Dematerialization of shares involves converting physical share certificates into electronic format, reducing problems like forged or stolen certificates. It establishes an electronic book entry system managed by depositories like NSDL and CDSL, where share ownership is recorded electronically rather than through physical certificates. The depository system designates depositories as registered owners on company records, while investors are beneficial owners; all share rights lie with beneficial owners. It streamlines share transfer and settlement, and removes stamp duty on intra-depository transfers.

1. A small note of De materialization of shares:India has the largest number of listed companies in the world and the capital market is growing by leaps and
bounds. The physical movement of share certificates and their transfer are fraught with a number of problems and
are usually difficult and time consuming. Further, with the increase in the volumes of trading, there has been an
increase in the number of BAD DELIVERIES (ie return of share transfer form due to non or improper filling up of
share transfer form, discrepancy in the signature of the transferor etc.,) and this has introduced increased risks in
settlement of trade. The De materialization of shares is to reduce or do away with the threat of wrong/forged
signatures, stolen shares, fake certificates etc.
De materialization of shares involves setting up of an electronic system with scripless trading and quick settlement
cycle. After de materialization, the shares become FUNGIBLE ie, shares will be without any number and any share
can take any other share’s place. In case of physical share certificates, a share certificate for a particular number of
shares has a specific running number ( like 000100 to 000150) which is identifiable with a particular shareholder.
In this new system of keeping ownership records in the form of electronic holdings , the physical movement of
securities would be replaced by a book entry system, under which the ownership would betransferred by
ELECTRONIC ENTRIES.
The Depositories Act, 1996, makes a provision for the setting up of multiple depositories in India. At present there
are now two Depositories, the National Securities Depository Limited (NSDL) and the Central Depository Services
Ltd (CDSL). The investor has been granted an option of holding securities in a physical or dematerialized form.
In the Depository system, the “Registered owner” means a Depository, whose name is entered as such(ie either as
NSDL or CDSL) in the register of the ISSUER,ie the Company which issues the shares. Ie, it is the Depository’s name
which will be in the companies’ records. The Register and the Index of “Beneficial Owners” maintained by a
depository is deemed to be the index and register of members and the debenture holders of the Company.
“Beneficial owner” means a person whose name is recorded as such with a Depository. All rights with respect to
the securities held in the Depository will lie with the beneficial owner(Investor) and not with the depository, the
depository acting as the registered owner only.
The important advantage of the de mat is that when transacting through a depository, the investor will not
be required to pay stamp duty on transfer of shares or the units of mutual funds within the depository.
In the demat transaction, thus there are four parties, namely
THE COMPANY(the issuer)- THE DEPOSITORY-THE DEPOSITORY PARTICIPANT-THE BENEFICIAL OWNER(ie the
shareholders)
The Depository will interface with the investors(ie shareholders) through market intermediaries called Depository
Participants. The depository will hold the beneficial owner-level information through its network of Depository
participants. This will facilitate proper distribution of benefits arising out of the investor’s holdings such as
dividend, interest, bonus and rights as on a given record date by the Issuer Company.
Every week, on Friday, the depository will furnish the company with the list of Beneficial owners electronically. If
a company requires the list of the beneficiaries as on a day other than the Friday, it can get such a list as on the
required day on payment of Rs.10,000/-.