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Dematerialization of Shares and Retail Investors in India - A Study

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www.ijemr.net ISSN (ONLINE): 2250-0758, ISSN (PRINT): 2394-6962

Volume-5, Issue-3, June-2015

International Journal of Engineering and Management Research
Page Number: 393-400

Dematerialization of Shares & Retail Investors in India - A Study

Dr. Surendar G
Assistant Professor, Department of Business Management, SR Engineering College (Autonomous), Waranagal, Telangana,
INDIA

ABSTRACT trades on the stock exchanges can take place only

This paper is attempted to know the level of
understanding on dematerialization of shares among the
retail investors in India. In the process, the theoretical
aspects of dematerialization like need and importance,
benefits, and procedure for it are presented as a prelude to
the empirical analysis. It is found from the study that all
the sample investors had a demat account except very little
amount. Majority of the investors had all their shares in
demat form. Still there is a need to create awareness among
retail investors and encourage them to dematerialize their
shares that have not done. ‘Not understanding the
dematerialization system and account maintenance
charges’ are the major reasons cited for partial
dematerialization of shares.
Keywords----- Retail Investors, Equity Shares,
Dematerialization
I. INTRODUCTION
Dematerialization or ‘Demat’ is a process
whereby securities such as shares, debentures, are
converted into electronic data and stored in computers
by a Depository. Physical form securities registered an
investor’s name are surrendered to depository participant
(DP)and these are sent to the respective companies who
will cancel the physical paper after “Dematerialization”
and credit investor’s depository account with the DP.
The securities on Dematerialization appear as balances
in investor’s depository account. These balances are
transferable like physical shares. Later, if an investor
wishes to have these ‘demat” securities converted back
into paper certificates, the same can be done with the
help of the Depository. At present, there are two
depositories in India; they are National Securities
Depository Limited (NSDL) and Central Depository
Services Limited (CDSL). These depositories have
appointed different Depository Participants (DP) for
them. An investor can open an account with any of the
depositories’ DP. However, transfers arising out of
393 Copyright © 2011-15. Vandana Publications. All Rights Reserved.
amongst account-holders with NSDL’s DPs
II. NEED FOR
DEMATERIALIZATION
Dematerialization was introduced to overcome
the problems associated with physical form of securities.
Most of these problems arose due to the intrinsic nature
of paper based trading and settlement, like theft or loss
of share certificates, delay in transfer of shares,
possibility of forgery on various documents leading to
bad deliveries and legal disputes, prevalence of fake
certificates in the market, mutilation or loss of share
certificates in transit, etc. The physical form of holding
and trading in securities also acts as a bottleneck for
broker community in capital market operations.
In this scenario dematerialization was
introduced. The Depositories Act, 1996 enacted by the
Indian Parliament has facilitated paperless trading by
way of dematerialization of shares. Securities and
Exchange Board of India (SEBI) and the Government of
India together have endeavored from time to time to
ensure that the concept of paperless trading is effectively
implemented for the benefit of the investors at large.
III. OBJECTIVE OF THE STUDY
• To study the need and procedure of
dematerialization of shares in general
• To study the level of understanding on
dematerialization of shares among retail
investors.
IV. METHODOLOGY
Sources of Data: This study is based entirely on primary
data collected through a well designed structured
questionnaire. The data was collected from investors
spread over five selected major cities in the country viz.,
Bangalore, Chennai, Hyderabad, Mumbai and Warangal.
Warangal is one of the rapidly growing city and my
www.ijemr.net ISSN (ONLINE): 2250-0758, ISSN (PRINT): 2394-6962
native place; hence I have selected Warangal as one of
the cities to study. Admittedly, the sample does not
represent the country’s entire population but only “the
universe of potential investors”. Secondary data is also
used to supplement the findings drawn from the primary
data. The secondary data is collected from the various
sources available like websites mainly SEBI, RBI, BSE
and NSE, Magazines, Journals etc. wherever necessary.
Sample Design:Retail investors from five cities namely
Bangalore, Chennai, Hyderabad, Mumbai and Warangal,
who have been operating for a period of two years or
more are still performing during the period of the study
are selected on the basis of convenient sample method.
For an in depth study 100 literate retail investors have
been selected from each city. And these retail investors
are identified from the selected cities with the help of
stock broking houses like Kotak Securities Ltd., ICICI
Securities Pvt. Ltd., India Bulls Securities Ltd and Share
Khan, etc
Data Analysis: The data is analyzed by employing
simple statistical tools like averages, mean standard
deviation. Pie-charts and bar charts are also used to
present the data wherever required. Further standard
deviation is also used to judge the homogeneity of the
mean.
V. BENEFITS OF
DEMATERIALIZATION
Transacting through the depository way has several
advantages over the traditional system of transacting
using share certificates. Some of the benefits are: (a)
Trading in Demat completely eliminates the risk of bad
deliveries, which in turn eliminates all cost and wastage
of time associated with follow up for rectification. (b) In
case of transfer of electronic shares, investors save 0.5%
in stamp duty. (c) The investors also avoid the cost of
courier/notarization/ the need for further follow-up with
his broker for shares returned due to company objection.
(d) In case the certificates are lost in transit or when the
share certificates become mutilated or misplaced, to
obtain duplicate certificates, the investor has to spend at
least Rs.500 for indemnity bond, newspaper
advertisement etc, which can be completely eliminated
in the demat form (g) He can also expect a lower interest
charge for loans taken against demat shares as compared
to the interest for loan against physical shares. This
could result in a saving of about 0.25%to 1.5%. Many
banks have implemented this.
George Mathew (1999) mentioned in their study
titled “Small investors opting out of demat shares” that
small investors are flocking to the odd-lot counters of
brokers to sell off their small holdings and avoid going
to the depository for mandatory scrip less trading which
improves efficiency and allow quick electronic transfers.
Government and SEBI should create awareness on
dematerialization of their shares among retail investors;
Progress of dematerialization at NSDL and CDSL are given in the following Table 1.
394 Copyright © 2011-15. Vandana Publications. All Rights Reserved.
otherwise the intention of this program may not fulfill its
purpose.
VI. PROCESS OF
DEMATERIALIZATION
Whenever an investor wishes to dematerialize the
securities, he or she has to fill a Demat request from
(DRF) provided by the depository Participant (DP) for
dematerialization of share. The form is submitted along
with the physical certificates. Each security comes with
a unique international securities number (ISIN) and each
different ISIN requires a different request form to be
furnished. The process of Dematerialization involves
the following steps:
1) Investor submits Physical Share Certificates
with the DRF to the DP
2) The depository is intimated of the request by
the DP
3) The certificates are submitted to the issuer
company’s registrar
4) The Dematerialization request is confirmed by
the registrar
5) Registrar than updates accounts after
Dematerialization and informs the depository of
the completion of the process
6) Depository updates accounts and information is
passed on the DP
7) Investor’s Demat account is updated by the DP
VII. DEMATERIALIZATION
CURRENT SCENARIO
At the end of March 2014, there are 130.6 lakh
demat accounts at NSDL and 87.8 lakh demat accounts
at CDSL. As on March 31, 2014, 12,210 companies
have signed up for dematerialisation at NSDL and 8,630
at CDSL The quantity of dematerialised securities
increased by 15.9 percent to 79,550 Crores in 2013-14
from 68,647,58 crores in 2012-13 at NSDL. At CDSL
too, the quantity of dematerialised securities increased
by 16.8 percent from 15,179 crores in 2012-13 to
17,731crores in 2013-14. The quantity of dematerialised
shares increased at the CDSL but both the quantity and
value of shares settled in demat declined. On the other
hand at NSDL, the value of shares settled in demats
increased but the quantity of shares settled in demats
decreased. The total value of demat settled shares
increased by 6.2 percent from 12,72,531 crore in 2012-
13 to 13,51,886 crore in 2013-14 at NSDL. However, at
CDSL the value of shares settled in demat decreased by
2.8 percent from 3,18,559 crore in 2012-13 to 3,09,767
crore in 2013-14. The ratio of dematerialised equity
shares to total outstanding shares of listed companies
was 83.8 percent at NSDL and 13.8 percent at CDSL at
the end of 2013-14.
www.ijemr.net ISSN (ONLINE): 2250-0758, ISSN (PRINT): 2394-6962

