As the world moves towards a more technologically advanced era, even the investment market has been impacted. With the advent of dematerialisation or DEMAT, holding physical share certificates is no longer necessary.
In this article, we will give you a brief overview of the DEMAT form of holding shares and how it has revolutionised the investment industry. Not only is it a safer and more secure way of investing, but it is also a cost-effective and convenient way of tracking your shareholdings.
Demat share : Understanding what they are and how they work
Demat share is the electronic means of holding shares. 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.
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. By having an organized structure dedicated for this, the transfer or sale can happen sooner and more efficiently.
Navigating the Dematerialization Process
Actions from the Company:
Step 1: Demat Preparedness
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Step 2: Revision to the existing Articles of Association (AOA Amend the existing AOA, if necessary, to accommodate dematerialization requirements. | ||
Step 3: Selection of a Depository and appointment of Registrar and Transfer Agent (RTA)
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Step 4: Authorisation by the Board for getting shares dematerialised. Obtain authorization from the company’s board of directors to initiate the dematerialization process. | ||
Step 5: Documentation as per the list of CDSL/ NSDL and submit along with the application
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Step 6: ISIN Generation Obtain ISIN from the depositories for all classes of securities. ISIN is a unique 12-digit code for securities. Each type of security has a different ISIN. |
Actions from the Shareholders/ Promoter/ Director/ KMP (individuals or body corporates):
Step 1: Obtain PAN Obtain PAN if not available. Even non resident shareholders will need to obtain a PAN to open a demat account. | ||
Step 2: Opening a demat account Open a demat account with a depository participant. Similar to a bank account, shareholders select a DP, fill a form, provide documents, and submit them. Opening an account is often possible online. | ||
Step 3: Dematerialisation of physical share certificates Shareholders to individually apply for conversion of their physical shares certificates in dematerialised form through their stock brokers with whom the demat account is held. The request is made by submitting a demat request form along with original share certificates. |
How are shares transferred under the Demat form?
In a Sale 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 Purchase 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.