#Demat of physical shares

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HOW TO CONVERT PHYSICAL SHARES TO DEMAT FORM?

There was once a time when the Indian Share Market followed the open outcry system where the investors had to make themselves physically present in order to carry out the buying and selling of shares. In that era, everything used to be on papers and the trading of shares could only be done in physical form i.e., with the help of the physical share certificate which was used as a proof of ownership of physically transferred shares.

With our ever-evolving technology, this process of physical trading of shares became out-dated and redundant. Gradually, this process got overshadowed by the new trends of online trading and got replaced by the technology-backed trading platforms. Now the Indian stock market has evolved to offer better features and ease of trading through online platforms.

Now, as per the new regulations laid down by the governing board i.e., Securities and Exchange Board of India (SEBI) has made it mandatory for the investors to convert their shares and securities in Demat form in order to continue investing, buying or selling of shares. These reforms in the stock market have taken place in order to ensure a smooth and efficient way of trading with the shares viz-a-viz has made it easy for the authorities to maintain a true account of all the transfers of shares.

However, not everyone holds a Demat Account. Some people are still the owners of physical shares. As it is compulsory for all the investors to hold shares in Demat form in order to continue investing and trading, the shift in trends has raised a question that “How can the investors convert their physical shares into Demat form?”.

To understand the process of Conversion/Dematerialization of Shares better, we should first take look at some important terms:

    DEMATERIALIZATION

Dematerialization refers to a process by which physical share certificates of a particular company are converted into an electronic format.

    DEMAT ACCOUNT

When physical shares are converted into Demat form, then they are held in electronic form. In order to hold them in electronic form, there is a requirement to open a depository account, i.e. called as a Demat Account.

    DEPOSITORY PARTICIPANT

A depository participant (DP) is an agent of the depository through which the Demat Account is made, maintained and operated. A DP acts as a middle-men between the account holder and the depository. Any financial service provider, like banks, state financial corporations, stock-brokers, NBFC, etc., can get themselves registered as a DP.

    DEPOSITORY

A depository in an entity that holds securities like shares, debentures, bonds, government securities, mutual fund units etc. of the investors in electronic form on behalf of the investors or security holders. For instance, in India, there are two depositories named National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Ltd. (CSDL) that are registered with SEBI.

STEPS TO CONVERT YOUR PHYSICAL SHARES TO DEMAT FORM

  The first step is to open the Demat Account in the depository registered with SEBI with the help of Depository Participant (DP) by submitting the application form and other KYC documents.

  Thereafter, the investor/shareholder will be obligated to read and sign the terms of agreement mentioning the rights of potential account holder and the DP along with the scheduled charges for the same. A Demat account number will be provided and the Demat Account will be opened.

  Once the Demat Account has been opened, the investor has to send a form called the Dematerialization Request Form (DRF) along with his physical share certificate of the company to the Depository Participant (DP). In cases where the investor holds physical shares of more than one company, then he must submit physical share certificates of all the companies along with a completed DRF form for each of the companies.

  The DP will check and verify the completeness and veracity of all the documents submitted by the Investor. Meanwhile, a Dematerialisation Request Number (DRN) will be issued to the investor as an acknowledgment receipt till the time DP verifies his documents.

  After verifying the documents, DP will send the request of dematerialisation to the company of which the share-holder wants to get his shares converted to Demat format.

  After the approval, the physical shares will be converted to Demat form. Thereafter, the physical shares will be destroyed for the purpose of avoiding misuse or duplicity.

  Once the physical shares are dematerialised, the monetary value of the physical shares will be credited to the   Demat Account which can, later, be used for buying or selling with the ease of online trading.

After following the above-mentioned steps, the Physical share certificates will be said to be converted to Demat format.

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Can I convert physical shares to demat in 2023?

No, you cannot convert physical shares to demat in 2023. The deadline for converting physical shares to demat was March 31, 2023. After that date, companies and their RTAs (Registrars and Transfer Agents) will no longer be able to process requests for dematerialization of physical shares.

This was a mandatory requirement by the Securities and Exchange Board of India (SEBI) to promote a paperless environment in the Indian stock market. The deadline for the dematerialization of physical shares was extended several times in the past, but it was finally made mandatory on March 31, 2023.

If you still have physical shares, you will need to hold onto them as a physical asset. You will not be able to trade them on the stock exchange, and you will not receive any dividends or other benefits associated with the shares.

If you have any questions, please contact your broker or the RTA for the company whose shares you hold.

Here are some of the reasons why the deadline for the dematerialization of physical shares was made mandatory:

To reduce the risk of fraud and forgery.

To make it easier for investors to trade their shares.

To promote a paperless environment.

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Demat account: Features, Types and Benefits

The first step is always important when you start investing in the share market. It involves opening a Demat account to hold all your investment securities in the digitised form. Finding a suitable Demat account service provider is as critical as making sound investment decisions. If you are not sure where to start your search, worry not! We will clear your doubts regarding the Demat account opening. 

What is a Demat account?

Demat stands for dematerialised. A demat account holds shares and securities in electronic form. It also helps you track all your investment activities in shares, ETFs, bonds, and mutual funds in one place. 

Advantages of a Demat account

It is a digitally secured way of holding your investment securities 

Demat account eliminates chances of theft, loss, forgery, and damage to physical certificates 

It facilitates the quick transfer of shares 

Eliminates paperwork and stamp duty 

Simplifies the process of adding beneficiary 

It streamlines the process of share investment 

The online method of Demat account opening is simple and fast

Types of Demat account

There are three major types of Demat account services available in the market.

Regular Demat account

 The standard Demat account is available to all resident Indian investors. You can use this account for investing in shares, bonds, ETFs, and mutual funds. The charges depend on the subscription type and the volume that is there in the account.

