From certificate to entry
For most of the market's history a share was a printed certificate with a distinctive number, held in a folio in the company's register. Transferring it meant signing a transfer deed, posting the certificate, and waiting for the company's registrar to record the change, with forgery, loss and delay along the way.
Dematerialisation is the process of converting securities held in physical form into holdings in book-entry, electronic form. The investor opens an account with a depository through a depository participant, surrenders the certificates, and the holding is credited to the account. From then on the holding is a balance, not a document.
In demat form one investor's shares are not distinguished from another investor's. The shares carry no distinctive number, no folio number and no certificate number. Ten shares of a company are simply ten shares, interchangeable with any other ten, which is exactly what makes them settle electronically without paperwork.
The company's side of the bargain
SEBI's regulations require a company making a public issue of shares to enter into an agreement with all the depositories to dematerialise its shares, so that investors can be offered the option of holding them in dematerialised form. Combined with the primary market rule that IPO shares must be offered in demat, the effect is that new public issues arrive electronic from the first day.
The requirement is an agreement with all the depositories, which in India means both CDSL and NSDL. An option that lets a company choose a single depository for its public issue is wrong.
And back again
Rematerialisation is the reverse process: converting securities held electronically into physical form. It happens on the investor's request. The securities are then allotted as physical certificates with distinctive numbers, in place of the book-entry holding with the depository.
An elderly investor without a demat account inherits shares from a relative who held them electronically. Rather than open and maintain an account, the family may ask for the holding to be rematerialised into certificates in the heir's name. It is rare, and the direction of travel in the market is firmly the other way, but the process exists and the exam knows it.
- Dematerialisation converts physical securities into book-entry (electronic) holdings with a depository, held through a depository participant.
- In demat form one investor's shares are indistinguishable from another's; there are no distinctive numbers, folio numbers or certificate numbers.
- SEBI's regulations require a company making a public issue to enter into agreements with all depositories so investors can hold the shares in demat form.
- Rematerialisation is the reverse: on the investor's request, electronic holdings are reissued as physical certificates with distinctive numbers.