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Demat matters

P Mehta

A couple of years ago, when I happened to meet my friend Chirag Shah he was worried. With his hard earned money he bought some shares of his dream company Reliance India Ltd. However, when he lodged it for transfer he was in for a rude shock.

After 15 days he received a letter from Reliance saying that the shares could not be transferred in his name as the certificates were fake. Chirag who had little knowledge about shares, informed his broker Haribhai about the fake certificate. While Haribhai vowed to replace the shares back, what he could not promise was how long it would take. Though Chirag had paid for the shares, he did not own them. Meanwhile, the Sensex fell and with it the share price of Reliance also. Chirag wanted to sell his shares but he could not do so because he did not posess the shares. For no fault of his, he was the loser.

Rakesh Sharma, a software engineer by profession, knew that Infosys would make high profits in the software business. He knew that the share price of Infosys would go up. He wanted to buy the share. However, when he contacted his broker he was told that he would have to buy a minimum of 100 shares. At a price of Rs.2,000 this would cost him Rs.2 lakh. Since he did not have that amount he lost an opportunity to buy the share and consequently lost out on the bull run. Today the same share is going at Rs.8,000.

This week when I met them after a couple of years both of them were much more happier -- courtesy the depository. Today Rakesh can buy even a single share of Infosys, while Chirag does not have to worry about the authenticity of the share certificates. He receives them in electronic form in his depository account.

So what is a depository and what is dematerialisation all about? What is the reason for Chirag and Rakesh to be happy about?

The process of buying or selling shares through a recognised broker of a stock exchange is even now the same. What has changed is that post-transaction work has become much simpler.

The depository is a system that eliminates this voluminous and cumbersome paperwork involved while buying and selling shares. The depository enables the conversion of physical securities in electronic form through a process of dematerialisation (in short it is referred to as demat) of share certificates. Thus it facilitates share transactions and transfers electronically without involving physical share certificates or transfer deed. If after getting his shares dematerialised the investor wants his shares back in physical form, he can get it back by a process called as rematerialisation.

The depository system consists of the depository participants (DP), companies (or their registrars) and the investor. Currently in India there are two depositories namely the National Securities Depository Ltd (NSDL) and the Central Securities Depository Ltd (CSDL).

Put simply a depository is similar to a bank. In order to utilise the services of a bank an investor opens a bank account. Just like one holds funds in a bank account, he holds shares in a depository account. In a bank one can transfer funds between various accounts without actually handling money. In a depository he transfers shares without actually selling them.

A Depository Participant (DP) is the first point of contact with the investor and serves as a link between the investor and the company through the NSDL or CSDL for dematerialisation of shares. A depository participant could be a financial institution (like ICICI), bank (HDFC Bank, Global Trust Bank), custodian (Stock Holding Corporation) or a broker (Action Financial).

The first step for a investor would be to approach a DP of his choice and open an account just like one does with a bank. The account would have to be opened in the same order as the shares are held. There is no restriction on the number of depository accounts an individual can open.

After that in case he wants to get his physical shares dematerialised he can surrender these shares to the DP who then confirms the details with the concerned company. If everything is found in place the shares are dematerialised and credited to the investors account. The whole process may take somewhere close to 40 days. Just as a bank gives a statement that keeps records of all transactions made, the DP gives a statement for every buying or selling transaction done.

After the physical shares have been converted into electronic shares the modus operandi is simple. When an investor sells shares, he instructs his DP to debit his account with those shares. Similarly when he buys shares through his broker, the DP credits his account with those shares. In case a company comes out with a bonus issue or a rights issue, the investor has nothing to worry about, as these shares will directly come into his depository account. However, if he wants the shares in physical form he can request the company to do so.

Why go for a depository?

According to leading players in the stock markets, in two years time more than 90 per cent of shares will be traded in the depository mode. The benefits of a depository are obvious. As soon as you buy shares, it takes merely a day's time to become the owner. One does not have to send shares to the company for transfer. Thus there is no possibility of fake shares or loss of shares.

Another reason for investors to go in for a depository is the fact that as time passes, brokers will be reluctant to deal with physical shares. This is because brokers are exposed to the risk of bad deliveries (bad deliveries are those share certificates which the registrar cannot transfer because of some problem of the transfer deed such as mismatch of signature or outdated/invalid transfer deed). It may take upto a year for a broker to discover the risk. In case of a depository the only risk will be that the investor does not own the shares which he has sold. However, this will be known within 10-15 days. Hence the broker would prefer to deal in securities in the depository mode.

Today there are as many as 533 companies where the investor can buy and sell dematerialised shares. Similarly there are 109 DP participants who have as many as 1191 service centres across the country.An investor could look at some of these parameters before choosing his depository participant

1. Convenience as far as location is concerned so that a investor can operate his account irrespective of his location. Stock Holding Corporation has around 70 branches of its own and a equal number of franchisees.
2. Telephonic service: There should be a special cell, which answers all investor-related query immediately on the phone itself.
3. No hidden costs: Some banks insist on the individual opening a savings account with the bank wherein he would have to maintain a minimum deposit of Rs.5,000. Some other foreign banks have a minimum transaction cost of Rs.50.
4. A player for whom a depository is a core business should be preferred unlike a player for whom it is a mere add-on business.

Though opening a depository account involves a small cost, the benefits are but obvious.

The Best Depositories

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