Capital Market

Financial Market

Juana Dela Cruz’ Depository Participants Those who need funds

grandmother like private individuals
Financial Intermediaries or firms
Lender
Borrower

Shares certificate

Financial Instruments

Dematerialization of Securities

Dematerialisation is a process through which physical securities such as share certificates and other
documents are converted into electronic format and held in a Demat Account.

A depository is responsible for holding the securities of a shareholder in electronic form. These securities
could be in the form of bonds, government securities, and mutual fund units, which are held by a
registered Depository Participant (DP). A DP is an agent of the depository providing depository services
to traders and investors.

Process of dematerialization
 Dematerialization starts with opening a Demat account. For Demat account opening,you need to
shortlist a Depository Participant (DP) that offers Demat services.
 To convert the physical shares into electronic/Demat form, A Dematerialization Request Form
(DRF), which is available with the Depository Participant (DP), has to be filled in and deposited
along with share certificates. On each share certificate, 'Surrendered for Dematerialization'needs
to be mentioned.
 The DP needs to process this request along with the share certificates to the company and
simultaneously to registrars and transfer agents through the depository
 Once the request is approved, the share certificates in the physical form will be destroyed and a
confirmation of dematerialization will be sent to the depository
 The depository will then confirm the dematerialization of shares to the DP. Once this is done, a
credit in the holding of shares will reflect in the investor's account electronically.
 This cycle takes about 15 to 30 days from the submission of dematerialization request
 Dematerialization is possible only with a Demat account,therefore it is essential to learn how to
open a Demat account to understand dematerialization.
Purchasing dematerialised securities:
 Step 1: Choose a broker who can facilitate the purchase of the securities
 Step 2: Make a payment to the broker who will then arrange for the payment to the clearing
corporation on the pay-in day
 Step 3: The securities are credited to the broker’s clearing account on the pay-out day
 Step 4: The broker will give instructions to its Depository Participant (DP) to debit the clearing
account and credit the same to your account
 The depository will then confirm the dematerialization of shares to the DP. Once this is done, a
credit in the holding of shares will reflect in the investor's account electronically.
 Step 5: You will receive shares into your account. In order to receive the credit, you will need to
give
‘Receipt Instructions‘ to the DP if you did not give standing instructions during the opening of your
account

Selling dematerialised securities:

 Step 1: Choose a broker and sell the securities in a stock exchange linked to the NSDL (National
Securities Depository Limited)
 Step 2: The Depository Participant (DP) needs to be instructed to debit your account with the
number of securities sold and credit the broker’s clearing account
 Step 3: You need to send the delivery instruction to your Depository Participant (DP) using the
delivery instruction slips
 Once the request is approved, the share certificates in the physical form will be destroyed and a
confirmation of dematerialization will be sent to the depository
 Step 4: The broker will give instructions to its DP for delivery to the clearing corporation before
the
pay-in day
 Step 5: You will receive the payment from the broker for the sale of your securities

Why was dematerialization needed?

 Handling of paperwork related to shares in the physical format often led to errors and unforeseen
mishaps in the past.
 Tracking records and share documents with respect to transfer and upkeep transactions was
difficult
 The authorities in charge of updating these documents could not keep up with the increasing
volume of share papers, which, if left unchecked, could cripple the financial base of the Indian
share market and associated businesses.

Benefits of dematerialization
There is a wide range of benefits of dematerialisation of securities. Some of them are as follows:

 You can conveniently manage your shares and transactions from anywhere
 Stamp duty is not levied on your electronic securities
 Holding charges levied are nominal
 Risks involved with physical securities such as theft, loss, forgery or damage
are eliminated
 You can buy securities in odd lots and buy a single security
  Due to the elimination of paperwork, the time required for completing a
transaction gets reduced

Transmission of Shares

One of the lesser-known but widely experienced problems with respect to dealing in share certificates is transmission of shares.
The Companies Act distinguishes transmission of shares from transfer of shares. While transfer of shares relates to a voluntary
act of the shareholder, transmission is brought about by operation of law. The word 'transmission' means devolution of title to
shares otherwise than by transfer, for example, devolution by death, succession, inheritance, bankruptcy, marriage, etc. While
transfer of shares is brought about by delivery of a proper instrument of transfer (viz, transfer deed) duly stamped and
executed, transmission of shares is done by forwarding the necessary documents (such as a notarised copy of death certificate)
to the company. On registration of the transmission of shares, the person entitled to transmission of shares becomes the
shareholder of the company and is entitled to all rights and subject to all liabilities as such shareholder.

In case the deceased shareholder had holdings in different companies, then in order to effect transmission of shares for these
shares, the relevant documents must be sent to each of the companies, along with the share certificates. This results in a heavy
reliance on the postal system. Follow-up may have to be made with each of the companies in order get the transmission
effected before the book closure, if the survivor(s) wishes to avail of the benefits accrued through these shares.

Transmission of Securities in the Depository System

In the depository system, all these problems are mitigated as the shares are account balances in the electronic form. The
process of transmission through the depository is not only simple but it is also quicker. This is because the successor to the title
interacts only with one entity - his DP.

Transmission of Securities held jointly : In case the deceased was one of the joint holders, then the surviving holders have to
request the DP vide a form called the transmission form along with a copy of notarised death certificate to transmit the
securities lying in the account of the deceased to the account of the surviving holders. For this purpose, the surviving clients
must have a depository account, which can be with the same DP or with a different DP.

Transmission of Securities held singly: In case of death of the sole holder, the legal heir(s) or legal representative(s) of the
deceased must request the DP to transmit the balances lying in the Client account of the deceased to the account of the legal
heir(s) or legal representative(s). For this, the legal heir (s) or the legal representative(s) of such securities must submit an
instruction called the transmission form to the DP along with the following documents:

 A copy of the death certificate duly notarised

 A copy of the Succession certificate duly notarised or an order of a court of competent jurisdiction where the
deceased has not left a Will; or
 A copy of the Probate or Letter of Administration duly notarised.

However, if the legal heir(s) or the legal representative(s) express inability to produce either of the documents mentioned
under (b) and (c) above, and the market value of the securities held in each account of the deceased as on the date of
application for transmission does not exceed Rs. one lakh, then the DP will process the transmission request on the basis of the
following documents:

 Transmission form;
 Copy of the death certificate duly notarised;
 Letter of Indemnity duly supported by a guarantee of an independent Surety acceptable to the DP, made on
appropriate non judicial stamp paper;
 An Affidavit made on appropriate non judicial stamp paper; and
 No Objection Certificate(s) from all the legal heir(s) who do not object to such transmission.
The DP will ensure that the documents submitted by the legal heir(s) or the legal representative(s) are in order and will then
effect a transfer of the balances to the Client account of the legal heir(s) or the legal representative(s). After effecting the
transmission, the DP will close the account of the deceased.

Transmission of Securities in case of Nomination

The nomination facility for shares is provided by amendment in Companies Act 1956. The clients can avail of this facility by
furnishing duly filled Form for Nomination available with their DPs. This form contains photograph of the nominee and the
other details of the nominee, which help DPs to identify and give effect to the nomination given by the clients.

Upon the death of the sole client (in case of securities held singly) or the death of all the clients (in case of securities held
jointly), the nominee must request the DP in writing along with a certified true copy of the death certificate and transmission
form to transmit the securities covered by the nomination to the account of the Nominee. The DP will ensure the completeness
of the form and validity of the signature of the client and then execute the transmission request. Thus transmission of securities
where nomination has been made eliminates the need of cumbersome legal documents such as will, succession certificate etc.