Dematerialized securities (Demat in short) are securities that are not on paper
and a certificate to that effect do not exist. They exist in the form of entriesin the book of depositories. Essentially, unlike the traditional method ofpossessing a share certificate to the effect of ownership of shares, in the dematsystem, the shares are held in a dematerialized form. This system works through adepository who is registered with the Securities and Exchange Board of India(SEBI) to perform the functions of a depository as regulated by SEBI. UnderSection 68 B of the Companies Act, inserted by the Companies (Amendment) Act,2000, it is mandated that every Initial Public Offer (IPO) made by a listedcompany in the excess of Rs. 10 Crores has to be issued in dematerialized form bycomplying with the requisite provisions of the Depositories Act, 1996.BackgroundIndian capital market has seen unprecedented boom in its activity in the last 15years in terms of number of stock exchanges, listed companies, trade volumes,market intermediaries, investor population, etc. However, this surge in activityhas brought with it numerous problems that threaten the very survival of thecapital markets in the long run, most of which are due to the large volume ofpaper work involved and paper based trading, clearing and settlement.Until the late eighties, the common man kept away from capital market and thus thequantum of funds mobilized through the market was meager. A major problem,however, continued to plague the market. The Indian markets were drowned in sharesin the form of paper and hence it was problematic to handle them. Fake and stolenshares, fake signatures and signature mismatch, duplication and mutilation ofshares, transfer problems, etc. The investors were scared and were undercompensated for the risk borne by them. The century old system of trading andsettlement requires handling of huge volumes of paper work. This has made theinvestors, both retail and institutional, wary of entering the capital market.However, lack of modernization become a hindrance to growth and resulted increation of cumbersome procedures and paper work.However, the real growth and change occurred from mid-eighties in the wake ofliberalization initiatives of the Government. The reforms in the financial sectorwere envisaged in the banking sector, capital market, securities marketregulation, mutual funds, foreign investments and Government control. Theseinstitutions and stock exchanges experienced that the certificates are the maincause of investors` disputes and arbitration cases. Since the paper work was notmatching the rapid growth so there was a need for a better system to ensureremoval of these impediments.Government of India decided to set up a fully automated and high technology basedmodel exchange that could offer screen-based trading and depositories as theultimate answer to all such reforms and eliminate various bottlenecks in thecapital market, particularly, the clearing and settlement system in stockexchanges. A depository in very simple terms is a pool of pre-verified sharesheld in electronic mode which offers settlement of transactions in an efficientand effective way.Meaning of DematerializationDematerialization is a process by which physical certificates of an investor areconverted into electronic form and credited to the account of the depositoryparticipant. Dematted securities do not have any certificate numbers ordistinctive numbers and are dealt only in quantity, i.e., the securities arereplaceable.Investors can dematerialize only those certificates that are already registered intheir names and are in the list of securities admitted for dematerialization.