equity dematerialisation

1. Dematerialisation of Shares
Dematerialisation of shares refers to the process of converting physical share certif i
cates into
electronic form. This facilitates easy and secure transfer, trading, and ownership of shares.
In India:
Two depositories called Central Depository Services India Limited (CDSL), and
National Securities Depository Limited (NSDL) is registered with the Securities
and Exchange Board Of India
an

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Process of Dematerialisation
The Dematerialization starts with opening a Demat account. So, let’s first see how to create an account.
Select a depository participant (DP): Most f i
nancial institutions and brokerage service f i
rms are referred
to as Depository Participants.
Fill an account opening form: You need to f i
ll an account opening form to open a Demat account. This
includes basic contact information.
Submit documents for verif i
cation: You need to submit a copy of your income proof, identity proof,
address proof, active bank account proof and one passport-sized photograph for verif i
cation. All copies
of documents need to be duly attested.

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Sign a standardized agreement with the DP: A standardized agreement will contain the rules and
regulations, charges you will incur and the terms and conditions of the agreement between you
and the depository participant.
Verif i
cation of documents: A staff member from the DP will verify all the documents that you
have submitted in your application.
Demat account number and ID are generated: Once all your documents have been verif i
ed, your
Demat account number and ID will be generated. You can use this information to access your
online Demat account.
Request form Verification and Information sent to the Depoistory.

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BEBEFITS OF DEMATERIALISATION
Easy and Convenient
A Demat account provides you the facility to carry out the transactions electronically. There is no need for
you to be physically present at the broker’s place to settle a transaction. Moreover, the investor can have
access to the Demat account using a computer or smartphone. In addition, you can convert your physical
holdings into electronic format to become the legal owner of your shares.
Fund Transfer
By linking your Demat account with the bank account you can easily transfer funds electronically. This
saves you from the hassles of drawing a cheque or transferring the funds manually.
Safe and Secure
All the risks like theft, damage, loss of share certif i
cates, etc. that were associated with holding shares in
physical form are completely eliminated.

6. Nomination Facility
Demat account provides you the facility to grant the right to operate your Demat
account to the nominee in your absence.
Paperless
One of the main benef i
ts of using a Demat account is that it excludes the need for
paper. Furthermore, cutting down paper usage is also good for the environment.

7. Avail Loan Facility
The Demat account helps you in availing loans against the holdings in dematerialized form.
Easily Traceable
With the help of a Demat account, you can monitor your portfolio from your home, of f
i
ce or
anywhere across the globe.
Ease In Receiving Corporate Benefits
Demat account eases the process of receiving various corporate benef i
ts like dividends,
interest, refunds, etc. All the benefit amount gets directly credited into the Demat account.
Multiple Purposes
In the Demat account, you can not only hold shares or equities but also debt instruments. You
can even purchase, hold and sell securities through the Demat account.

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Pros of multiple demat accounts
Organised Portfolio:
It allow you to manage your investments with different brokers. For example,
long-term investments can be made via one demat account, while intraday
trades can be made through a second demat account.
Access To Market Insights:
With multiple demat accounts, you can easily access research and insights
from different brokers. You can use these insights to boost your investments
and enhance your current trading/investment strategy.
Diversification Of Portfolio:
You can diversify your portfolio with multiple demat accounts. You can
segregate your securities into different demat accounts as per your
investment strategies to reduce your risks and losses.

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Cons of multiple demat accounts
Higher Costs:
Having more demat accounts means more account maintenance and transaction fees,
resulting in higher overall costs.
Requires More Time And Effort:
Managing multiple demat accounts is not an easy task. You will have to spend more time
and effort monitoring each account and its operations, which may not be possible for all
investors.
Cost Of Inactivity:
With multiple accounts, you need to monitor the activity on the accounts and ensure that
the accounts have routine transactions so that the broker does not freeze your account
after a long period of inactivity.

11. Process of Rematerialisation
Initiation Request
Investors initiate the rematerialisation request with the relevant Depository
Participant.
Physical Submission
Investors submit the required electronic statements and documents to the DP
for verification and processing.
Issuance of Certificates
Upon completion, physical share certificates are issued to the investor as per
their request.

