Defacing

Once a certificate has been dematerialised, it must never be usable again. Otherwise the same shares could effectively exist twice — once electronically, once on paper.

So, before the certificate leaves the DP's hands, the DP marks it permanently. The workbook calls this defacing the certificate, and it goes together with a second step, mutilation: punching two holes through the certificate with a normal office perforator.

Both steps happen before the certificate is sent onward to the Issuer or its R&T Agent for cancellation.

The DP defaces the certificate by marking it with the words "Surrendered for Dematerialisation", along with the DP name, DP-ID and Client-ID. This gives every certificate a permanent, traceable record of exactly which demat request destroyed it. In CDSL's Operating Instructions, it is specified that the DP, not the client, must carry out this defacement and mutilation — the certificate is not accepted already marked by the investor.

Mutilation follows: 2 holes are punched at the top of the certificate using a normal office perforator. The certificate must not be defaced or damaged in a way that destroys any material information on its face — signatures, certificate numbers and distinctive numbers must all remain legible even after defacement.

One exception applies. Government securities are handled differently: the DP endorses the certificate by writing "Tendered for Cancellation and credit to SGL A/c No. ___, Mumbai" on the reverse, and is specifically instructed not to punch holes on the face of a G-Sec certificate — the usual mutilation step does not apply to government securities.

Mrs Rao surrenders a physical certificate for 250 shares worth Rs 1,37,500 at Rs 550 each, along with her DRF, to her DP. Before forwarding it to the company's R&T Agent, the DP marks the certificate "Surrendered for Dematerialisation", writes on it the DP's name, its DP-ID (say IN300XXX) and Mrs Rao's Client-ID, and punches two holes through the top of the certificate.

The certificate now cannot be presented anywhere else as evidence of ownership — even if it were lost or stolen after this point, it carries a permanent record identifying exactly which DP and which client surrendered it. Had Mrs Rao instead submitted a government security certificate, the DP would have endorsed the reverse with a cancellation note instead of defacing and punching it, since G-Secs are exempt from the usual mutilation step.

Chapter 7, section 7.3.2, step 7, and the DP checklist that follows it, both require defacement and mutilation before certificates are sent to the Issuer or R&T Agent, and the workbook flags the CDSL-specific rule that the DP, not the client, must do this.

Expect a question on what exactly must appear on a defaced certificate (DP name, DP-ID, Client-ID, and "Surrendered for Dematerialisation") and on the government-securities exception, where holes are specifically not punched.

• Defacing and mutilation must not obscure material information — signatures, certificate numbers and distinctive numbers must remain readable.
• In CDSL, the DP must deface and mutilate the certificate — not the client. A certificate submitted already marked by the client is not simply accepted at face value.
• Government securities are exempt from the hole-punching step — the DP endorses the reverse instead, and is specifically told not to punch the certificate.
• This step exists purely to prevent reuse or misuse of a certificate once its shares exist electronically — it has nothing to do with valuing or verifying the certificate's authenticity, which is checked separately.