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Dematerialisation of Shares

Dematerialisation of shares

Like everything else, the influx of technology made its mark on the investment market. This advancement moved holding the documentary proof of shares from physical form to electronic form, known as “DEMAT” (Dematerialisation).

This article provides a brief overview on the demat form of holding shares.

Demat share : the what and how

Demat share is the electronic means of holding the share. Dematerialization is the process of converting physical form of shares to electronic demat shares. Under the depository system of holding shares, a depository entity registered with SEBI holds the securities of the company in a demat form. Currently, NSDL and CDSL are the main depositories in India. These depositories appoint depository participants who are the middlemen between the investors and the depository. All communications between the investors and the depository are done through the depository participants. These participants are mainly banks, share transfer agents, financial institutions and other parties authorized by SEBI. Here, the depository is the registered owner of the shares while the shareholder/investor is the beneficial owner. Any transaction involving securities regarding purchase, sale, transfer are done through the depository.

How does the depository system of holding shares work?

Under the Depository System of holding shares, a Depository Entity registered with SEBI holds the securities of the Company in a Demat form. Currently, NSDL (National Securities Depository Limited) and CDSL (Central Depository Securities Limited)  are the main Depositories in India. These Depositories appoint Depository Participants who are the middlemen between the investors and the Depository. All communications between the investors and the Depository are done through the Depository Participants. These participants are mainly Banks, Share Transfer Agents, Financial Institutions and other parties authorized by SEBI. Here, the Depository is the registered owner of the shares while the shareholder/investor is the Beneficial Owner. Any transaction involving securities regarding purchase, sale, transfer are done through the Depository.

Effective from 10th September 2018, it has been made compulsory for unlisted public companies to make any public offer, offer for sale or rights issue only in Demat form, with an option for shareholders to decide if they want to receive the documentary title of ownership in Physical form or in Dematerialized form.

What is the benefit of holding shares in Demat format?

For Company

Share transactions mostly involve buy, sale or transfer of shares. Under the Demat form, all transactions relating to the shares can be maintained in a single system and easily recorded, tracked, monitored with no paperwork. Since the Depository Participant maintains up to date of all the share transactions undertaken by the shareholder, the whole process is transparent, extremely systematized and safe. Further, since all transactions are routed through the participant all information relating to shares can be accessed easily and hassle free. 

For Investors

Monitoring and constantly keeping a track of the large shareholder base is extremely difficult. Having an organized entity who records day to day transactions of shareholders helps Companies to efficiently keep a track of their shares.

It is now mandatory for all unlisted public companies to transfer/sell related transactions to happen in Demat form. By having an organized structure dedicated for this, the transfer or sale can happen sooner and more efficiently.

How are shares transferred under the Demat form?​

In a Purchase Transaction

If an investor wishes to purchase securities, the seller has to give instruction to his registered Depository Participant to debit his account and credit the purchaser/beneficiary owner account. The beneficiary owner then directs his depository participant to receive credit of the securities.

In a Sale Transaction

The shareholder wishing to sell the securities, should give a delivery instruction to the Depository Participant to debit his account and credit the purchaser’s account. These instructions have to be given to the Depository Participant at least 24 hours before receiving the payment against such sale.

The important point to note here is that the RTA must confirm from the Company and obtain the company’s approval before undertaking any transfer in the Demat mode.

Is stamp duty payable on Demat shares?

Until recently, no stamp duty was payable on shares traded in Demat Form. However, recent amendments have made payment of stamp duty applicable on shares held under the Depository System as well.  For shares, held in Demat Form, the Depository is responsible to collect the stamp duty and remit the same to the respective government of – (i) the state where the buyer resides in case of an Indian buyer, (ii) state where the share broker or the depository participant of the buyer is located in case of a foreign buyer. Such stamp duty is payable by the Company on the market price of shares in respect of all share allotments made in the Demat Form.

While the procedure under Demat Form of shares looks more tedious, the benefits of transacting in this form are more. Demat Forms of shares are user friendly and most investors and stock brokers prefer dealing in Demat securities. This has also proven beneficial in foreign investment transactions.

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