Dematerialisation

Dematerialisation is the one-way door the Indian depository system was built around. India chose demat rather than immobilisation — under immobilisation the certificates survive in a vault; here they are destroyed and the holding exists only as an electronic record.

The investor fills a Dematerialisation Request Form (DRF), hands it to the DP with the certificates, and in due course the same number of securities appears in the demat account. Nothing about the ownership changes. What changes is the form in which the ownership is evidenced.

Only the registered holder may make the request, and the name on the certificates must match the name on the demat account.

The chain has four links, each with its own clock.

1. The client submits the DRF with the certificates. Separate DRFs are needed for each ISIN, for free and locked-in securities, for securities locked in for different reasons, for different paid-up values, and for each client account.
2. The DP checks and accepts the form, enters it under the maker-checker discipline, and the system generates a Dematerialisation Request Number (DRN). The DP defaces the certificates with the words "Surrendered for Dematerialisation" together with its name, DP ID and Client ID, and mutilates them by punching two holes at the top. It then forwards the DRF, the certificates and a certified Client Master Report to the issuer or its R&T Agent within seven days of accepting them.
3. The R&T Agent verifies and must confirm or reject the request within 15 days of receiving the physical shares. If it raises an objection, the DP has 15 days to remove it; failing that the request may be rejected and the certificates returned.
4. On confirmation the depository credits the client's account. For income tax, the date of credit is taken as the date of acquisition.

An investor holds 1,200 shares of a company at Rs 850, worth Rs 10,20,000, in three certificates — 500, 400 and 300. Of these, 300 are locked in.

Because free and locked-in securities cannot share a form, the DP takes two DRFs: one for 900 free shares (Rs 7,65,000) and one for 300 locked-in shares (Rs 2,55,000).

Suppose instead the signature on the DRF does not match the specimen with the company, though it matches the one with the DP. The request need not fail: the client submits a Signature Variation Form (Form 42) along with the DRF, or signs twice — once as recorded with the DP and once as recorded with the company.

Chapter 7 (Functions of DP — Dematerialisation) is one of the most heavily examined chapters in Series VI, and Chapter 2 introduces demat as the defining feature of the Indian model. The numbers examined are the seven days for the DP to forward and the 15 days for the R&T Agent to confirm or reject, along with the list of situations requiring separate DRFs and the defacement and mutilation steps.

• Seven days is the DP's clock, fifteen days is the registrar's. The DP forwards within seven days of accepting; the R&T Agent confirms or rejects within 15 days of receiving the shares. Both numbers appear as options in the same question.
• Only the registered holder can request demat. A buyer who has not yet been registered cannot dematerialise the certificates.
• Defacing and mutilating are two different acts. Defacing is writing "Surrendered for Dematerialisation"; mutilating is punching two holes. Under CDSL operating instructions the DP, not the client, defaces and mutilates.
• A separate DRF per ISIN, per account, and per lock-in status. One form for a mixed bundle is the most common operational error in the chapter.
• India uses dematerialisation, not immobilisation. The certificates are destroyed, not stored.
• The date of credit is the date of acquisition for income tax — not the date the certificates were bought, and not the date the DRF was lodged.