Introduction
In the context of trading, you might have been asked to open a demat account to start trading in stocks. Demat is short for dematerialisation and it refers to the process of converting physical financial instruments into electronic form. In this blog let’s discuss dematerialisation and rematerialisation in detail and understand the key differences between the two aspects.
Dematerialisation
Dematerialisation involves converting physical documents of financial instruments, such as shares, securities and mutual fund units into their electronic versions. This allows these instruments to be stored and transferred digitally, removing the hassle of handling physical certificates.
Process
1. Opening a Demat Account
The DP, with whom the investor has opened a demat account with, acts as an intermediary between the two parties.
2. Submission of Certificates
The DP receives the physical certificates submitted by the investor along with a Dematerialization Request Form, or DRF.
3. Verification
The DRF and the documents are transferred by the DP to the relevant organization or its registrar to be verified.
4. Conversion
After the verification is done, the organization instructs the DP to carry out the conversion process of the instruments to electronic form.
5. Credit to Demat Account
Finally, the converted securities are added to the investor’s open demat account for online trade and storage.
Rematerialisation
In rematerialisation, the conversion happens the other way around. Electronic instruments are converted into physical certificates when they are rematerialised. This could happen for many reasons. The regulations may require this conversion or perhaps it is a personal preference of the investor. There could also be an external requirement for physical certificates by entities that only accept them.
Process
1. Request for Rematerialisation
A request has to be submitted properly by the investor to the DP. This will be called an RRF, or Rematerialisation Request Form.
2. Verification
The submitted form then gets duly verified by the DP and then post verification gets forwarded to the depository.
3. Approval
The depository after receiving the forwarded form, processes the request. And on completion of the process it informs the issuing company or its registrar, to proceed.
4. Issuance of Certificates
Upon receiving the approval of the depository, the organization goes ahead to issue physical certificates and sends the same to the investor.
Key Differences
1. Purpose
Dematerialisation: Conversion of physical documents into electronic form for easy and secure trading.
Rematerialisation: Conversion of electronic securities back into physical documents, often for regulatory or personal reasons.
2. Process Flow
Dematerialisation: Includes submission of physical documents which get converted to electronic form.
Rematerialisation: Includes submission of a request for conversion of electronic securities back into physical form.
3. Usage
Dematerialisation: An inherent part of modern trading, to facilitate speed, security, and convenience.
Rematerialisation: Useful during specific circumstances where preferences require physical certificates.
4. Ease and Speed
Dematerialisation: Usually faster and more direct, in tune with digital trading practices.
Rematerialisation: Takes time and is more cumbersome because of the need for issuance of physical documents.
5. Security and Risk
Dematerialisation: Risk associated with physical certificates is reduced and therefore threats such as loss, theft, or damage are eliminated.
Rematerialisation: Brings back the risks eliminated by the dematerialisation process.
Conclusion
Dematerialisation and rematerialisation are both important aspects to be known for any trader. Understanding the provision associated with requesting physical documents later in the course of online trading is important in cases where the trader is required to produce them.
Similarly the understanding of dematerialisation is also crucial since the whole process would not make sense otherwise. As with most topics that form part of the trading journey, these two terms also need to be in your vocabulary.