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Process of Rematerialization
Re-materialisation is the process by which a client can get shares and securities
held in a Demat Account converted into physical share certif i
cates by submitting
a re-materialisation request to its Depository Participant (DP) with whom they
have a demat account.
The DP will then start processing the request by entering the details in their
system, which will block holdings to the extent of the remat request.
The DP will then release the request to the concerned depository (NSDL/CDSL)
and also send the Remat Request Form (RRF) received from the client to the
Issuer / agent.
If the details are found satisfactory, the Issuer /agent then prints the certif i
cates,
despatches the same to the client directly, and simultaneously electronically
conf i
rms the acceptance of the remat request to the concerned depository
(NSDL/CDSL).
Thereafter, the client's blocked balances are debited from the demat account.

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Listing of Securities
Listing refers to the approval of allowing certain f i
nancial assets, like stocks or
bonds, to be bought and sold on an of f
i
cially recognised stock market. These
assets can belong to various entities, such as public companies, government
bodies, financial institutions, or local governments.
The primary reasons for listing are:
Providing Liquidity: It makes it easier for people to buy and sell these assets,
ensuring that they can quickly convert their investments into cash when needed.
Encouraging Savings: Making these assets available for trading, encourages
people to invest their money, which, in turn, supports economic growth.
Protecting Investors: Listing requirements ensure that companies provide all
necessary information, safeguarding the interests of investors by promoting
transparency.
On the other hand, delisting means permanently removing a company’s assets
from a stock exchange. This means those assets won’t be traded on that particular
exchange anymore.

14. Listing of Securities
Listing of securities is a system of permitting the securities to be traded in the recognized stock exchanges.
It ensures ready marketability of shares, stocks, bonds and debentures, the control and supervision of
stock exchange authorities and protecting the shareholders and public investors from risks. Moreover,
listing of shares continues to the growth, expansion, modif i
cation and diversif i
cation of companies,
besides entails certain responsibilities on the companies.
SEBI is also stipulating listing of securities.
Listing Requirements
The following are the pre-requisites for listing securities in the stock exchanges in India.
(1) Memorandum and Articles of Company
The company’s memorandum and articles must have the provisions listing regulations,
requirements of selling and buying shares and the system of share transfer.
(2) Minimum Public Offer
The company must offer 60 percent of its issued capital for public subscription of which eleven
percent it to be reserved for the Government and public sector financial institutions.

15. (3) Public Offer by Existing Companies
The companies not invited public subscription may issue capital to 60 percent of
the issued capital. The further issue of capital or offer for sale to the investing public
should be made at face value.
(4) The Prospectus
The prospectus must contain a cause that an application has been made to one or
more stock exchanges for listing of securities. The prospectus should be advertised at
least one week before the opening of the subscription list. The new issues would be open
to Indians and Non Resident Indians. The prospectus should mention that the issue
would be kept open for a period of at least 10 days.
(5) Offer for Sale
The offer for sale must be in a form approved by the stock exchange and must give
all material particulars of the company such as its capital structure, capitalization of
resources, any revaluation of assets, prof i
t and losses for the last 5 years, cost of capital,
dividend policies, tax and contingent liabilities etc.

16. (6) Publicity of New Issues
The new issues of the companies are required to publish/advertise in the
newspapers either the prospectus or an announcement about the public issue.
The stock exchanges have every right to take necessary action against the
issuing company for any breach of the general requirements.
(7) Fair and Equitable Allotment
Listing requirements must ensure investing public fair and unconditional
allotment of shares. The procedure should follow in regard to the allotment of
shares in the event of over subscription, and also in the case of under
subscribed.

17. Introduction to Stock Exchange:
Stock Exchanges are the places where shares and securities are
traded in the form of sale and purchase. These stock exchanges
provide liquidity by providing the facility to unwind positions by
traders and thus minimize or eliminate their risk. They also
facilitate public issue of shares.

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Features of Stock Exchanges
Stock exchange is a voluntary organization either as a private or a public limited
company. It provides facilities to its members to transact, to control and regulate
their business activities.
It promotes high standard of business morality and integrity among the members.
It safeguards the interest of members, investors, public and the economy.
The organized stock exchange is managed by a managing committee that consists
of elected members. The committee has control over the members through the
disciplinary powers and actions of the stock exchange.
The direct and indirect dealings on the f loor are controlled by the manager
committee of the stock exchange.
The managing committee is empowered to give penalties to the erring members on
the basis of the nature of offense.
The organized stock exchanges can enforce stringent rules of the members.

