For several decades, the Indian market was dependent on holding of securities and dealing in them through

the physical form wherein certificates were printed and issued to investors evidencing their title to such
securities. Whenever these were traded, they were sent to the issuing company for transfer in the name of the
transferee along with a share transfer deed signed by the transferor. This system depended heavily on physical
handling and transportation of securities through postal department and other means. This resulted in several
bottlenecks such as delay in transit, bad deliveries due to non-matching of signatures or other technical errors,
loss in transit and issue of duplicate certificates, additional paper work in verification of signatures and other
details and more importantly, the menace of duplicate share certificates floating in the market leading to loss
of investors’ confidence in the system. The duplicate share problem that rocked the stock market in the
midnineties
is a fall out of the physical handling system.
The securities markets in the developed countries had migrated to the dematerialised mode for quite some
time prior to the Indian authorities realising that the lack of it in Indian market was a major infrastructural
bottleneck for the future development of the market. Depository system was introduced in India with the
passing of the Depositories Ordinance in 1995 which was later replaced with a full-fledged Depositories Act
in 1996.This law provided the statutory framework under which depositories and de-materialised trading
could take place. The two types of depository models that are in existence are the de-materialisation model
and the immobilisation model. While in the former method, physical certificates are completely destroyed
and securities are held electronically, in the latter case, the physical securities are held in safe custody by
the depository and the records of holdings and trades are maintained electronically. The de-materialisation
system being the more cost efficient and convenient system is what was adopted in India.
The process of de-materialisation and re-materialisation of securities and electronic dealing therein happens
entirely through system connectivity in electronic medium between the market participants in the depository
system such as the Depository, the DPs, the clearing corporation of the stock exchanges, the registrars to
new issues and the share transfer agents or the share transfer departments of respective issuers.While
dematerialisation
is initiated through a De-materialisation Request Form (DRF) by the beneficial owner, rematerialisation
happens in much the same way with the beneficial owner initiating the re-materialisation
request form. Similarly, transfers resulting from buy or sell transactions or otherwise are initiated by the
sellers by issuing a delivery instruction which is an instruction to the DP to reduce the stated number of
shares from the seller’s account. The delivery instruction, thus, becomes the basis on which the securities get
transferred from the seller’s demat account to the buyer’s demat account (either with the same DP or another
DP) by routing the transaction through the clearing corporation and the depository.
Under the depository system, all types of securities such as shares, bonds, stock, debentures or any other
marketable security, units of mutual funds, collective investment schemes, venture capital funds, commercial
paper, certificates of deposits, securitised instruments, money market instruments, government securities and
unlisted securities can be dematerialised.