Why is dematerialisation needed?
The process of dematerialisation is needed to convert physical shares into an electronic format to start trading online. The shares in the electronic format are held in a Demat account, so opening a Demat account online is a prerequisite to online trading. Apart from holding your securities in electronic format, there are myriad benefits extended by this account. So, before you understand the advantages of dematerialisation, you need to first understand what a demat account is, its features, and benefits.
Once you understand how a Demat account works, you can learn more about the advantages of dematerialisation.
Dematerialisation of shares is carried out by individual investors who want to start trading online. The various benefits of dematerialisation have been explained in detail below:
- Demat account opening allows uninterrupted management of share transactions as it functions electronically. It eliminates the need for the investor to be physically present to settle transactions
- Access to a demat account can be gained conveniently through a smart phone or computer
- Conversion of securities into electronic equities deems you the legal owner of your shares. After this, certificates need not be transferred to the company’s registrar
Allows merging of bank account & Demat account
- One of the benefits of a Demat account is that it can be linked to your bank account
- This helps in facilitating easy transfer of funds electronically
One of the benefits of a Demat account is that it can be linked to the investor’s bank account. This helps in facilitating easy transfer of funds electronically
Provides nomination facility
- Providing a nominee is one of the key features of holding a Demat account
- Including a nominee will allow the investor to grant a right to the nominee to operate the account in his/her absence
Securities are credited and transferred by electronic means. Hence, the risks associated with paper securities, such as fraudulency and theft, are averted.
Demat excludes the need for paper
Handling your share trading online through a Demat account eliminates the need to use paper-based documents. This proves effective for companies to reduce administrative hassles, while also adhering to environmental norms by cutting down on the use of paper
Help with loan approval
Existing securities like bonds and debentures can be used to procure a loan. Securities in Demat account can be held as collateral.
Reduces transaction costs
There is a marked decrease in transaction costs as the depository ensures that entitlements are directly credited to the investor’s account
Benefits of Demat for different groups
Benefit to investors
- Trading using a Demat account is a huge time-saver for individual investors as they can trade online without the need to maintain extensive paperwork and visit brokers
- Dematerialisation mitigates the risk of inefficiencies such as delayed settlements and deliveries, thus allowing quicker and safer transactions
- Investors are also able to monitor shares at any time from the convenience of their homes, which increases the potential for profits due to more interest and participation
- Demat shares can also help investors procure loans at a lower interest rate given the higher level of liquidity and acceptability of securities in Demat
Benefit to company
- Companies that issue shares electronically are able to maintain a more transparent and efficient trading system by enabling quick transfer of shares
- Online trading using a Demat account eliminates the need for paper documents, thus helping from both an administrative and environmental perspective.
- Demat helps in cutting down costs related to printing and distribution of shares to investors
- The company is able to communicate with the shareholders in a timely manner due to minimal dependencies
Benefit to brokers
- Brokers are able to provide more satisfactory services because there is limited risk related to fraud, theft, and bad deliveries. The greater interest and participation in trading by investors increases the earning potential and profits of brokers
- The quick and easy transfer of Demat shares helps build confidence among investors, thus increasing the level of trust they put in the brokerage service
In addition to the advantages of dematerialisation outlined above, here is some more information to keep in mind while undertaking the process of dematerialisation of shares.
Role & Functions of the Depository Participant
- The depository participant (DP) is the intermediary between the depository and the investor that offers the Demat services to the investors. Angel broking is a certified DP registered with the Central Depositories Services Limited (CDSL) in India
- Regular statements of your account activity and holdings are also provided by your depository participant.
Dematerialisation of shares by a company
In addition to investors holding Demat shares under a Depository Participant (DP), any private limited company can also become an issuer of Demat shares by signing an agreement with depositories like NSDL as well as with an existing Registrar and Transfer Agent (RTA). The RTA acts as an intermediary between the company and the NSDL and is responsible for completing the crediting and transfer of shares. Once the securities are admitted to the depository system, the NSDL will provide an International Securities Identification Number (ISIN) for each share of the company.
Demat account deactivation
Using a Demat account allows you the opportunity to be a participant in the market and invest in securities. However, in the event of failing to use your account, it is considered wise to deactivate it. Deactivating the account will prevent the account from being utilized for fraudulent purposes.
- Deactivating an account is possible only in the absence of shares in the account
- Deactivation is completed by furnishing an application along with unused delivery instruction slips to the DP. It is mandatory to settle all dues before deactivation
For safe and efficient handling of your securities, contact recognized stockbroking companies like Angel One, offering one of the best Demat accounts services in the industry. It is an Indian stockbroking firm doing noteworthy work since 1987.