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Role of SEBI
Malpractices of companies, brokers, merchant bankers and investment consultants to
the detriment of the interest of investors, compelled the government to constitute the
SEBI in 1988 to regulate and promote the securities market. The board can:
Regulate business in the stock exchange and any other securities market.
Prohibit insider trading.
Regulate substantial acquisition of shares and takeover of companies, and perform
any other function as called upon to do so by the central government.
Promote investor education.
Register and regulate the work of brokers, sub-brokers, transfer agents, bankers to
issue, underwriters, portfolio managers, investment managers or any other bodies
associated with the securities market in any manner.
Register and regulate mutual funds.
Prohibit fraudulent trade practices relating to the securities market.
The establishment of SEBI as the market regulator brought substantial changes in
market regulations, like registration, membership, disclosure norms, etc. Now,
brokers have to register with SEBI in order to trade in the stock market.

20. Disadvantages of Stock Market
1. Business risk
The most frequent risk facing investors who buy individual equities is a company-specif i
c
risk. Investors risk losing their money if the f i
rm they invested in is unable to generate
sufficient sales or profits.
2. Headline danger
A part of company risk that is frequently evaluated is headline risk. This is the danger posed
by media reports that could harm a company's reputation and bottom line. A single
unfavourable headline can trigger a market retaliation against a certain business or an
entire industry, and frequently both.
3. Market danger
Due to the total systematic risk af f
l
icting the f i
nancial markets, investors may suffer losses.
A prime illustration of increased market risk is stock market crashes. Although it cannot be
totally eradicated, market risk can be protected.

21. Liquidity Risk
A signif i
cant and obvious risk involved in stock market investing is liquidity risk. Even though
most shares and ETFs have signif i
cant liquidity, they are not all created equal. Certain small-
cap stocks or penny stocks may have liquidity problems. Investors may experience dif f
i
culties
while buying and selling these products at their fair price.
5. Low margin and high brokerage
Brokers are still necessary for the market to operate smoothly, despite the fact that it is now
much more accessible. They demand large brokerage fees, which reduces investors' prof i
t
margins and detracts from the appeal of the investment option.
6. Inadequate knowledge
The investors' ignorance of their investments and the f i
rms they invest in is one of the obvious
drawbacks of the stock market. The majority of issuers rely on broker recommendations or
market trends, which might not be their greatest advantage.
7. Time-consuming
The act of trading stocks has gotten easier and faster thanks to the development of online
trading. Still, the registration process, such as registering a Demat account, takes a little longer.
The data and analysis needed before making a valid investment, however, still require diligent
work because it is a one-time activity.

22. METHODS OF MARKETING SECURITIES
Various methods being adopted by corporate entities for marketing the
securities in the New Issues Market:
1. Pure Prospectus Method 5. Rights Issue Method
2. Offer for Sale Method 6. Bonus Issue Method
3. Private Placement Method 7. Book-building Method
4. Initial Public Offers (IPOs) Method 8. Stock Option Method
9. Bought-out Deals Method

23. 3.
4.
Pure Prospectus Method
The method whereby a corporate enterprise mops up capital funds from the general public
by means of an issue of a prospectus is called ‘Pure Prospectus Method’. It is the most
popular method of making public issue of securities by corporate enterprises.
Features
1. Exclusive subscription According to the SEBI norms, a minimum of 49 percent of the
total issue at a time is to be offered to public.
2. Issue price Direct offer is made by the issuing company to the general public to
subscribe to the securities at a stated price. The securities may be issued either at par,
of at a discount or at a premium.
Underwriting Public issue through the ‘pure prospectus method’ is usually underwritten.
Prospectus A document that contains information relating to the various aspects of
the issuing company, besides other details of the issue is called a ‘Prospectus’. The
document is circulated to the public.

24. Offer for Sale Method
Meaning
Where the marketing of securities takes place through intermediaries, such as issue houses,
stockbrokers and others, it is a case of ‘Offer for Sale Method’.
Features
A bought deal is a securities offering in which an investment bank commits to buy the entire
offering from the client company. A bought deal eliminates the issuing company’s f i
nancing
risk, ensuring that it will raise the intended amount. The difference between the purchase
price and the issue price constitutes ‘prof i
t’ for the intermediaries. The intermediaries are
responsible for meeting various expenses such as underwriting commission, prospectus cost,
advertisement expenses, etc.

