Functions of DP- Dematerialisation

Functions of DP- Dematerialisation (Part 1)

Definition: Dematerialisation is the process of holding securities in a fungible form, where they do not bear any distinguishable features like distinctive numbers, folio numbers, or certificate numbers.
Importance of ISIN: Each security is identified in the depository system by an International Securities Identification Number (ISIN) and a short name, which is a unique 12-character long identification code.

Key Concept 1: International Securities Identification Number (ISIN)

Definition: ISIN is a unique identification number for each security issued in any of the International Standards Organisation (ISO) member countries, in accordance with the ISIN Standard (ISO 6166).
Components of ISIN: ISIN has three components:
1. A two-letter country code (e.g., IN for India)
2. A nine alphanumeric characters (letter and/or digits) basic number
3. A check digit at the end, computed according to the modulus 10 "Double-Add-Double" method
Allocation of ISIN: Securities issued by the same company, issued at different times or carrying different rights, terms, and conditions are considered different securities for the purpose of allocating ISIN and are allotted distinct ISINs.

Key Concept 2: Dematerialisation Process

Eligible Securities: The following securities are eligible for holding in dematerialised form:
1. Shares, scrips, stocks, bonds, debentures, debenture stock, or other marketable securities of similar nature
2. Units of mutual funds, rights under collective investment schemes, and venture capital funds
3. Commercial paper, certificate of deposit, securitised debt, money market instruments, government securities, and unlisted securities
Prerequisites for Dematerialisation Request:
1. The registered holder of the securities should make the request
2. Securities to be dematerialised must be recognised by the depository as eligible security
3. The company/Issuer should have established connectivity with the depository
4. The holder of securities should have a beneficiary account in the same name as it appears on the security certificates to be dematerialised
5. The request should be made in the prescribed dematerialisation request form
Procedure for Dematerialisation:
1. DP provides dematerialisation request forms (DRF) to their clients
2. The client completes the DRF and submits it to the DP along with the security certificates to be dematerialised
3. The DP checks the DRF for validity, completeness, and correctness
4. The DP enters the dematerialisation request in the DP system and generates a request number (DRN)
5. The DP defaces and mutilates the security certificates before sending them to the Issuer or RTA
6. The DP forwards the DRF and the relevant security certificates to the Issuer or its R&T Agent for dematerialisation

Functions of DP- Dematerialisation (Part 2)

Dematerialisation Process: The dematerialisation process involves the conversion of physical securities into electronic form. The Depository Participant (DP) plays a crucial role in this process by verifying the Demat Request Form (DRF) and ensuring that the securities are valid and eligible for dematerialisation.
Verification of DRF: The DP verifies the DRF for completeness, correctness, and validity. The DP also checks the signature of the client on the DRF and compares it with the specimen signature available in its records.
Submission of DRF: The DP submits the DRF to the Issuer or its Registrar and Transfer (R&T) Agent along with the security certificates. The DP ensures that the certificates are defaced and mutilated to prevent any further use.
Rejection of DRF: The R&T Agent may reject the DRF if it finds any discrepancies or objections. The DP is required to take action to resolve the objections and resubmit the DRF.

Checklist for Investors

Obtain the DRF from the DP with whom they have opened an account
Fill in the DRF in duplicate/triplicate as required by the DP
Fill all the information asked in the DRF since it is mandatory
Fill separate forms for separate ISIN numbers of the company
Fill separate forms for lock-in and free securities
All holders should sign the DRF form, with signatures matching those on the account opening form
The order of the holders should be the same as that in the account opening form
After submitting the certificates, an acknowledgement slip duly signed by the DP should be collected

Checklist for DP

Verify that the client has submitted the securities for dematerialisation along with the DRF
Check that the certificates submitted by the client for dematerialisation belong to the eligible list of securities admitted by the Depository
Verify that the DRF submitted by the client has been filled completely and duly signed
Verify the signature of the client on the form and compare it with the specimen available in its records
Issue an acknowledgement slip duly signed and stamped to the client
Deface the certificates by mentioning "surrendered for dematerialisation"
Enter the request details in the DP system and generate a Dematerialisation Request Number (DRN)
Forward the DRF to the Issuer or its R&T Agent only after ascertaining that the number of certificates annexed with the DRF tallies with the number of certificates mentioned on the DRF

Rejection of DRF

Objections: A demat request can be rejected due to various objections such as physical quantity of shares/certificates received by R&T Agent from DP is less than or more than mentioned in Demat Request Form, fake certificates, lost or stolen certificates, duplicate certificates, forged or fake endorsements, and differences in name(s) of holder(s) or certificate details.
Action to be taken: In case of rejection, the DP/client may contact the R&T Agent for clarification, submit a fresh Demat Request Form, or forward the certificates to the pertinent R&T Agent with a fresh Demat Request Form. The DP/client may also be required to verify the signature of the client on the Demat Request Form or submit a fresh Demat Request Form with the correct particulars.

