IIFL: Difference Between Dematerialisation and Rematerialisation
There was a time when the Indian stock market followed the open outcry system, and the default trading method was through physical certificates. Conventionally, this resulted in a large amount of paperwork for traders and investors. It also contributed to the associated risks of dealing with physical copies.
However, with time, the Securities and Exchange Board of India (SEBI) introduced a new alternative to increase efficiency and transparency in the trading process. The resulting processes mandated the conversion of storing securities in digital format instead of using physical certificates. However, the option of converting digitally held securities in physical format is still functional and is used by traders to convert their electronic securities into physical forms. Converting physical securities into digital is known as dematerialisation, while the conversion of digital securities into physical certificates is known as rematerialisation.
This blog details both of the processes for a better understanding of the difference between dematerialisation process, and rematerialisation processes.
What is Dematerialisation ?
Dematerialisation is the process of converting physical share certificates and debentures into electronic format. The term ‘demat’ in Demat accounts stands for dematerialisation as investors essentially use the account to hold dematerialised shares and securities virtually.
To dematerialise your securities, you must approach a Depository Participant (DP) to open a demat account in India. The DPs utilise two depositories: the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) to open Demat accounts in India.
What is Rematerialisation ?
Rematerialisation is the process of converting securities that are in digital format into physical certificates. Investors who have converted or have their securities in electronic format stored in Demat accounts can opt for the rematerialisation process. However, while securities are undergoing the rematerialisation process, investors cannot trade them on the relevant exchange.
Other Differences: Dematerialisation vs Rematerialisation
Apart from the difference in definitions and processes, there are various other differences between the dematerialisation and dematerialisation processes.
The matter of security of assets and transactions is an important distinction between dematerialisation and rematerialisation. In this regard, dematerialisation ensures a much higher level of security than rematerialisation.
In dematerialisation, securities are directly converted into a digital format and stored in demat accounts. As a result, there is a lesser chance of forgeries, fraud or theft, which is possible in the case of physical certificates. On the other hand, rematerialisation involves paperwork and dealing with physical forms of securities, thereby increasing the chances of encountering the problems mentioned above.
The convenience of Process:
Dematerialisation is popular among investors owing to its easy and transparent process. The only thing you need to utilise in the dematerialisation process is a trusted Depository Participant of your choice to open a Demat account. Meanwhile, rematerialisation is a much more difficult and cumbersome process. The process can also take a long time and often requires professional expertise to be done properly.
Ease of Trading:
Dematerialisation is a smooth, transparent and straightforward process. Regardless of where you are situated, all your transactions can easily take place online via your online demat account . this is not the case with rematerialisation. Since rematerialisation converts securities into physical formats, investors must conduct all transactions physically by visiting the required locations.
Costs of Maintenance:
Rematerialised securities do not come with a maintenance cost. As they are stored as physical certificates, the investor takes responsibility for holding and maintaining the securities. However, dematerialised securities can only be held in a Demat account that brokers and financial institutions provide. Therefore, they levy a maintenance charge for the service and the Demat account maintenance. Although, these costs are minimal when considering the convenience of having your securities stored securely and conveniently in a digital format.
Authority of Account:
Another distinction between dematerialisation and rematerialisation is the matter of who holds the authority of your account. In the case of rematerialisation, the account maintenance authority lies with the company. However, in dematerialisation, the account maintenance authority rests with the depository participant (NSDL or CDSL). Since these services are instituted by the Securities and Exchange Board of India (SEBI), they are reliable and transparent.
Overall, the processes of dematerialisation and rematerialisation have opposite meanings and functions. While the dematerialisation process converts securities from physical to digital formats, rematerialisation converts them back to physical certificates. The two processes and features are completely different and the decision to opt for either of them depends on your requirements as a trader. You too can make the most of trading with dematerialised securities by opening a trading and Demat account in India with IIFL. With IIFL, investors and traders can avail of an all-in-one account to trade in multiple securities online at their convenience.