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

Related image

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

This SEBI notification deems all physical share certificates to be worthless unless converted into a dematerialised form, which raises the question, what do holders of physical share certificate do?

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

Majority of the shares which remain in physical form were issued or purchases before the passing of 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 cost 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 account, many investors preferred holding on to their physical share certificates rather incur additional cost to dematerialise and store their share certificates.

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

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

Investors will require to open demat accounts to hold their shares and securities in dematerialised form. Since the opening of demat account with a depository participant requires KYC verification of the shareholder and demat account holder, it would help reduce and eliminate cases of fraud 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 make the holding of shares only in demat form and based on the recommendation from the big market players, SEBI issued a notification to implement 100% dematerialisation of shares. Dematerialised 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 dematerialised form by following the steps mentioned below.

  1. The opening of a Demat Account

The first step towards converting your physical share certificates into a demat form is the opening of a demat account. A dematerialised account popularly known as a Demat account is a form of 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, and thereby facilitating an easy trade for the users. A Demat account can hold all forms on 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 account 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 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 verification of 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 dematerialised form within two weeks.

  1. Dispose of Physical Share Certificates

Physical share certificates need to be stored safely and securely, and they are prone to theft, physical wear and tear, delay in processing, fraudulent transactions, bad delivery and pose several disadvantages when 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 which can affect the profitability of your investments.

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