25. Private Placement Method
Meaning
A method of marketing of securities whereby the issuer makes the offer of sale to
individual and institutions privately without the issue of a prospectus is known as
‘Private Placement Method’.
Features
Under this method, securities are offered directly to large buyers with the help of
share brokers. This method work in a manner similar to the ‘Offer for Sale Method’
whereby securities are f i
rst sold to intermediaries such as issues houses, etc. They
are in turn placed at higher prices to individuals and institutions. Institutional
investors play a signif i
cant role in the realm of private placing. The expenses relating
to placement are borne by such investors.

26. Initial Public Offer (IPO) Method
The public issue made by a corporate entity for the f i
rst time in its life is called ‘Initial Public Offer’
(IPO). Under this method of marketing, securities are issued to successful applicants on the basis of
the orders placed by them, through their brokers.
When a company whose stock is not publicly traded wants to offer that stock to the general public, it
takes the form of ‘Initial Public Offer’. The job of selling the stock is entrusted to a popular
intermediary, the underwriter. An underwriter is invariably an investment banking company. He
agrees to pay the issuer a certain price for a minimum number of shares, and then resells those
shares to buyers, who are often the clients of the underwriting f i
rm. The underwriters charge a fee
for their services.
Stocks are issued to the underwriter after the issue of prospectus which provides details of f i
nancial
and business information as regards the issuer. Stocks are then released to the underwriter and the
underwriter releases the stock to the public.

27. Full disclosure of all material information in connection with the offering of new securities must
be made as part of the new offerings. A statement and preliminary prospectus (also known as a
red herring) containing the following information is to be filed with the Registrar of Companies:
1. A description of the issuer’s business
2. The names and addresses of the key company of f
icers, with salary and a 5 year
business history on each
3. The amount of ownership of the key officers
4. The company’s capitalization and description of how the proceeds from the offering
will be used and
5. Any legal proceedings that the company is involved in

28. Rights issue Method
Where the shares of an existing company are offered to its existing shareholders, it takes the
form of ‘rights issue’. Under this method, the existing company issues shares to its existing
shareholders in proportion to the number of shares already held by them.

29. Bonus Issues Method
Where the accumulated reserves and surplus of profits of a company are converted
into paid up capital, it takes the form of issue of ‘bonus shares’. It merely implies
capitalization of existing reserves and surplus of a company. The issue of bonus
shares is subject to certain rules and regulations. The issue does not in any way
affect the resources base of the enterprise. It saves the company enormously of the
hassles of capital issue.

30. Book-building Method
A method of marketing the shares of a company whereby the quantum and the
price of the securities to be issued will be decided on the basis of the ‘bids’
received from the prospective shareholders by the lead merchant bankers is known
as ‘book-building method’. Under the book-building method, share prices are
determined on the basis of real demand for the shares at various price levels in the
market. For discovering the price at which issue should be made, bids are invited
from perspective investors from which the demand at various price levels is noted.
The merchant bankers undertake full responsibility for the issue.

31. Book Building Process:
1. Appointment of book-runners the first step in the book-building process is the appointment
by the issuer company, of the book-runner, chosen from one of the lead merchant bankers.
The book-runner in turn forms a syndicate for the book building. A syndicate member
should be a member of National Stock Exchange (NSE) or Over-the-Counter Exchange of
India (OTCEI).
2. Drafting prospectus The draft prospectus containing all the information except the
information regarding the price at which the securities are offered is to be f i
led with SEBI
as per the prevailing SEBI guidelines.
3. Circulating draft prospectus A copy of the draft prospectus f iled with SEBI is to be
circulated by the book-runner to the prospective institutional buyers who are eligible for
firm allotment and also to the intermediaries who are eligible to act as underwriters.

32. 4. Maintaining offer records The book-runner maintains a record of the offers
received. Details such as the name and the number of securities ordered together
with the price at which each institutional buyer or underwriter is willing to subscribe
to securities under the placement portion must f i
nd place in the record. SEBI has
the right to inspect such records.
5. Intimation about aggregate orders The underwriters and the institutional investors
shall give intimation on the aggregate of the offers received to the book-runner.
6. Bid analysis The bid analysis is carried out by the book-runner immediately after
the closure of the bid offer date. An appropriate f i
nal price is arrived at after a
careful evaluation of demands at various prices and the quantity. The f i
nal price is
generally fixed reasonably lower than the possible offer price.

