interest of the investors by providing them with a safe and secure alternative for carrying out trading in the stock market. The conversion must not be viewed as a regulatory obligation but as a chance to enhance the trading experience. It is great to consult an expert having expertise in the dematerialization process. 

Read our Article: Dematerialization of Securities: Mandatory for Unlisted Public Companies to issue shares in Demat Form