Did you look at the stack of yellowed sheets in your cupboard when you did your annual spring cleaning recently? Yes, those share certificates, perhaps bought in the IPO-gaga from the old 90s market or even earlier. Your share certificates are a great case of profits, but only on papers not in demat form.
Besides the difficulty in selling or transferring these shares, you run on the risk of someone counterfeiting a transfer, faking your physical certificate or maybe simply losing out your certificates. To avoid these pitfalls, you can dematerialize (demat) your physical shares anytime.
Over the last 20 years, India has seen a drastic boom in capital markets. There has been a tremendous increase in the number of companies listed and the shares volume issued by these listed companies. Many institutional investors are participating in the share markets today. Earlier, when companies sold their shares and securities to the public, share certificates were issued to investors in physical form and the holder of the shares had to keep physical possession of the certificates. However, keeping shares in physical form is now leading to some of the major problems for Issuers, holders and as well as facilitators. Currently, many investors—especially senior citizen investors—who possess physical shares are finding it unmanageable to convert the securities into demat form. These investors also have to struggle to claim their bonus shares and split shares issued by their respective companies. A large number of investors still hold shares in physical form which amounts to 2.4 lakh crores.
Process of conversion:
According to the SEBI (Stock Exchange Board of India) following are the steps to convert the physical shares into Demat form.
- Open a demat account with a depository participant (DP); generally a Stockbroker.
- Handover physical certificates to DP
- DP intimates to the depository regarding the request of conversion
- DP then submits the physical certificates to the registrar of the issuer company
- Registrar of the issuing company confirms the dematerialization request from depository
- After dematerializing of the physical certificates, registrar updates accounts
- Depository updates its demat accounts and informs the DP
- DP updates the demat account of the investor and intimates about the success of the process to the investor.
Benefits to demat account holder:
- In the demat format, the biggest benefit for account holder is that even single share can be sold.
- In physical format, the document might represent a lot of fives or tens or hundreds number of shares and in order to sell it, the entire lot has to be sold at once.
- The cost of a transaction goes down significantly when compared to possessing the securities in physical format
- When the company announces bonus or goes for a rights issue, the allotted shares are immediately credited to the account of the investor. However, if the shares are in the paper format, bonus shares will only be given to you in the physical format. So, it will be sent by post. If the person has shifted houses, they will have run around chasing the company.
- There are other typical problems associated with physical shares, such as the risk of damage due to fire or theft or imitation. Demat account owners also evade stamp duty (as against the 0.5 per cent payable on physical shares) and filling of transfer deeds. The major benefit of having a demat account is that
- You don’t have to pay for stamping charges since the securities are electronically stored, which reduces the transaction cost and communication significantly.