TABLE 1
PROGRESS OF DEMATERIALIZATION AT NSDL & CDSL
Year NSDL CDSL
Demat Qty Companies Mkt Cap Demat
Companies Mkt Cap. (Shares in Available (Rs. Crore) Quantity
Available (Rs.Crore) Crores)* (Shares in
Crores)*

2000-01 2,786 5,55,376 3,721 2,703 1,92,726 192

2001-02 4,172 6,15,001 5,167 4,284 3,44,796 482

2002-03 4,761 6,00,539 6,876 4,628 5,92,132 821

2003-04 5,212 11,07,084 8,369 4,810 11,92,263 1,401

2004-05 5,536 16,38,300 12,866 5,068 16,71,226 1,908

2005-06 6,022 30,05,067 17,472 5,479 29,52,742 2,722

2006-07 6,483 35,98,800 20,270 5,589 33,89,445 3,125

2007-08 7,354 52,19,700 23,690 5,943 51,62,637 4,982

2008-09 7,801 31,10,300 28,287 6,213 31,43,729 7,082

2009-10 8,124 61,84,300 35,114 6,805 62,19,651 7,795

2010-11 8,842 78,19,625 47,130 7,490 66,97,504 10,531

2011-12 9,741 62,65,157 57,980 8,329 63,10,530 13,357

2012-13 10,844 64,39,115 68,647 8,062 65,21,762 15,179

2013-14 12,210 75,32,989 95,503 8,630 74,54,885 17,731

Source: SEBI annual reports

In the above background investors were enquired whether they know what the dematerialization is? The response of
the investors is mentioned in the following table 2.

