Finance

Why You Need a Demat Account before 5th December Deadline

According to the SEBI notification issued on June 8, 2018, all share certificates held in physical form will be deemed worthless pieces of paper if they are not dematerialized. According to the said notification, share certificates cannot be transferred from 5th December onwards unless they are converted into a dematerialized form, except share certificates held under the will upon a shareholder’s death.

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After almost two decades since the Indian stock markets have gone online and introduced the dematerialization of shares, many traditional investors still hold physical share certificates. For instance, Reliance Industries Limited still has shares worth about 9600 crores in physical form. Similarly, many companies such as ITC, HUL, MRF also have a large proportion of their physical form shares.

This SEBI notification deems all physical share certificates worthless unless converted into a dematerialized form, which raises the question: What do holders of physical share certificates do?

Why have so many people not converted their physical share certificates into Demat Form?

The majority of the shares that remain in physical form were issued or purchases before passing the Depository Act. Also, many traditional investors intended to hold on to their shares on a long-term basis and hence did not wish to incur additional costs and expense on account of various fees associated with opening and maintaining a demat account and at that time. Due to the absence of banks and DPs offering investors and customers any provisions to open free demat accounts, many investors preferred holding on to their physical share certificates rather than incur additional cost to dematerialize and store their share certificates.

Why SEBI issued a notification to dematerialize all physical Share Certificates?

SEBI aims to eliminate fraudulent dealings by adopting a 100% dematerialization of shares. As per some estimates, retail investors hold shares worth over Rs. 1.2 Lakh crore and over Rs. Mutual funds own 45000 crores worth of shares in physical form.

Investors will require to open demat accounts to hold their shares and securities in dematerialized form. Since opening a demat account with a depository participant requires KYC verification of the shareholder and demat account holder, it would help reduce and eliminate fraud cases in the securities market.

For instance, some employees of a firm working as a share-transfer agent had defrauded many companies by fraudulently withdrawing unclaimed dividends worth crores instead of crediting the dividends to its rightful shareholders. These fraudsters had duped the banks into transferring the dividend amounts in their accounts instead of an account of the actual shareholders.

SEBI requesting SEBI to hold shares only in demat form due to such scams. Based on the big market players’ recommendation, SEBI issued a notification to implement 100% dematerialization of shares. Dematerialized shares and KYC checks will prevent such scams and cases of fraud in the future.

How to convert physical share certificates into Demat Form

Many shareholders of physical share certificates can convert their share certificates into dematerialized forms by following the steps mentioned below.

The opening of a Demat Account

The first step towards converting your physical share certificates into a demat form is opening a demat account. A dematerialized account, popularly known as a Demat account, is a form of the account used to hold, trade, and transact shares and securities in electronic form. While trading in stocks and securities online, shares and securities are purchased and held in a Demat account, thereby facilitating easy trade. A Demat account can hold all forms of securities investments such as shares, exchange -funds, bonds, government securities, and mutual funds in one single place. Many banks and DPs are now offering investors to open demat accounts for free.

You can open a free demat account using the below-mentioned steps.

  1. You need to contact a Depository Participant who is registered with SEBI and fill an account opening form.
  2. You can also approach your bank for the opening of a demat account.
  3. Provide your KYC documents along with a filled application form
  4. Sign an agreement along with a schedule of charges with the DP/bank. This agreement will provide and mentions the responsibilities and rights of both the account user and the DP.
  5. You will be provided with a demat account number, and you can start trading in the stock and financial markets using your free demat account.
  6. Process of Transferring

Holders of physical share certificates are required to fill a Dematerialization Request Form or a DRF. These DRF forms are easily available with any Depository Participant, and the investor also needs to submit their share certificate along with the DRF. Upon verifying the DRF and the physical share certificate, the investor will receive an electronic request if all physical shares and forms submitted are in order.

Generally, the physical shares are converted into dematerialized form within two weeks.

Dispose of Physical Share Certificates

Physical share certificates need to be stored safely and securely. They are prone to theft, physical wear and tear, delay in processing, fraudulent transactions, bad delivery, and several disadvantages compared with a share in demat form.

With the conversion of physical share certificates in demat form, investors can safeguard themselves from the risk mentioned above, avoid complex and time-consuming processes that can affect their investments’ profitability.

Dematerialization of shares offers investors several advantages when compared to traditional physical share certificates. Dematerialization shares held in demat accounts can be stored safely and do not risk theft, damage, etc. It can be easily transferred, easily divided, unlike physical share certificates that come in lots of a fixed number, do not require stamp duty payment, etc. Also, many banks and DPs offer an opportunity to open a free Demat account to encourage investors to comply with SEBI’s directive and move towards 100% dematerialization of shares.

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