Repatriable Demat account

It is a Demat account suitable for NRIs investors who want to invest in Indian shares from anywhere in the world. A repatriable Demat account allows NRIs to transfer funds to any foreign country and is linked to their NRE bank account.  

Non-repatriable Demat account

It is similar to the repatriable Demat account but doesn’t allow the transfer of funds to foreign accounts. You must link this account to the Non-resident Ordinary Account (NRO).

Besides these three major types, SEBI, in 2012, introduced another type called the Basic Services Demat Account or BSDA.  

What is BSDA?

It is a special type of Demat account introduced by SEBI for small investors. It requires much less of an investment compared to regular Demat accounts. 

Here are the benefits of the Basic Services Demat Account. 

It eliminates the charges imposed by the DP to mail a physical statement of your account

The dematerialisation charges have got removed

Annual maintenance charges, which can be between Rs 600 and 800 depending on the DP, are eliminated

Demat account charges 

While discussing Demat account charges, let’s see what it will cost you to invest.

Account opening fees

The account opening fee is a one-time initial expense charged by the DP. The actual rate depends on the DP. Most DPs now offer free Demat account openings to stay in the competition. However, additional charges like stamp duty, GST and other statutory levies will still apply.

Annual maintenance charges (AMC)

The DP charges an annual fee for maintaining your account and offering continuous service. It can range anywhere between Rs 300-900. Each depository has its specific guidelines regarding AMC changes. However, some DPs have now waived off the AMC to become more affordable.

SEBI has made Basic Services Demat Accounts AMC free if the volume in the Demat account is less than Rs 50,000.   

Custodian fees

It is a one-time fee charged by your broker to pay to the depository. Often it is paid directly by the company to the depository, which is NSDL or CDSL. 

Transaction fees

A transaction fee is a brokerage charge collected by the DP for each transaction by the investor. Some brokers have now waived transaction fees for delivery equity transactions. 

Final words 

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How do I give my shares in physical form to my son who has a demat account?

Transferring physical shares to a demat account, especially as a shareholder wanting to transfer them to your son's account, might initially seem like a daunting task. However, the process can be broken down into a series of simple steps to ensure a smooth transition.

This transfer holds significance not only in terms of ownership but also in managing these assets in a more modern and efficient manner. We have broken it down into simple steps and provided insights into the taxation aspects as well.

Understand the Basics

Before diving in, let's grasp the essentials:

Physical Shares: These are actual paper certificates representing ownership in a company.

Demat Account: An electronic account that holds securities in digital format, simplifying trading and ownership.

Convert Physical Shares to Demat Form

To transfer physical shares to your son's demat account, follow these steps:

Step 1: Gather Documents

Ensure you have all the necessary documents ready for a smooth transfer:

Share Certificates: Collect the physical share certificates of the companies in which you hold shares.

Transfer Deed: Obtain a duly filled and signed transfer deed for each company's shares. You can get this from your stockbroker or download it from the company's website.

Step 2: Submit Request

Fill Transfer Deed: Carefully fill out the transfer deed, providing details of the shares being transferred, your son's demat account information, and your details.

Attach Share Certificates: Attach the physical share certificates to the transfer deed.

Step 3: Submission

Submit to Registrar: Send the completed transfer deed and share certificates to the registrar of the respective companies.

Processing Time: The registrar will verify the documents and process the transfer. The processing time can vary, so be patient.

Step 4: Demat Account Update

Credit in Demat Account: Once the transfer is processed, the shares will be credited to your son's demat account.

Intimation: You and your son will receive notifications confirming the transfer.

Taxation on Share Transfer

Transferring shares involves tax implications:

Gift Tax: As a parent transferring shares to your son, it might be considered a gift. In India, gifts from close relatives are generally not subject to gift tax.

Capital Gains Tax: Your son might face capital gains tax if he sells the transferred shares later. The tax depends on the holding period:

Short-term Capital Gains: If shares are held for less than 12 months, gains are added to your son's income and taxed as per his slab rate.

Long-term Capital Gains: If shares are held for more than 12 months, gains are taxed at a flat rate with indexation benefits.

Keep Records

Maintain proper records of the share transfer process and related documents. These records can be crucial for future reference and to establish ownership.

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What will happen to Physical Shares Certificate after 31st March 2023?

The shares will become worthless. This means that you will not be able to sell them, transfer them, or claim any dividends or other benefits.

The shares may be frozen by the company. This means that the company will not allow you to sell or transfer the shares, and you may not be able to claim any dividends or other benefits.

You may be treated as a Benami holder under the Benami Transactions (Prohibitions) Act, 1988. This means that you may be subject to penalties and fines.

In addition to these consequences, there are a few other things that you should be aware of if you have physical shares certficate:

You will not be able to vote at shareholder meetings. This means that you will not have a say in how the company is run.

You will not be able to benefit from corporate actions such as bonus shares or rights issues. This means that you will miss out on opportunities to increase your shareholding or acquire new shares at a discounted price.

If you have physical shares, it is important to convert them to demat form as soon as possible. This will ensure that you do not lose your investment and that you are able to participate fully in the market.

Here are some of the benefits of converting your physical shares to demat form:

Demat shares are more secure. They are held in electronic form in a depository, which is a regulated entity. This makes them less vulnerable to theft or loss.

Demat shares are more convenient to trade. They can be bought and sold online, which makes it easier for investors to participate in the market.

Demat shares are more efficient. They do not require the physical movement of certificates, which saves time and money.

If you are not sure how to convert your physical shares to demat form, you can contact your broker or a depository participant. They will be able to help you through the process.