Introduction

Meaning & Features

Advantages & Disadvantages

Scope of Dematerialization

Effect of Dematerialization
Origin of Demat in India

The concept of demat was introduced in Indian capital market in 1996 with the setting up of
NSDL. A depository holds securities in dematerialized form. It maintains ownership records of
securities in a book entry form and also effects transfer of ownership through book entry. SEBI
has introduced some degree of compulsion in trading and settlement of securities in demat form
while the investors have a right to hold securities in either physical or demat form, SEBI has
mandated compulsory trading and settlement of securities in select securities in dematerialized
form. This was initially introduced for institutional investors and was later extended to all
investors. Starting with 12 script on15th Jan 1998, all investors are required to mandatory trade
in dematerialized form in respect of 2335 securities as at end-June 2001. By Nov, 2001. 3811
companies were under demit mode and the rest of the companies were brought under compulsory
demat mode by 2nd Jan. 2002. The securities of companies which fail to establish connectivity
with both the depositories on the scheduled date as announced by SEBI are traded on the “trade
for trade” settlement window of the exchanges. However in order to mitigate the difficulties of
small investors the stock exchanges provide additional windows for sales up to 500 shares in the
physical form.
Dematerialisation is the process of converting the physical form of shares into electronic
form. Prior to dematerialisation the Indian stock markets have faced several problems like
delay in the transfer of certificates, forgery of certificates etc. Dematerialisation helps to
overcome these problems as well as reduces the transaction time as compared to the
physical segment. The article discusses the procedures, advantages and problems of
dematerialisation.

The Indian Stock markets have seen a major change with the introduction of depository
system and scrip less trading mechanism. There were various problems like inordinate
delays in the transfer of share certificates, delay in receipt of securities and inadequate
infrastructure in banking and postal segments to handle a large volume of application and
storage of share certificates .To overcome these problems physical dealing in securities
should be eliminated . The Indian stock market introduced the system of dematerialisation
recognizing the need for scrip less trading.

According to the Depositories Act, 1996, an investor has the option to hold shares either in
physical or electronic form .The process of converting the physical form of shares into
electronic form is called dematerialisation or in short demats. The converted electronic data
is stored with the depository from where they can be traded. It is similar to a bank where
an investor opens an account with any of the depository participants. Depository participant
is a representative of the depository .The DP maintains the investors securities account
balances and intimates him about the status of holdings.

Procedure for converting the physical shares into electronic form.

To convert the shares into electronic form the investor should open an account with any of
the depository participants. For opening an account the investor has to fill up the account
opening form. An account number (client ID) will be allotted after signing the agreement
which defines the rights and duties of the DP and the investor wishing to open the account.
The client ID along with the DP ID gives a unique identification in the depository system.
Any number of depository accounts can be opened.

After opening an account with the DP the investor should surrender the physical certificates
held in his name to a depository participant. These certificates will be sent to the respective
companies where they will be cancelled after dematerialization and will credit the investors
account with the DP. The securities on dematerialisation will appear as balances in the
depository account. These balances can be transferred like the shares held in physical form.
Dematerialised shares are in the fungible form and do not have any distinctive or certificate
numbers .The securities in the demat can again be converted into physical form   which is
called as rematerialisation.

Safety to the investor

* Securities Exchange Board of India (SEBI) has laid down certain rules and regulations for
getting registered as a depository participant. With the recommendation of the Depository
and SEBI's own independent evaluation a DP will be registered under SEBI.

* The investors account will be credited/debited by the DP only on the basis of valid
instruction from the client.
* The system driven mandatory reconciliation is done between the DP and NSDL.

* Periodic inspections of both DP and R&T agent are conducted by NSDL

* The data interchange between NSDL and its business partners is protected by standard
protection measures such as encryption.

* No direct communication links exist between two business partners and all
communications are routed through NSDL.

* A statement of account is received periodically by the investors. NSDL sends statement of

account to a random sample of investors a s a counter check.

* The investor has the right to approach NSDL if the grievances of the investors are not
resolved by the concerned DP.

Advantages of dematerialisation

* There is no risk due to loss on account of fire, theft or mutilation.

* There is no chance of bad delivery at the time of selling shares as there is no signature
mismatch.

* Transaction costs are usually lower than that in the physical segment.

* The bonus /rights shares allotted to the investor will be immediately credited into his
account.

* Share transactions like sale or purchase and transfer/transmission etc. can be effected in
a much simpler and faster way.

Problems of Dematerialisation.

Prior to dematerialization there was almost a gap of three months between application date
and listing of shares .Dematerialisation has reduced this gap to a great extent. But quick
money brings with itself a host of problems. Current regulations prohibit multiple bids or
applications by a single person.But the investors open multiple demat accounts and make
multiple applications to subscribe to IPO's in the hope of getting allotment.

The recent IPO allotment scam proves that even a highly automated system is not the
solution to prevent malpractices, if there is laxity. The scam of Yes bank and IDFC reveal
that the investor banker has failed to weed out multiple applications either direct or benami.
Not only the investor banker the DP and the depository failed to detect the large number of
demat accounts opened with the same address but different names. Lack of coordination
between banks, DP's, brokers depositories, registrars and investment bankers and clarity of
their roles has given rise to such problems.

Remedial measures

* To prevent the sprouting of fictitious demat accounts at DP's the allotment of shares
should be checked thoroughly.

* The concerned DP should strictly enforce the Know your client (KYC) norms rather than
relying on bank documents and verification of brokers.

* DP's should be asked to give monthly figure of accounts opened for the public.

* Coordination and Clear definition of roles is important to weed out manipulations.

Though dematerialisation has several benefits the recent scam has the potential to
adversely affect the confidence of retail investors in the capital market .To reap the benefits
of dematerialisation SEBI, as a regulator has to place a system that is alert and vigilant
against unjust gains.
Scope