Before 1996, companies in India used to issue shares certificates in physical form. Indian stock markets used to face umpteen problems like delay in the transfer of certificates, forgery of certificates, etc. The establishment of depositories in India and the dematerialization of shares helped in overcoming these problems an also reduced the transaction time as compared to the physical segment.

To enable electronic settlements of all the trades a Demat account is required. This account functions like any bank account. When you deposit money in a bank, respective entries are made the in bank passbook. Similarly, securities (shares) are also held in electronic form and are debited or credited accordingly. Demat account can be opened with practically no balance in your account.

The trading of shares held in the Demat account began on NSE in 1996. It saw the beginning of a paperless trading stock market environment in India. A share purchased today gets credited to the investor's account in two days.

A Depository Participant (DP) acts as the representative of the depository. Sharekhan is a Depository Participant.

For converting the physical shares into a digital form, an investor will have to open an account with any of the depository participants. On opening the account, an account number (client ID) will be allotted. The client ID along with the DP ID gives the investor a unique identification in the depository system. An investor can open any number of depository accounts.

The physical certificates held by the investor has to be surrendered to the depository participant with whom he /she has opened the account. The certificates will then be sent to the company that issued the share certificate where after dematerialization, they will be canceled and the same will be credited to the investors Demat account with the DP.

The securities (shares) on dematerialization can be seen as balances in the depository account. It is possible to transfer these balances like the shares held in physical form. Dematerialized shares do not have any distinctive certificate numbers. The shares in the Demat account can be converted into physical form at any time. This is called as rematerialization.

Advantages of dematerialization

* Risk due to loss on account of fire, theft, or mutilation is eliminated.

* Chance of bad delivery at the time of selling shares is eliminated as there is no signature mismatch.

* Lower transaction costs than that in the physical segment.

* The bonus /rights issue of shares allotted to the investor will be automatically credited into the Demat account of the investor.

* Sale or purchase, transfer/transmission, etc. are affected in a much simpler and faster way.

Safety to the investor

* SEBI = Securities Exchange Board of India has mandated certain rules and regulations for a depository participant to get registered. A DP will be registered under SEBI only after independent evaluation and recommendation by the Depository and SEBI.

* The account of the investor will be credited or debited by the DP based only on valid instruction from the client.

* Mandatory reconciliation between the DP and NSDL is system driven.

* The depository conducts regular inspections of DP and R&T agents.

* The exchange of data between depository and its business partners is protected by standard protection measures such as encryption.

* There are no direct communication links between two business partners and all communications are routed through the depository.

* Investors receive a statement of account periodically from the depository.

* The investor has the right to approach the depository if the grievances of the investors are not resolved by the concerned DP.