Dematerialisation and Rematerialisation of Securities in India with reference to the Depositories Act 1996

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Introduction
Before the enactment of Depositories Act, 1996, in Indian security market transaction of securities i.e. allotment of securities and transfer of securities was based on paper based ownership. Movement of securities was possible only in physical form which resulted in delay in settlement and transfer of securities.  Some time it led to bad delivery, theft, forgery etc.  As a result investor was deprived liquidity in security. It was a major drawback of the Indian Securities market.
To pave the way for smooth and free transfer of securities a law was needed for depositories. This Act was enacted to ensure the transferability of securities with speed, accuracy and security. It gives the option to an investor to choose holding of securities in physical form or hold the securities in a dematerialised from a depository.

Parties to Dematerialisation of Securities
Dematerialisation of Securities means conversion of physical securities certificates into digital form.Under the depository system depositories provide for maintenance of ownership records in a book entry form through Depositories Participants.To understand the process of Dematerialisation of Securities one should know  the meaning of Depositories, Depositories Participant, Issuer, Beneficial Owner, Registered Owner and their role under the depositories Act, 1996. A “depository” means a company formed and registered under the companies Act and approved by SEBI by getting a certificate of registration. A Depository provides services for recording of allotment of securities or transfer of ownership of securities in the record of a depository. Therefore a depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry form through Depositories participant. At present mainly two depositories NSDL, CSDL are working in India.
Depository participant means a person registered under SEBI Act as “Depository participant” (DPs) to act as representative or agent of depository system. DPs work as intermediary between Depository and Investor (Beneficial owner of securities). It maintains the investor’s securities account balance and intimate to him the status of his credit and debit of his securities. An Investor can open the accounts with one or more DPs when a person buys any securities which has depository node. The buyer will become owner of the said security in the depository within a day of settlement being completed. The buyer is not required to apply to the company for registering the security in his name.  According to SEBI guidelines Financial Institution, Bank Custodian, Stock Brokers etc. can become DP of depository.  First Largest DP in India is Stocking Holding Corporation of India Limited (SHCIL) registered with NSDL.
 “Beneficial Owner” means a person whose name is recorded as such with a depository. “Issuer” means any person making an issue of securities. Generally a legal person or company issues the securities to generate fund from the public. Depository is registered in the record of issuer or company as “registered owner”.

Procedure of Dematerialisation of Securities
Every person subscribing to securities offered by an issuer shall have an option either to receive the security certificate or hold securities with a depository. Where a person opts to hold a security with a depository, the issuer shall intimate such depository the details of allotment of security and the depository, on receipt of such intimation, shall enter the name of the allottee in its record as beneficial owner of that security.  

For Dematerialisation of Securities, a depository shall enter into an agreement with one or more DPs as its agent.  Any Investor, who wishes to seek services of a depository, may enter into an agreement with any depository through a DP. Investor shall surrender the certificates of securities for dematerialisation of securities to issuer.  For this Investor shall submit dematerialisation Request Form (DRF) along with the certificate to DP. DP shall transmit DRF electronically to the Depository and send the physical DRF and securities certificates to Company (Issuer). Depository shall intimate the Company about such DRF. Company shall check the authenticity of request and confirm to Depository. Depository shall confirm dematerialisation of securities and request to DP to intimate the Investor. DP shall intimate that Investor’s account is credited with DP. DP shall send the statements of transaction to the investor. Every depository shall register the transfer of securities in the name of transferee on the intimation of DP.

Procedure of Rematerialisation of Securities
Rematerialisation of Securities means conversion of electronic shares into physical share certificate.If any beneficial owner does not want to continue with dematerialisation of securities or seeks to opt out of a depository he shall inform the DP accordingly. For Rematerialisation of Securitiesbeneficial owner shall submit Rematerialisation Request Form (RRF) to DP. DP shall intimate the Depository of such request electronically. Depository shall confirm the RRF to company (Issuer). Company shall update its account and print securities certificate and confirm depository. Depository shall update the account and send the details to DP. DP shall send the intimation to its client about rematerialsation of securities.  Company (issuer) shall dispatch the certificate to the holders thereof.

Advantage of Dematerialisation of Securities
Dematerialisation of Securities eliminates the risk of “bad delivery” means there will be no risk of stealing, risk of theft , risk of forgery, risk of duplicacy because it is in Dmat form, and very easy to debit and credit security. There is no risk or insecurity in holding the security.  Faster delivery, no need of stamp duty in digital form required. No transfer deed required- immediate and instant transfer of securities is possible. Faster credit of non-cash corporate benefit- e.g. bonus share etc. Reduction in high volume of paper documents, safe custody possible (no loss, no tear, no steal). All parties can enjoy the benefit of Dematerialisation of Securities.

Conclusion
As per Depositories Act after dematerialsation of securities, depository shall be registered owner only for the purpose of effecting transfer of ownership of security on behalf of a beneficial owner. Depository will not have any voting right of shareholder or member of a company in respect of securities held by it. Only beneficial owner shall be entitled to all rights and benefits and be subject to liabilities in respect of securities held by a depository.

Reference
1.       The  Depositories Act, 1996
2.       The of SEBI Act, 1992
3.       The  SCR Act, 1956

Prof. (Dr.) Pallavi Gupta, Profeesor & Head, JEMTEC School of Law, Greater noida






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