How to Dematerialize Your Physical Share Certificates?

How to Dematerialize Your Physical Share Certificates?

The Indian stock market has evolved to offer better features and ease of trading to new-age investors. There was a time when the Indian share market followed the open outcry system where if investors wanted to buy and sell shares, they had to be physically present at the stock exchanges. The buying and selling were done based on physical share certificates that marked the shares' ownership. However, the process became outdated with the introduction of online trading and technology-backed trading platforms.

Now, as per the regulations laid out by the Securities and Exchange Board of India (SEBI), you can only trade and invest in shares that are in the dematerialized (Demat) format. This step was taken primarily to ease the process of buying, selling, and transferring the shares of a company. However, the shift has created a critical question where investors who still hold physical share certificates look for a way on how to convert physical shares to Demat. The process is important to dematerialize share certificates and allow for continuing investing. This blog will help you as a guide to understanding all about the Demat account and the steps to convert physical shares to Demat India.

What is a Demat Account?

In 1996, the Securities and Exchange Board of India (SEBI) introduced Demat accounts in the country, and it revolutionised investing by making it a digital process. One of the most important factors introduced by SEBI was a Demat account.

'Demat' refers to dematerialization, a process by which physical securities are converted into electronic format. Therefore, a trader can use a Demat account to hold, transfer, and transact securities without the hassles of dealing with physical securities. As a result, trading has become a safer, quicker, and much more efficient method of storing securities and executing trades.

What is the Dematerialization Process?

Before the introduction of digital trading, people held physical share certificates. However, SEBI has made it mandatory that physical share certificates should be converted to virtual shares through the process of dematerialization which converts your physical shares into electronic form. This consists of four primary parties: depository, issuer, beneficial owner, and depository participant.

A depository participant (DP) is an agent of the depository through which you maintain and operate your Demat account; the DP provides the interface between you and the depository. Just as banking services can be availed through a branch, depository services can be availed through a DP. Any financial service provider, including financial institutions, banks, state financial corporations, stockbrokers, NBFC, etc., complying with SEBI’s norms can register and function as a DP.

Your investments in shares and debentures can be held electronically or dematerialized in a depository. A depository is an entity that holds securities (shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors. National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL) are the depositories that are licensed to operate in India and are registered with SEBI (Securities and Exchange Board of India). Dematerialization is comparable to keeping your money in a bank account. In Demat form, your physical share certificates are replaced by electronic book entries; purchases of shares are reflected as credits in your Demat account, and sales are reflected as debits.

Before you learn how to convert physical shares into Demat online, here are some rules of the dematerialization process:

  • In the process of dematerialization, a company revises its Article of Association through a special resolution in the general meeting, allowing it to issue shares in electronic form.
  • Private companies, then, have to register with both NSDL and CDSL. The depositories have their own set of criteria for registration, and the issuer has to comply with them.
  • Post-registration, the depositories provide a unique ISIN for each of the shares. An ISIN is a 12-digit code used to identify different securities such as shares, bonds, etc.
  • The companies get access to depository services only through an intermediary. If the issuer wants to transfer the dematerialized shares, it has to arrange for Demat connectivity from depositories.

Why Dematerialization? Advantages of Dematerialized Shares

The main motive behind investors searching how to convert physical shares to Demat online is the policy where SEBI has announced that investors must convert every physical share certificate into electronic form. SEBI’s direction is not based on assumptions but on valid research that this process accompanies numerous benefits over the holding of physical share certificates. Once an investor knows how to convert physical shares to Demat, it will provide the following benefits:

  • Safety: Dematerialization eliminates the chances of shares being lost, forged or misplaced, increasing the safety of the holding. They are stored in secure depositories, which has made theft a thing of the past.
  • Convenience:Thanks to the electronic nature of dematerialized shares, the problems related to their storage and maintenance have been eliminated. You won’t have to deal with lost or damaged certificates anymore.
  • Accessibility: All the records of shares are stored electronically and online. This allows you to access dematerialized shares from almost anywhere and anytime using the internet.
  • Cost-efficiency: Electronic trading doesn’t require cumbersome paperwork, which reduces a lot of expenses.
  • Flexibility: Dematerialization led to increased flexibility and therefore improved access for small investors. Now, one can buy/sell even a single share without any restriction on the numbers.

Difference Between Dematerialization and Re-materialization

While Dematerialization is the process of converting physical shares into electronic form, Rematerialization is the process of reconverting electronic shares to physical certificates. You can opt to rematerialize your shares anytime you want which is done within 30 days. However, rematerialized shares are illiquid as they cannot be traded. In the process of knowing how to convert physical shares into Demat online, it is important to understand the difference between dematerialization and rematerialization.

