What is meant by Dematerialization of Shares?

Until 1998, the share markets in India were paper-based. The securities were made of paper and during buying and selling process, these papers were exchanged from one individual to another. In 1998, computer-based exchange was used, thereby, almost all shares were converted to electronic forms and electronic transfer of shares was initiated.

In electronic form, the shares were kept in a depository. This form of the depository of shares was named Demat (from dematerialization) form and since then a very high proportion of companies started to use the electronic forms of shares. Nowadays, almost all the share transactions are electronic and the shares are stored in demat form.

Depositories in India

The demat shares are kept primarily in two depositories in India. These are NSDL and CDSL. The trade of securities in India has gained a fully electronic mode and hence almost all shares now are stored in demat mode.

The major features of demat mode of depository and transaction include the following −

Downsizing in Settlement and Other Fees

As the demat form is used with electronic means, the cost of the settlement comes down to a large extent. There is hardly any cost of settling exchanges and it only takes a few clicks of the buttons. Therefore, dematerialization is advantageous for both the investors and the share-issuer.

No Stamp Duty

Stamp duty has nothing to do with the electronic form of trading. Therefore, it also helps fasten the trade and reduce costs at the same time.

Shaping the Share Market

Dematerialization has helped in stock market microstructure too. It enables the stock market to be lean and efficient in the computerized form. The deals are more effective and instantaneous and the information is also available exclusively and within a fraction of seconds.

Increase in Reach

With electronic structure and demat form, the reach of shares has gone to rural areas too. Now, anyone can participate in share trade. So, the breadth and depth of share trading have increased manifolds.

Decrease in Explicit Transaction Costs

In electronic and demat form, the explicit transaction cost has gone down to a large extent. Moreover, the chances of error in measuring demands and supply in the market have become more efficient.

Increase in Turnover

With electronic trading and dematerialization, the total turnover of the market has increased heavily. More and more investors have flocked to the stock markets and the amount of invested money has also increased to a palpable extent.

Conclusion

Dematerialization or the change in form of the shares has helped the investors and companies alike. There is now hardly any need for paper-based transactions and the advantages of electronic trading are known to all.