Dematerialization and rematerialisation are two important concepts in the world of stock market and investment. In this article, we will explore what these terms mean, the process of dematerialization and rematerialisation, and the benefits and drawbacks of each.
What is Dematerialization?
Dematerialization, also known as demat, is the process of converting physical stock certificates into electronic form. This process enables investors to hold and manage their stocks and securities electronically, eliminating the need for physical certificates. The electronic form of stock certificates is known as a Demat account, which is maintained by a Depository Participant (DP).
In India, the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are the two depositories that offer Demat services to investors. To open a Demat account, investors need to provide their personal and financial details, as well as other required documents, to the DP. The DP then opens the Demat account and the investor can start buying and selling stocks electronically. Investors must open a demat account for dematerialization.
What is Rematerialization?
Rematerialization is the process of converting electronic shares back into physical stock certificates. This process is typically used when an investor wants to receive physical stock certificates instead of holding their shares in electronic form.
To rematerialize their shares, an investor needs to request the DP to convert their electronic shares into physical certificates. The DP will then verify the request, print the certificates and send them to the investor.
Benefits of Dematerialization
Convenience: Dematerialization eliminates the need for physical stock certificates, making it much more convenient for investors to manage their portfolios. Investors can access their Demat accounts online and view their holdings, transactions and other details anytime, anywhere.
Safety: Storing physical stock certificates can be risky as they are vulnerable to loss, theft or damage. Dematerialization eliminates this risk as the electronic form of the certificates is stored in a secure and centralized location, which is regularly monitored and audited.
Faster transactions: Transactions in a Demat account are processed much faster than in a physical stock certificate, as they are carried out electronically. This eliminates the need for physical transfers and reduces the time taken for transactions to be completed.
Cost savings: Dematerialization eliminates the need for physical certificates, which can be expensive to produce and distribute. This results in cost savings for both the company and the investor.
Benefits of Rematerialization
Physical proof of ownership: Physical stock certificates serve as proof of ownership, which can be useful in certain situations. For example, if the electronic system fails, physical certificates can be used to verify ownership.
Legacy considerations: Some investors may prefer to hold physical stock certificates as a symbol of their investments, or as a way of passing their investments on to future generations.
Drawbacks of Dematerialization
Dependence on technology: Dematerialization relies heavily on technology and electronic systems. In the event of a technical failure, investors may not be able to access their Demat accounts, which can be inconvenient.
Increased risk of fraud: While dematerialization reduces the risk of physical loss or theft, it increases the risk of fraud and cybercrime. This is because Demat accounts are maintained electronically, making them vulnerable to hacking and other forms of cybercrime.
Cost: While Demat accounts can result in cost savings for companies and investors, there may be fees associated with opening and maintaining a Demat account.
Drawbacks of Rematerialization
Cost: Rematerialization can be expensive. Investors who choose to convert their electronic securities into paper certificates may be required to pay fees for the process, including printing, postage, and handling fees.
Inconvenience: Rematerialization can also be inconvenient. Investors may have to wait for several weeks or even months to receive their paper certificates. During this time, they may not be able to trade their securities or access the benefits of owning them.
Risk of loss or damage: Paper certificates can be lost, stolen, or damaged, which can result in the loss of the investor’s ownership rights. If a paper certificate is lost or stolen, the investor may need to go through a lengthy and expensive process to obtain a replacement.
Environmental concerns: Rematerialization contributes to the production of more paper, which can have negative environmental impacts. In an era where digitalization is increasingly becoming a trend, rematerialization can be seen as a step backward in terms of sustainability.
Reduced liquidity: The process of rematerialization can make it more difficult for investors to trade their securities quickly. In some cases, investors may need to physically deliver their paper certificates to a broker or transfer agent to complete a transaction, which can be time-consuming and expensive.
Increased risk of fraud: Paper certificates can be easily forged or altered, which can result in fraudulent activities. In contrast, electronic securities are typically more secure and less susceptible to fraud.
Both Dematerialisation and Rematerialisation are the opposite ends of the trading spectrum. It’s a compulsion to have a demat account to trade in the Indian stock market. Hence it’s convenient to make use of a demat account app for trading activities.