  • Dematerialized shares have unique ISINs while rematerialized shares have distinct numbers.
  • Dematerialized transactions take place electronically, but re-materialized shares are traded physically. As per the latest SEBI norms, rematerialized shares cannot be traded.
  • Dematerialized shares are maintained by depositories, while respective companies maintain rematerialized shares.
  • Since electronic shares are stored in secure depositories, investors need to pay the maintenance charges with annual fees ranging from Rs. 500-1000. Individual investors store rematerialized shares that do not levy any maintenance charges.
  • The most significant difference between dematerialization and re-materialization is the safety of the securities. The threat of theft is lower in dematerialized shares, while it is easier to forge/steal physical certificates.

How to Dematerialize Your Physical Share Certificates?

To dematerialize share certificates has become mandatory if you do not want to lose the ownership of the shares. If you’re holding physical share certificates of a company, you will be first required to convert them into an electronic format before selling or transferring the shares. The process of converting the physical shares of a company into an electronic form is commonly known as dematerialization (Demat). You will have to open a Demat account with a Depository Participant (DP) before raising a request for conversion of your physical shares. However, it is important that the stockbroker you choose should be experienced and come with no hidden cost to help you better understand how to convert physical shares to Demat online.

IIFL Securities is among India's highest-rated and leading stockbrokers with over 25 years of financial market experience. It is one of the few stockbrokers registered with the National Securities Depository Limited (NSDL) and Central Depositories Services Limited (CDSL), allowing you to choose between the two as your depository institution. Being the most trustworthy stockbroker, IIFL provides the following benefits when you choose to open a Demat account with India Infoline.

  • Paperless Process: Opening a Demat account with IIFL is done using an advanced technology-backed online platform, which is quick and completely paper-free. All you have to do is visit the IIFL website or download the IIFL Markets app from the app store and fill out the Demat account opening form, which takes less than 5 minutes.
  • User-Friendly Interface: The user interface of the IIFL trading platform and IIFL stock trading app is easy to comprehend and use. It has numerous investor-oriented features to offer hassle-free and seamless trading and investing experience. The platform has very low latency, allowing for the trades to be executed instantaneously.
  • Cost-effective: Opening a Demat account with IIFL comes with the most cost-effective prices. When you open a Demat account with IIFL, it comes with zero account opening charges and free-of-cost account maintenance charges for the 1st year. Furthermore, a Demat account with IIFL has zero fees per order for ETF & Mutual Funds brokerage along with 0% interest on margin trading funding for 30 days.
  • Goodwill:IIFL comes with 25 years of experience and customer trust with over 22 lakh happy customers. IIFL Markets app, which provides comprehensive trading and investing facilities to customers, has over 7 million downloads. Furthermore, IIFL has over 1,10,000 cores under its Asset Under Management which is among the top AUM holders in the financial market.
  • Unique Trading Platform: When you open a Demat account with IIFL, you can access various unique features of the IIFL trading platform. You can track your favourite stocks directly from your home screen and set customised and actionable alerts with the account. The platform also includes livestock charts with over 230+ indicators along with an advanced 20-level market depth.

The Process to Convert Your Physical Shares into Demat Form

Learning how to convert physical share to Demat online requires following the dematerialization process developed by the Securities and Exchange Board of India. The first step in the two-step process is to open a Demat account, followed by raising a request for the dematerialization of shares.

1. Open a Demat Account

  • Step 1: Visit your preferred DP’s website and open a Demat and trading account quickly and effortlessly.
  • Step 2: Click on the 'Open a Demat and trading account' link on their website.
  • Step 3: Fill in the application form.
  • Step 4: Upload scanned copies of all the necessary documents for Know Your Customer (KYC).
  • Step 5: Sign the agreement with the DP along with the charges. This agreement contains the duties and responsibilities of both the depository participant and the account holder. Therefore, it is important to read them thoroughly before putting your signature.
  • Step 6: Once all the relevant documents are submitted, your application will be processed by the DP.
  • Step 7: On successful approval of your Demat and trading account application, you will receive a unique user ID and password to access your trading account along with a Demat account number.

2. Raise a Request for Dematerialization of Shares

Once you open a Demat account, you will have to put in a request to convert your physical share certificates into the dematerialized format. You can follow the steps mentioned below to raise a dematerialization request with your DP:

  • Step 1: Contact your DP for a Dematerialization Request Form (DRF).
  • Step 2: Fill up the DRF with all the required details and put your signature. Submit the duly filled form along with your physical share certificates to your DP. It is important to mention ‘Surrendered for Dematerialization’ on each physical share certificate.
  • Step 3: Your DP will process your request after receiving the DRF along with the surrendered physical share certificates.
  • Step 4: Further on, your DP would send the dematerialization request to the concerned company’s appointed Registrar and Share Transfer Agent (RTA).
  • Step 5: Once the dematerialization request is approved, your physical share certificates get destroyed, and your Demat account gets credited with the relevant number of shares.

