The advent of technology has impacted different industries positively. Owing to the successful adoption of technology many industries have grown faster than ever. For this reason, other sectors have started to include technology in day-to-day activities aggressively.
When it comes to the share market, a major transformation occurred with the introduction, followed by the implementation of the Demat accounts. Since its application, it has been hailed as a success from all the quarters of the business world.
The first and the most obvious advantage that Demat accounts have brought is definitely the elimination of the involvement of the voluminous paperwork that had been associated with buying and selling of shares on a regular basis. In addition to that, the automated process of trading in the share market using Demat accounts have also made the share market a much safer platform and a convenient one too.
The Concept of Dematerialisation
The introduction of dematerialisation is considered to be a momentous occasion in the landscape of the Indian stock exchange because, for the first time it offered the option of paperless trading to the traders. The Indian traders were offered an avenue through which share transactions and transfers are electronically processed without the involvement of transfer deed or share certificate. However, for this to happen, it was required that the share certificate was previously converted to an electronic form from physical form. Simply explained, every shareholder had to switch the hard copy of their share certificate to a soft copy in dematerialised form. Thus, the process of conversion of a physical share to a digital or dematerialised form is called dematerialisation.
If a shareholder wants to convert his or her physical share into a dematerialised one, then the shareholder must have a Demat account and a depository participant (DP). A depository participant is an intermediary in the market who provides depository services to the investors. Once physical shares are submitted for conversion, the share will be visible in the Demat account of the shareholder.
The Need for Dematerialisation
Many people have wondered if there was actually a need for the infusion of technology, in an already flourishing sector. However, this decision was taken after due consideration looking at the various advantages. Today, as per the Depositories Act, 1996, any investor has the choice to either hold shares in physical format or in their Demat accounts in dematerialised form. At the same time, the rule also states that if a trader intends to either buy or sell a share through the stock exchanges available, then it is compulsory to convert it into a dematerialised form.
Such a move was brought forth as historically it was noted that mishandling of paperwork that was related to physical shares led to many unforeseen mishaps and errors, which proved fatal. Moreover, the entire process of tracking previous records and share documents in relation to transferring and maintaining records of transactions was proving to be extremely difficult, as with time the volume kept increasing substantially. As the authorities found it extremely difficult to update the documents in a regular manner, it led to a situation where it was predicted that if such a trend was to continue, then it could end up crippling the country’s share market and the businesses associated with it. Hence, from an administrative point of view, this was a move that was more forced by circumstances than a choice made by the administrators.
Major Benefits of Dematerialisation
In an age when the time is of paramount importance for everyone, dematerialisation can prove to be an extremely important and helpful process of doing business in the share market. The following are some of the top reasons why the dematerialisation of shares is a good idea under the current stock market situation.
- Time-Saving – The conventional procedure of transferring the name of the buyers used to take a considerable amount of time. This caused much inconvenience for the person selling a share as well as the one who is purchasing it. The advent of dematerialisation has ensured that the process is now much more straightforward and less time consuming than before. To add to it has also managed to eradicate some of the inherent issues that were associated with this standard procedure.
- No Stamp Duty – Most of the investors are in the share market with the sole intention of making money. Any additional cost, however small it may be can hurt the investor especially when dealing with a significant volume of shares in the market. When transferring securities of physical shares a stamp duty is levied to the tune of 0.25% of the total sale value. An investor can avoid paying the additional 0.25% by simply switching to trading in shares in dematerialised form.
- Account Freezing – When trading using a Demat account the investor has the flexibility of maintaining it operational or making it non-operational for specific periods of time. This is a useful facility which is handy particularly for the beginner investors or seasonal investors.
- Pledge and Hypothecate Securities – Financial security is an essential aspect of modern human beings. Without some sort of financial securities, it becomes rather difficult to survive as the possible uncertainties can be a cause for immense stress. However, a Demat account holder who has many securities in his or her account can hypothecate and pledge securities and request for financial loans from the premium lending organisations in India. Most of the banks today prefer an electronic form of securities over physical ones when approving loans and even offer better deals to those who can show good Demat account holdings.
- Benefits the Investors – Dematerialised shares are of particular value to the investors for a wide range of reasons. Firstly, it gives total control to the investor as every transaction that is carried out from an account needs to be authorised by the investor himself or herself. Secondly, in case of an unlikely event of a natural calamity like an earthquake flood, cyclone or human-caused destruction like fire, theft or an accident, the physical shares may get damaged causing a loss to the investor. However, when dealing with dematerialised shares, they remain the same nonetheless.
Besides these, there are also many other advantages of using dematerialised shares like reduction of the risk of bad deliveries, high liquidity of securities, quicker payment of shares post sale of shares among others. Overall, thousands of traders in India and the rest of the world have already benefited from using a Demat account for trading. Based on their experience and the fact that substantial time has passed since its introduction without any mishap, it is safe to say that opting for dematerialised shares is the best option in the market at this moment in time.
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