TABLE 2
CITY WISE INVESTORS’ OPINION ON UNDERSTANDING DEMATERIALIZATION

City of Did you understood the concept of

Respondent dematerialization of shares
Yes No Total

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www.ijemr.net ISSN (ONLINE): 2250-0758, ISSN (PRINT): 2394-6962

Mumbai 83 (19.4%) 17 (23.3%) 100 (20%)

Bangalore 86 (20.1%) 14 (19.2%) 100 (20%)

Hyderabad 91 (21.3%) 9 (12.3%) 100 (20%)

Chennai 82 (19.2%) 18 (24.7%) 100 (20%)

Warangal 85 (19.9%) 15 (20.5%) 100 (20%)

Total 427 (85.4%) 73(14.6%) 500 (20%)

Source: Primary Data

The table reveals that 85.4% (427) of the total
responded retail investors were able to understand the
dematerialization of shares where as only about 14.6% of
the respondents i.e., 73 out of the total respondents (500)
have said that they did not understood the
dematerialization of shares. It means majority of the
respondents knows the dematerialization of shares.
Further, an attempt is also made to test whether
there is any significant difference among the sample
respondents belongs to selected cities with regard to their
understanding the dematerialization concept.
Null Hypothesis (Ho): There is no significant difference
among respondents belongs to selected cities with regard
to their perception on dematerialization of shares.

Chi-Square Test
Asymp. Sig.
Value df (2-sided)
a
Pearson Chi-Square 3.946 4 .413
Likelihood Ratio 4.209 4 .378
a. 0 cells (.0%) have expected count less than 5. The minimum expected
count is 14.60.

Since the calculated value (3.946) is less than the
table value (9.488) at 5% significance level, hence the null
hypotheses is not rejected or the null hypothesis is
accepted. Therefore it may be concluded that there is no
significant difference among respondents belongs to
selected cities with regard to their perception on
dematerialization of shares.
Further the investors were enquired whether they
have a demat account? Table 3 presents the response of the
investors.

TABLE 3
INVESTORS HAVING DEMATERIALIZATION ACCOUNT
Do You have a Demat
No. of Investors % of Investors
Account?

Yes 483 96.6

No 17 3.4

Total 500 100.0

Source: Primary Data
396 Copyright © 2011-15. Vandana Publications. All Rights Reserved.
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The table reveals that 96.6 percent of the investors investors i.e., 3.4% of the investors did not have demat
have a demat account and 3.4 percent of the investors did account.
not have a demat account. This means almost all investors Further the investors were enquired whether they
(around 97%) had demat accounts, very little amount of have all their shares in the demat form? Their responses
are given in Table 4.

TABLE 4
PERCENTAGE OF SHARES IN DEMAT FORM

Shares No. of % of
Dematerialized Investors Investors

Fully 444 88.8

Partly 39 7.8

Not 17 3.4

Total 500 100.0

Source: Primary Data

The above table reveals that 88.8 percent of the Investors were also enquired the reasons for partial
sample investors had all their shares in demat form, dematerialization of shares. Reasons vary from the
whereas 7.8 percent of the investors had at least some investor to investor. The responses of the investors for this
shares in the physical form and remaining 3.4 percent are given in table 5.7.
share holders having no demat account, it means that these
investors are still having their shares in physical form only.

TABLE 5
REASONS FOR PARTIAL DEMAT OR NO DEMAT ACCOUNT
Reasons for Partial Demat or No. of
No demat Investors

High maintenance charges 13

I am a long term share holder, hence don't need demat 13

Other reasons 30

Companies concerned have not joined the depository 0

I don’t fully understand the demat system 30

Total 56
Source: Primary Data

It reveals that the ‘Other reasons’ and ‘I don’t or partial demat of shares, then ‘High maintenance charges
need a demat account’ are the major reasons to not to join and ‘I am a long term share holder, hence I don’t need

397 Copyright © 2011-15. Vandana Publications. All Rights Reserved.

www.ijemr.net ISSN (ONLINE): 2250-0758, ISSN (PRINT): 2394-6962

demat’ are the next leading reasons for not joining or Further, the investors were enquired about the
partial demat of shares. Hence, they are compelled to year of opening of their demat account. The responses are
retain those companies’ shares in the physical form. tabulated in Table 6.