33. 7. Mandatory underwriting In case an issue is made through book-building route, it is
mandatory that the portion of the issue offered to the public be underwritten. For
this purpose, an agreement has to be entered into with the underwriter by the issuer.
8. Filing with ROC A copy of the prospectus as certif i
ed by the SEBI shall be f i
led with
the Registrar of Companies within two days of the receipt of the acknowledgement
card from the SEBI.
9. Bank accounts The issuer company has to open two separate accounts for
collection of application money, one for the private placement portion and the other
for the public subscription.
10.Collection of completed application The book-runner collects from the institutional
buyers and the underwriters the application forms along with the application money
to the extent of the securities proposed to be allotted to them or subscribed by them.

34. 12.
11. Allotment of securities Allotment for the private placement portion may be made on the
second day from the closure of the issue. The issuer company, however, has the option to
choose one date for both the placement portion and the public portion.
Payment schedule and listing The book-runner may require the underwriters to the ‘net
offer to the public’ to pay in advance all moneys required to be paid in respect of their
underwriting commitment by the eleventh day of the closure of the issue.
13. Under-subscription In the case of under-subscription in the ‘net offer to the public’
category, any spillover to the extent of under-subscription is to be permitted from the
‘placement portion’ category subject to the condition that preference is given to the individual
investors.

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Benef i
ts – Book building helps in evaluating the intrinsic worth of the instrument being
offered and the company’s credibility in the eyes of public. The entire exercise is done on a
wholesale basis.
Price of instrument is determined in a more realistic way on the commitments made by
the prospective investors to the issue.
The prime objective of book-building process is to determine the highest market price
for shares and securities and demand level from highest quality investors in order to
adjust pricing and allocation decision.
Book building is a process of f i
xing price for an issue on feedback from potential
investors on how they are willing to bid to pick up issues and instruments.
The process of book building is advantageous to the issuer company as the pricing of
issue would be more realistic as the final price is decided about 11 to 12 days before the
opening of the issue.
Book building also offers access to capital more quickly than the public issue.
As the issue is pre-sold, there would be no uncertainties relating to the fate of the issue
involved.
The issuer company saves advertising and brokerage commissions.
Issuers can choose investors by quality.
Investors have a voice in the pricing of issues.

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The issue price is market-determined.
Ef f
i
cient capital raising with improved issue procedures, leading to a
reduction in (a) issue costs, (b) paper work and (c) lead times.
Flexibility to increase/decrease price and/or size of offering the issues is
possible.
Transparency of allocations is made.
Upgraded information flow of issues, lead managers, syndicate members
and investors is made possible.
Book-building process inspires investor’s conf i
dence leading to a larger
investor universe.

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Limitations – The book-building system, however, has various limitations.
Some of these limitations are:
Book-building is appropriate for mega issues only. In the case of small
issue, the companies can adjust the attributes of the offer according to
the preferences of the potential investors. It may not be possible in big
issues since the risk-return preference of the investors cannot be
estimated easily.
The issuer company should be fundamentally strong and well known to
the investors.
The book building system works very ef f
i
ciently in matured market
conditions. In such circumstance, the investors are aware of the
various parameters affecting the market price of the securities. But,
such conditions are not commonly found in practice.

38. Stock Option or Employees Stock Option Scheme (ESOP)
The Employee Stock Option Plans (ESOPs) are granted to management and key
employees as a form of incentive compensation. It is to be distinguished from
stock right available to all shareholders. The stock option is used when rights
are issued other than pro rata to all existing shareholders.
The objective of ESOPs is to motivate the employees to perform better and
improve shareholders value. Apart from giving f i
nancial gains to the employees,
they also create sense of belonging and ownership amongst the employees.
ESOPs usually mean of supplementing employees salaries with the right to buy
shares in the company at a price less than the market price. Employees are
typically awarded stock options entitling them to purchase a certain number of
shares in one or two year’s time at the prevailing market price.

39. Bought-out Deals
A method of marketing of securities of a body corporate whereby the
promoters of an unlisted company make an outright sale of a chunk of
equity shares to a single sponsor or the lead sponsor is known as
‘bought-out deals’.