Functions of DP- Dematerialisation (Part 3)

Dematerialisation Process: The dematerialisation process involves the conversion of physical securities into electronic form. The Depository Participant (DP) plays a crucial role in this process.
Demat Request Form (DRF): The DRF is a critical document in the dematerialisation process. It is used to request the dematerialisation of physical securities.
Rejection of DRF: The R&T Agent may reject the DRF due to various reasons such as:
- Wrong ISIN: Demat request initiated under wrong ISIN.
- Allotment/Call Money Payment Not Attached: Allotment/call money payment advice not attached.
- Security Certificates Not Available for Demat: Security certificates not available for demat.
- Rejected Under Automatic Corporate Action: Rejected under automatic corporate action.
Action to be Taken by DP/Client: In case of rejection, the DP/Client may contact the R&T Agent for clarification, quoting the reference of the objection letter.
Miscellaneous Grounds for Rejection: The DRF may also be rejected on miscellaneous grounds such as:
- Recovery Pending from Client: Recovery pending from client for double or excess payment of dividend/interest.
- Duplicate Interest Warrants Issued: Duplicate interest warrants issued by R&T Agent.
- All/Some Certificates Held Under Different Holding Basis: All/some certificates held under different holding basis.
- All/Some Certificates Sent by DP to Incorrect Address or Office(s) of R&T Agent: All/some certificates sent by DP to incorrect address or office(s) of R&T Agent.
- All/Some Certificates Received by R&T Agent Do Not Relate to ISIN Mentioned in Demat Request Number or Form: All/some certificates received by R&T Agent do not relate to ISIN mentioned in demat request number or form.
Transposition cum Dematerialisation: The depositories have amended their bye-laws to enable investors to transpose names of joint holders along with the process of dematerialisation.
Transmission cum Dematerialisation of Securities: In case of death of one or more joint holders, the surviving joint holder(s) can get the name(s) of the deceased removed from the security certificate(s) and get them dematerialised.
Procedure to be Followed if Physical Securities are Lost in Transit: The DP shall provide proof of dispatch and confirm that the certificates are not returned undelivered at their end. If the certificates are lost in transit, the DP shall execute an Indemnity Bond in favor of the Issuer/RT Agent.
Dematerialisation of Shares Held in More Than Three Names: The DP has to process the dematerialisation request as per usual procedure, ensuring that the main BO name is mentioned as first account holder and the balance joint holders are accommodated in the two joint holders’ names.

Functions of DP- Dematerialisation (Part 4)

Dematerialisation Account: A dematerialisation account should be used only for the purpose of dematerialisation and once all certificates have been dematerialised, such account should be closed and shares transferred to a new account opened in the name of maximum three holders.
Restrictions on Dematerialisation Account: The Client shall not use this account for the purpose of allotments in the primary market or purchases from the secondary market and hence no instructions other than for dematerialisation, bonus, rights & preferential offer will be given by the Client to any person which has the effect of crediting this account.

Enhanced Due Diligence for Dematerialization of Physical Securities

SEBI Regulations: As per the amended SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2018 (LODR), transfer of securities held in physical mode is not permitted since April 01, 2019.
Due Diligence Process: The Depositories and the listed companies / RTAs were directed to implement the following due diligence process:
- Listed companies or their RTAs were advised to provide data of their members holding shares in physical mode to the Depositories.
- Depositories were required to capture the relevant details and put in place systems to validate any dematerialization request received after December 31, 2019.
- In case of mismatch of name on the share certificate(s) vis-à-vis name of the beneficial owner of demat account, the depository system shall generate flag / alert.

Rematerialisation

Definition: Rematerialisation is the reverse of dematerialisation, referring to the process of issuing physical securities in place of the securities held electronically in book-entry form with a depository.
Process: The beneficial owner desiring to receive physical security certificates in place of the electronic holding should make a request to the Issuer or its R&T Agent through his DP in the prescribed Rematerialisation Request Form (RRF).
Prerequisites:
- The beneficial owners of the securities should make the request.
- There should be sufficient free /lock-in balance of securities available in the beneficiary account to honour the Rematerialisation request.
Rematerialisation Request Form (RRF): The DP should provide RRF to clients, which should be completed in all respects and submitted to the DP.

Conversion of Mutual Fund units

De-statementization: De-statementization is the process that enables beneficial owners to convert their mutual fund units represented by Statement of Account (SoA) in physical form to electronic form and hold the same in their demat account.
Process:
- Beneficial owners desirous of converting their Mutual Fund units represented by Statement of Account (SoA) into electronic form shall approach their DP for the same.
- The DP shall hand over a Mutual Fund De-statementization Request Form (MF-DRF) to the BO.
- The BO shall submit separate MF-DRF for each account and for each RTA.
- The DP shall ensure that MF units contained in the SoA are admitted with Depository and are eligible for conversion into electronic form.

Functions of DP- Dematerialisation (Part 5)

Dematerialisation Process: The DP receives physical documents from the Beneficial Owner (BO) and sends them to the Asset Management Company (AMC) / Registrar and Transfer Agent (RTA) within 7 days.
Verification: The AMC/RTA compares the physical documents with the electronic data and credits the BO's account with Mutual Fund (MF) units if the details match.
Destatementization: The process of converting electronic holdings of MF units into physical form, i.e., Statement of Account (SoA) / certificates, at the request of the BO.
Restatementization Request: The BO submits a Restatementization Request Form to the DP, which is then sent to the AMC/RTA for processing.
Reconversion of MF Units: The AMC/RTA converts the electronic holdings of MF units into physical form and sends the SoA / certificates to the BO.
Credit of Units of AIFs: The Securities and Exchange Board of India (SEBI) has specified that units of Alternative Investment Funds (AIFs) must be held in dematerialized form, and the credit of units is done through a separate demat account called the "Aggregate Escrow Demat Account".
Off-market Transfer and Pledge Creation: The off-market transfer and pledge creation of AIF units in dematerialized form require the approval of Investment Managers (IMs).

Key Concepts:

Dematerialisation: The process of converting physical securities into electronic form.
Destatementization: The process of converting electronic holdings of MF units into physical form.
Restatementization: The process of converting electronic holdings of MF units into physical form at the request of the BO.
AIFs: Alternative Investment Funds, which must hold units in dematerialized form as per SEBI regulations.
Aggregate Escrow Demat Account: A separate demat account used to hold demat units of AIFs on behalf of investors who have not provided their demat account details.

Review Questions:

Answer: (a) ISIN
Answer: (b) Registered holder of the security
Answer: (b) True
Answer: (b) 30 days