TABLE 6
YEAR OF OPENING OF DEMAT ACCOUNT

Year of Opening Account No. of Investors % of Investors

Before2001 6 1.24

During 2001to 2005 161 33.33

2006 and later 306 63.35

No response 10 2.07

Total 483 100.00

Source: Primary Data

Table brings out that one third of the sample Further the investors who are dematerialized their
investors have opened their account during 2001 to 2005, shares fully or partly were enquired about the problems
63% of the sample investors have opened during 2006 and faced while dematerialization, the response provided in the
later. Before 2001 there was a too little respondents having following table 7.
demat accounts i.e., 1.24 percent of the total respondents.

TABLE 7
OPINION ON PROBLEMS FACED WHILE
DEMATERIALIZING THE SHARES

Response No. of Investors % of Investors

Yes 69 14.29

No 414 85.71

Total 483 100.00

Source: Primary Data

Table 7 reveals that out of the total respondents an attempt is made to find the reasons they faced while
who have dematerialized their shares, 69 investors have dematerializing the shares. Reasons are mentioned in the
faced the problems. It means less amount of investors have following table 8
faced problems while dematerializing their shares. Further,

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TABLE 8
OPINION ON PROBLEMS WITH
DEMATERIALIZATION OF SHARES
Reason No. Of Responds % of Investors

Fake Certificate 19 27.5

Signature Difference 43 62.3

Third Party Claims 7 10.2

Total 69 100.00
Source: Primary Data

Most of the investors i.e., 43 out of 69 responses
faced a problem ‘Signature Difference’ while
dematerialization the shares. The reason might be the time
between purchases of shares and dematerialization them
and the second reason is ‘fake certificate’. Only 10.2
percent of the investors have faced the problem i.e., third
party claims.
Investors further asked opinion on the
dematerialization relative statements namely ‘With Demat
ownership transfer made fast, Demat has increased volume
of transactions, With Demat fake certificates and forgeries
have disappeared, Due to demit transaction costs and
charges have been reduced’ and measured using the likert
five point scale ranging from strongly agree to strongly
disagree. Strongly agree option was assigned a weight of
five and strongly disagree option was assigned a weight of
one. In between these two extremes other levels such as
agree, neither agree nor disagree and disagree were
assigned weights of four, three and two respectively.

TABLE 9
MEAN AND STANDARD DEVIATION OF INVESTOR’S OPINION ON DEMATERIALIZATION OF SHARES

Statements N Mean Std. Deviation

With Demat ownership transfer made fast 483 3.27 1.519

Demat has increased volume of transactions 483 3.07 1.187

With Demat fake certificates and forgeries have

483 3.06 0.953
disappeared

Due to demit transaction costs and charges have

483 3.05 1.079
been reduced

Source: Primary Data

The above Table reveals that the investors
strongly agree with the statement, ‘With demat ownership
transfer is fast’. They also agree to the statements that
‘With demat fake certificates and forgeries have
disappeared’. Thus one of the SEBI’s expectations with
regarding to dematerialization ‘The reduced risk’
(Possibility of forgery on various documents leading to
bad deliveries, legal disputes, possibility of theft of share
certificates, prevalence of fake certificates in the market,
mutilation or loss of share certificates in transit etc.,) has
been achieved and it is also well acknowledged by the
investors. However, the investors neither agrees nor

399 Copyright © 2011-15. Vandana Publications. All Rights Reserved.

www.ijemr.net ISSN (ONLINE): 2250-0758, ISSN (PRINT): 2394-6962
disagrees to the statement that ‘Demat has reduced the
transaction costs and other charges’ and disagreed to the
statement ‘Demat has increased volume of transactions’. It
can be interpreted that investors’ opinion towards these
statements is they expect SEBI to take many more steps to
bring down the transaction and other charges associated
with dematerialization and simultaneously should increase
the volume of transactions.
VIII. CONCLUSION
From above study it revealed all the sample
investors had a demat account except very little amount
i.e., 3%. Majority of the investors had all their shares in
demat form. Still there is a need to create awareness
among retail investors and encourage them to
dematerialize their shares that have not done. ‘Not
400 Copyright © 2011-15. Vandana Publications. All Rights Reserved.
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understanding the dematerialization system and account
maintenance charges’ are the major reasons cited for
partial dematerialization of shares.
REFERENCES
[1] George Mathew, “Small investors opting out of demat
shares”, Indian Express News Paper, May 23, 1999
[2] M.S.Sahoo, “An Overview of the Securities Markets in
India”, SEBI Bulletin, March, 2005,
[3] Dr. P Venugopal et al, “Small Investors’ Grievances
and Redressal Mechanism in Indian Capital Market”
IJMR, Vo. 2,Issue 7, July 2012, ISSN 22315780,
[4] www.cdsl.com
[5] www.sebi.gov.in
[6] www.nsdl.com,
[7] www.personalfn.com.