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Ask Mint | Demat accounts: making physical shares disappear

Ask Mint | Demat accounts: making physical shares disappear
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First Published: Sun, Nov 11 2007. 11 59 PM IST

Updated: Sun, Nov 11 2007. 11 59 PM IST
Opening a demat account could be as simple as buying a doormat for your house. But to some,opening a demat account may seem like crossing a big hurdle. Many questions crop up in their minds. Our friend Johnny also has some doubts. Let’s see how Jinny answers him.
Johnny: I used to like the smell of physical share certificates. But it has become difficult to spot them now. I wonder where they have disappeared. Is it the outcome of some sort of magic spell?
Jinny: Nothing to wonder about, actually. All your physical shares have got dematerialized. But this is not a magic scene out of a Harry Potter sequel. Dematerialization of shares has a different connotation from dematerialization of a witch.
In dematerialization of shares, your physical shares are converted into an equivalent number of securities in electronic form, and the value of your holding is credited into your demat account. It is just like a bank—taking your physical money as a deposit and crediting the value of the same in your passbook. You remain the beneficial owner of your shares in demat account for all practical purposes. But your depository becomes the registered owner.
Johnny: Registered owner? Beneficial owner? Depository? There are many questions in my mind but, right now, I will ask only one. Tell me, how does the concept of registered owner and beneficial owner actually work?
Jinny: You should not be confused about the concept of a registered owner and a beneficial owner. Its working is fairly simple.
If you want to avail of the services of a depository, you have to open an account with a depository, through a depository participant (DP). Before you get confused between depository and DP, I want to tell you that a depository is someone who acts like a record-keeper of your shares.
First, it converts all your physical shares into electronic form and credits the value of these in your demat account. Then, it maintains a record of all incoming and outgoing shares of your account in the electronic form.
However, you do not directly interact with a depository. All your interactions take place through DPs, who act as an agent or branch of a depository. After opening the account, you have to surrender your physical share certificates through your DP to the issuer company, which will cancel the physical share certificates and enter the name of the depository as a registered owner in its record. The depository, on its part, will enter your name as a beneficial owner in its record. All the rights and liabilities of a shareholder, such as voting rights, dividends and so on, remain with the beneficial owner.
Entering the depository’s name as a registered owner in the books of the company makes record keeping easy. Suppose you sell your shares of Reliance Industries Ltd to me. For effecting the transfer, your depository will simply substitute my name in your place as the beneficial owner of the shares. There is no need to make any change in the records of the company, where the depository will continue to be the registered owner.
Johnny: Holding a physical share certificate has its own benefit. In moments of loneliness, you can hold it, touch it, or even smell it. What are the benefits of holding shares in demat form?
Jinny: Well, too much handling can tear your securities, making their transfer difficult. Holding securities in demat form eliminates many of the risks, such as bad delivery, fake securities and so on, that are associated with physical shares. Demat shares can be transferred immediately without any stamp duty, with less paperwork and at a lower cost. You can trade on the electronic platform of the stock exchanges and settle your trade through your demat account electronically. You can also easily pledge your demat shares to take loans from banks. What more do you want?
However, you are free to keep your shares in physical form. There is no legal compulsion to convert your shares to demat form. In fact, you have the option to request for reconverting your demat shares into physical shares. The choice is always yours.
Johnny: I think you have counted enough benefits. Now tell me, how can I open a demat account?
Jinny: You can approach any of the DPs for opening an account. You have to submit proof of identity and proof of address. Production of a permanent account number card has also been made mandatory from 1 April 2006. After completing all the formalities, the DP allots you a Beneficiary Owner Identification Number.
The schedule of charges for operating the account is provided at the time of opening the account itself. The Securities and Exchange Board of India has rationalized the cost structure for dematerialization by removing account-opening charges, transaction charges for credit of securities and custody charges.
Before opening the account, you should find out about the charges levied by different DPs by examining the comparative charts available at depositories’ websites. It takes only a few simple steps to get a demat account.
Johnny: A small step for you is a huge jump for Johnny.
What: Dematerialization means conversion of physical sharesinto electronic form.
Who: Depositories act as the registered owner of the demat shares; however, beneficial ownership remains with theactual owner.
Why: Keeping shares in demat form has many advantages such as easy transferability, less paperwork and lower costs.
With whom: Demat accounts can be opened with any Depository Participant, who acts as an agent of the depositories.
Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to both of them at realsimple@livemint.com
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First Published: Sun, Nov 11 2007. 11 59 PM IST