Important Update: This article on Compulsory Dematerialization of Shares was published on 3 Dec 2018, and same evening the government postponed the date to 1 April 2019. Hence the date 5 Dec 2018 (Earlier Deadline) must be read as 31 March 2019.
Compulsory DEMATERIALIZATION of SHARES is a very old and long asked initiative to make the securities market more efficient and save cost. Finally 1 April 2019 onwards the Government through SEBI has made the transaction of shares in compulsory demat form only. Let’s see this change in details, know its implication and answer some myths around it.
SEBI has amended Regulation 40 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. It says the transfer of securities shall not be processed unless the securities are held in the dematerialized form with a depository with effect from December 5, 2018.
Shares, once upon a time were in form of a paper certificate. When you applied for it in an IPO, one used to receive this by post. It contains the name & details of the holder, companies information issuing the share and most importantly the number of shares held by the investor and their distinctive number.
After the introduction of electronic trading, the two depository NSDL & CDSL gave the facility to convert the shares in DEMAT or ELECTRONIC form. So they could be electronically be transferred from one demat to another electronically, similar to how your transfer funds in bank accounts.
But still, many investors are holding paper certificates or physical shares. The physical shares transfer can be done from one person to another by filling a transfer form (deed) and depositing duty.
But from 5 Dec 2018, the shares will not be transferred if you have them in physical form. Compulsory Dematerialization of Shares has to be done before any transfer.
Compulsory Dematerialization of Shares
This decision has invited or generated a lot of myths too. Let’s try to answer them:
Myth 1: The value of physical shares will become ZERO post 5 Dec 2018
Reality: the share value will be the same as that of its market price. Only thing is it cannot be traded without, dematerializing it. It cannot be transferred to another person. It needs to be DEMATERIALISE first then it can be sold.
Myth 2: It is illegal to hold physical share or certificates
Reality: There is no problem in holding physical share. You can keep any number of shares in paper form. But as discussed it can be traded after dematerializing it.
Myth 3: Apart from shares, if I have Debt Securities or infrastructure bonds or other company bonds, they also need to be dematerialized before 5 Dec 2018.
Reality: Apart from shares, bonds and other debt securities can be held and traded in physical form.
Myth 4: What if I get or discover physical shares in future that I don’t know they exist today.
Reality: No problem. When you discover them in the future & if they are in your name, you can dematerialize them and trade or hold.
Myth 5: What if receive physical shares accidentally like inheritance? What if they are not in my name?
Reality: SEBI has made this also clear that shares received in future by way of inheritance or death of family head, will be dealt as per current rules of succession. This means in case of nomination they will be transferred to the nominee. In absence of nominee, the title will be decided as mentioned in the will or by way of succession certificate.
Myth 6: Can we get the name of holder interchanged after 5 Dec 2018?
Reality: These are called transposition cases and will continue even after 5 Dec 2018 deadline.
What should you do?
First thing, if you have physical shares get them dematerialized. 5 Dec is the deadline for initiating the transfer. It is not a deadline for scrapping physical shares. So for convenience & ensuring liquidity, dematerialize the shares. You may contact your DP to help you obtain & fill the form.
Second thing, if you have other securities like bonds etc, it is better to DEMAT them too. It saves time and efforts of recordkeeping.
Third, in future only apply for securities in DEMAT form only. Major new securities like NCDs etc are now available in DEMAT forms. It is better for you and survivors to have them in demat form in your demat account with the correct nomination.
Lastly, try converting all your securities in DEMAT/electronic form. Insurance policies are available in electronic form now through Insurance Repository. For MFs, you may opt for DEMAT units but then the buying & selling becomes difficult. So you can opt for CAS (Consolidated Account Statement) from NSDL to keep a record in electronic form.
Hope this article clear your doubts on compulsory dematerialization of shares from Dec 2018. There is no need to panic as smooth transition will benefit the investor as well as the other stakeholder like regulator or your share brokers.
Update 3 Dec 2013: NSDL issued an FAQ regarding this topic. Link Here
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The worst part of the order is even unlisted shares have to be dematted. Many unlisted companies do not have demat option putting investors at risk. The Government/sebi should have asked all companies to have demat facility
The deadline to demat has been extended up to 1 April 2019, please edit your post
Right!… irony that post got published on 2nd Dec and 3 Dec evening, the deadline gets postponed. I have updated the post. Thanks for patronage Sir!