There was once a time when the Indian Share Market followed the open outcry system where the investors had to make themselves physically present in order to carry out the buying and selling of shares. In that era, everything used to be on paper and the trading of shares could only be done in physical form i.e., with the help of the physical share certificate which was used as proof of ownership of physically transferred shares.
With our ever-evolving technology, this process of physical trading of shares has become outdated and redundant. Gradually, this process was overshadowed by the new trends of online trading and was replaced by technology-backed trading platforms. Now the Indian stock market has evolved to offer better features and ease of trading through online platforms.
Now, as per the new regulations laid down by the governing board i.e., the Securities and Exchange Board of India (SEBI) has made it mandatory for investors to convert their shares and securities in Demat form in order to continue investing, buying, or selling of shares. These reforms in the stock market have taken place in order to ensure a smooth and efficient way of trading with the shares viz-a-viz has made it easy for the authorities to maintain a true account of all the transfers of shares.
However, not everyone holds a Demat Account. Some people are still the owners of physical shares. As it is compulsory for all investors to hold shares in Demat form in order to continue investing and trading, the shift in trends has raised the question “How can the investors convert their physical shares into Demat form?”.
To understand the process of Conversion/Dematerialization of Shares better, we should first take a look at some important terms:
Dematerialization refers to a process by which physical share certificates of a particular company are converted into an electronic format.
- DEMAT ACCOUNT
When physical shares are converted into Demat form, then they are held in electronic form. In order to hold them in electronic form, there is a requirement to open a depository account, i.e. called a Demat Account.
- DEPOSITORY PARTICIPANT
A depository participant (DP) is an agent of the depository through which the Demat Account is made, maintained, and operated. A DP acts as a middleman between the account holder and the depository. Any financial service provider, like banks, state financial corporations, stockbrokers, NBFC, etc., can get themselves registered as a DP.
A depository is an entity that holds securities like shares, debentures, bonds, government securities, mutual fund units, etc. of the investors in electronic form on behalf of the investors or security holders. For instance, in India, there are two depositories named National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Ltd. (CSDL) that are registered with SEBI.
STEPS TO CONVERT YOUR PHYSICAL SHARES TO DEMAT FORM
- The first step is to open the Demat Account in the depository registered with SEBI with the help of the Depository Participant (DP) by submitting the application form and other KYC documents.
- Thereafter, the investor/shareholder will be obligated to read and sign the terms of the agreement mentioning the rights of the potential account holder and the DP along with the scheduled charges for the same. A Demat account number will be provided and the Demat Account will be opened.
- Once the Demat Account has been opened, the investor has to send a form called the Dematerialization Request Form (DRF) along with his physical share certificate of the company to the Depository Participant (DP). In cases where the investor holds physical shares of more than one company, then he must submit physical share certificates of all the companies along with a completed DRF form for each of the companies.
- The DP will check and verify the completeness and veracity of all the documents submitted by the Investor. Meanwhile, a Dematerialisation Request Number (DRN) will be issued to the investor as an acknowledgment receipt till the time DP verifies his documents.
- After verifying the documents, DP will send the request of dematerialization to the company of which the share-holder wants to get his shares converted to Demat format.
- After the approval, the physical shares will be converted to Demat form. Thereafter, the physical shares will be destroyed for the purpose of avoiding misuse or duplicity.
- Once the physical shares are dematerialized, the monetary value of the physical shares will be credited to the Demat Account which can, later, be used for buying or selling with the ease of online trading.
After following the above-mentioned steps, the Physical share certificates will be said to be converted to Demat format.