Chapter 7: Functions of DP - Dematerialisation

Dematerialisation (Demat) is the statutory and operational process by which physical paper-based securities certificates (such as equity share certificates, debenture certificates, or government security bonds) held by an investor are surrendered to the issuer company, cancelled and destroyed, and substituted by an equivalent number of electronic securities credited into the investor's demat account.

DEMATERIALISATION WORKFLOW (DRN LIFECYCLE)

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The dematerialisation process is governed by strict statutory rules under the SEBI (Depositories and Participants) Regulations, 2018:

Step 1: Submission by Investor

• The investor fills and executes a Demat Request Form (DRF) in duplicate. A separate DRF must be submitted for each unique International Securities Identification Number (ISIN).
• If certificates are locked-in (e.g., promoter quota, ESOP vesting lock-in), separate DRFs must be submitted for locked-in and free (unlocked) shares.
• The physical share certificates are enclosed along with the DRF and handed over to the DP.

Step 2: Verification and Defacing by the DP

• The DP verifies that the name and order of holders on the share certificates match exactly with the names and order of holders on the demat account.
• The DP defaces each physical certificate by stamping or perforating across the face: "Surrendered for Dematerialisation". This prevents fraudulent reuse or theft during postal transit.
• The DP enters the request into the depository software (DPM in NSDL or CDAS in CDSL), generating an electronic Demat Request Number (DRN).
• The DP stamps the DRN on the DRF and hands over the client acknowledgment copy.
• The DP dispatches the physical certificates along with the system-generated DRF to the Issuer/RTA within 7 calendar days of receiving them from the client.

Step 3: Verification and Electronic Confirmation by RTA

• Upon receiving the physical package, the RTA matches the DRN and certificate numbers against its internal database and the physical register of members.
• The RTA checks for signature consistency, certificate authenticity, valid distinctive numbers, and absence of stop-transfer orders or court attachments.
• If everything is in order, the RTA accepts the request in its depository terminal and electronically confirms the DRN to the depository within 15 days of receiving the physical certificates.

Step 4: Electronic Credit of Securities

• Upon receiving electronic confirmation from the RTA, the depository immediately debits the "General Demat Account" of the company and credits the exact quantity of electronic shares into the beneficial owner's demat account.
• The overall process—from initial submission of the DRF to electronic credit in the demat account—must be completed within a statutory maximum of 21 calendar days.

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A demat request may be rejected by the DP or the RTA due to procedural, legal, or documentation flaws:

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1. Transposition cum Dematerialisation

When physical certificates are held jointly by two or more individuals (e.g., Ramesh and Suresh) but their demat account is structured in a reverse order (Suresh and Ramesh):

• Under legacy rules, investors were forced to open a new demat account matching the exact certificate order.
• Under the modern Transposition cum Demat facility, the investors submit a Transposition Request Form (TRF) along with the DRF.
• The RTA transposes the names to match the demat account structure during the dematerialisation process itself, eliminating the requirement to open multiple demat accounts.

2. Transmission cum Dematerialisation

If a joint shareholder has passed away while holding physical certificates, the surviving holder(s) can submit a Transmission Request Form along with the DRF and a certified copy of the death certificate:

• The RTA deletes the deceased holder's name from company records and dematerialises the securities directly into the demat account of the surviving holder(s).

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Under Section 14 of the Depositories Act, 1996, every beneficial owner retains the statutory right to convert their electronic holdings back into physical paper certificates. This reverse process is termed Rematerialisation (Remat).

REMATERIALISATION WORKFLOW (RRN LIFECYCLE)

Statutory Timelines for Rematerialisation:

• The DP must enter the request into the system and dispatch the physical RRF to the RTA within 7 calendar days.
• The Issuer/RTA must print the physical certificates, sign them, enter the investor's name in the physical register of members, and dispatch the certificates to the investor within a maximum of 30 calendar days from the date of receiving the electronic remat instruction.

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Investors holding mutual fund units directly through Asset Management Companies (AMCs) in Statement of Account (SOA) form can convert them into electronic demat holdings to consolidate their portfolio under a single depository view:

MUTUAL FUND SOA TO DEMAT CONVERSION

1. The Conversion Workflow (SOA to Demat)

1. Submission of CRF: The investor fills a Conversion Request Form (CRF) specifying the mutual fund scheme name, ISIN, folio number, and the number of units (or 'ALL' units) to be converted.
2. Verification by DP: The DP verifies that the primary and joint holder names and tax status on the mutual fund folio match the demat account records.
3. CRN Generation: The DP generates a Conversion Request Number (CRN) in the depository system and forwards the request to the mutual fund RTA (e.g., CAMS, KFintech).
4. Electronic Confirmation: The RTA verifies unit balances, marks the folio as dematerialised, and electronically confirms the CRN to the depository within seven calendar days. The depository immediately credits the units to the investor's demat account.

2. The Re-Conversion Workflow (Demat to SOA)

If an investor subsequently wishes to shift mutual fund units back into physical Statement of Account form:

1. The investor submits a Re-Conversion Request Form (RRF-MF) to the DP.
2. The DP verifies the unencumbered balance and generates a Re-conversion Request Number in the depository system, which locks the units.
3. The RTA confirms the request, updates its registry to issue an electronic Statement of Account (SOA), and the depository cancels the demat units.

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To eliminate counterfeit securities, tax evasion, and unaccounted corporate share transfers, the Ministry of Corporate Affairs (MCA) enacted far-reaching statutory amendments:

• Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014: Mandated that every unlisted public company must issue securities only in dematerialised form and facilitate dematerialisation of all its existing securities.
• Mandatory Demat for Large Private Companies: MCA extended the mandatory dematerialisation regime to non-small private companies, requiring them to obtain ISINs from NSDL and CDSL and ensure that promoters, directors, and major shareholders hold their entire equity and debenture capital in dematerialised form.
• Restriction on Securities Transfers: Investors holding physical share certificates in listed or mandated unlisted entities are statutorily prohibited from transferring their shares off-market or participating in corporate buybacks and open offers without first dematerialising their holdings.