A share is a unit of the equity capital of a limited company.
In the context of this article, a share means:
- Equity shares that carry voting rights.
- Shares of a public limited company traded in a recognized share exchange in India.
Preference shares and equity shares of private companies do not fall under the purview of this article.
There is a widespread assumption that shares are held for a few days or at most months in the day and age of Gamestop short squeeze. But that is hardly true.
Most investors prefer to buy a share and hold it for a long period. The annual dividend of blue-chip companies is a stable source of revenue, and over time the appreciation of shares is lucrative.
Many own shares for years and even decades. Your father may have purchased L&T or Tata Steel shares in 1990, and you have inherited them. It might be because you bought a few shares of Infosys in 2005 after you received your first salary and never traded them.
If you have not been paying attention for the past couple of years, you need to understand dematerialization.
What is Dematerialization?
Dematerialization, or Demat as it is known popularly, is holding shares in electronic form.
Originally shares were issued in physical form.
When you bought a share and held it long enough for your name to be updated in the share register, you received shares in paper form.
This is not very convenient for short-term technical trading.
The process of demat was introduced quite a long ago in India. However, it was not compulsory. From April 1, 2019, however, no one can trade shares in physical form (even private sale).
In short, a physical share still allows you to own a part of a company and receive dividends, but it is illiquid.
As soon as possible, you must convert physical shares that you own into dematerialized form.
Benefits of Dematerialization
Do you actually own your wealth in cash? No, it is in a bank account.
The same applies to shares. Do you really want to own hundreds of shares of a dozen companies in paper form?
- It is far more convenient to own shares electronically.
- It is impossible to defraud using fake share certificates.
- Moreover, there is no case of “odd lot” (shares sold only in tranches of ten or hundred). With demat, you can sell a single share without any problem.
- Lack of paperwork means more accelerated transfer and trading.
- Easier for brokerages to tackle high-volume trading.
- Easier to account for stock splits of one share into two.
- Possible to access shares from anywhere in the world.
Process of Dematerialization
There are two depositories in India that allow changing physical shares into demat:
- Central Depository Services India Limited (CDSL)
- National Securities Depository Limited (NSDL)
As a shareholder, you cannot directly deal with CDSL or NSDL. You have to choose a depository participant.
All large brokerages are also depository participants and offer the facility to open a demat account.
It takes a few minutes, and is as easy as opening a savings account.
Very few details are needed: name, address, age, PAN number, bank account number, and email address.
You can use the new demat account to buy and sell shares and also change any physical shares you own into electronic form.
For the latter, ask for a Dematerialization Request Form or DRF. It is available as a PDF download from brokerages.
Fill the form with details of shares to be dematerialized and send the form and the physical shares to your broker. Each share certificate has to be marked “Surrendered for Dematerialization.”
The depository participant sends a notification to the company’s share registrar. The process takes between 15-30 days to complete. In the end, your demat account would be credited with the same number of shares you surrendered. To convert the shares, it will cost between INR 150-400 per certificate depending on the depository participant.