Documents Required to Convert Physical Share Certificate to Demat

Holding the physical share certificates makes you the part-owner of the company that has issued the shares in the first place. However, the process of converting a physical share certificate to Demat requires some documents to be submitted for opening the Demat account and then raising the request to dematerialize share certificates. Here are the documents you would require to convert physical shares to Demat India:

  • Proof of identity with a photo such as your Aadhaar card, PAN card, voter ID card, driving licence, etc.
  • Provide evidence of your residence, such as registered lease agreements, driver's licence, passports, landline telephone bills, electricity bills, apartment maintenance bills (if applicable), copy insurance, gas bills, etc.
  • Your bank's passbook or account statement will serve as your proof of bank account (must be no more than three months old).
  • Your bank's passbook or account statement will serve as your proof of bank account (must be no more than three months old).
  • The original copy of the physical share certificates that you hold. The share certificates must be in good condition with the information visible.
  • Duly filled Dematerialization Request Form. You must ensure that you use separate forms for shares of different companies. For example, if you have 5 shares of XYZ company and 5 shares of PQR company, two separate forms will be filled for both the companies.
  • Each paper share in the physical share certificates must be defaced by mentioning ‘Surrendered for Dematerialisation’. Remember to get an acknowledgement slip for the surrendered shares.

Once you have submitted all the documents to convert physical shares to Demat, the physical certificates become void and are destroyed by the respective companies and new electronic shares are issued. These shares start to reflect in your Demat account, and you can trade by selling or buying more of the shares at your convenience.

If you have any copy of the physical share certificates, you should remember that you can not quote it to mark your ownership over the shares. Any trading practice involving the previously held physical share certificates will be deemed illegal from hereon. The only claim you will have over the shares will be through the transactions carried out in your Demat account. Hence, you must secure your Demat account and remember your Demat account number.

How to open a Demat account with IIFL

Now that you know how to convert physical share to demat, you know that the first step is to open a Demat account. The process of opening a Demat account may seem complex, but IIFL makes it the simplest through its customer-oriented website and highest rated IIFL Markets App. Opening a Demat account with IIFL requires following easy and simple steps with filling out a completely straightforward form. This step is the most important of the steps to open a Demat account online and allows the investor to inch closer to making the first investment. Here are the steps you must follow to open a Demat account with IIFL:

Step 1: Visit the Website or the Mobile Application

Visit the IIFL Securities website or download the IIFL Markets app from the app store. Click on the ‘Open a Demat account.’

Step 2: OTP and Link

You will receive a one-time password (OTP) on the mobile number. You will also receive a link on your registered email ID. Enter the OTP received on your registered email id. After verifying the OTP, you need to fill out the online Account Opening Form.

Step 3: Fill out the Online Application Form

Fill out the online form for a free Demat account with IIFL Securities. It will require you to submit the above-mentioned essential documents in the account opening format.

Step 4: E-KYC Process

Get your KYC details verified online. The verification of your KYC details is done online after you have submitted the required documents.

Step 5: Receive Demat Account Number

Once the documentation process is completed and the forms are received at HO, the account will be opened within 24 hours. Afterwards, you will receive your Demat account number, and you can start investing.

Final Word

The Indian stock market does not recognise physical share certificates as legal anymore, having shifted to the electronic format. Although you are still the owner of the shares, if you hold the physical share certificates, you can not trade using the paper shares. If you want to trade in the shares you hold as physical certificates, you have to convert them into the electronic format by opening a Demat account and raising a dematerialization request.

While the process of dematerialization may seem to be lengthy, it requires minimal user intervention. This entire process of conversion of physical share certificates into Demat format is likely to take around 2 to 3 weeks. Once your Demat account gets credited, you are free to either sell or transfer your shares at your convenience.

Frequently Asked Questions Expand All

Yes, SEBI has made it mandatory to dematerialize share certificates and convert them into electronic format only after they are converted into electronic format.

Physical form shares are the ones that are held by the shareholders physically in the paper format. All information about the trade is written on a piece of paper known as a physical share certificate, marking the ownership of the shareholder.

Yes, you can dematerialize your share certificate by opening a Demat account and raising a request for dematerialization of shares with your stockbroker. The detailed process is listed above.

You can redeem your paper stock certificate by opening a Demat account and converting your paper stock certificate into an electronic format. You can visit the IIFL Securities website or download the IIFL Markets App from the app store to get started.