Fungibility
Also written Fungible securities · Fungibility of securities
In the depository, securities of the same class carry no distinctive or certificate numbers — every unit is identical to every other and interchangeable, so title is counted in numbers, not in serial numbers.
In plain language
A share certificate is a specific object. It has a certificate number, a folio number and a block of distinctive numbers, and the shares it represents are those shares and no others.
Dematerialised securities are not like that. Once shares are dematerialised they lose their identification features entirely — no certificate number, no distinctive numbers, no folio. What you own is a quantity. The workbook's own footnote puts it plainly: fungible means "movable things that are standardised, so that one unit is essentially the same as another which may be estimated and replaced by weight, number and measure".
That is why title in the depository is expressed in terms of the number of securities, not in terms of which securities.
How it works
All securities in the same class are identical and interchangeable — all fully paid-up equity shares of one company, for instance, are one pool. The security is identified not by serial number but by its ISIN and a short name.
The practical consequences are the whole benefit case for the depository. Because any unit will do, the tradable lot falls to one unit — a common investor can buy a single share, bond or debenture. Odd lots disappear, because there are no lots. Bad delivery disappears, because there is no certificate to be mutilated, forged or wrongly endorsed.
Fungibility has a limit, though, and it is the limit that gets examined. Balances that are legally different are not pooled. Free balance, locked-in balance, pledge setup balance and pledged balance are tracked separately in the same account and in the same ISIN. Securities locked in for different reasons are separate again.
A worked example
An investor buys the same company's shares three times:
| Date | Quantity | Price | Value |
|---|---|---|---|
| 4 April | 200 | Rs 620 | Rs 1,24,000 |
| 19 June | 150 | Rs 688 | Rs 1,03,200 |
| 2 September | 250 | Rs 715 | Rs 1,78,750 |
| Holding | 600 | Rs 4,05,950 |
In the physical world these arrive as three certificates with three distinctive number ranges. To sell 300 shares the investor must decide which certificates to surrender, and a transfer deed goes to the company for each.
In the depository the account simply says 600. Selling 300 debits 300. Nobody asks which 300, because there is no such thing as which.
Now suppose 100 of those 600 are locked in — say they came from an allotment with a lock-in. The account shows 500 free and 100 locked-in under one ISIN. Fungibility does not merge them: the investor can deliver only 500 against a sale, and a demat or remat request would need separate forms for the free and the locked-in quantity.
Why NISM asks about it
Chapter 2 lists fungibility as a key feature of the Indian depository system, and Chapter 7 opens with it as the reason ISINs exist at all. Expect a straight definition question, and expect the consequence questions — why odd lots and bad deliveries vanished, and why the tradable lot became one unit.
Common exam traps
- Fungibility is not the same as dematerialisation. Demat is the process of converting paper into book entry; fungibility is the property the resulting holding has.
- It does not merge free and locked-in balances, nor securities locked in for different reasons, nor free and pledged balances. Separate demat and remat forms are required for each.
- Securities of the same company issued at different times or carrying different rights are not fungible with each other — they are treated as different securities and get distinct ISINs.
- After rematerialisation the investor gets certificates that may not carry the same folio or distinctive numbers as the ones originally surrendered. There is nothing to restore them to, because fungibility destroyed the link.
- India adopted dematerialisation, not immobilisation. Under immobilisation the certificates still exist in a vault; here they are destroyed.
Where this is taught
- Series XXI-B · Chapter 14: Behavioural Financeintroduced here
- Series II-A · Chapter 11: Depository Servicesintroduced here
- Series III-A · Chapter 1: Introduction to the Financial Systemintroduced here
- Series VI · Chapter 2: Introduction to Depositoryintroduced here
- Series X-B · Chapter 16: Basics of Behavioral Financeintroduced here
- Series X-A · Chapter 17: Operational Aspects of Investment Managementintroduced here
Related terms
- DematerialisationConverting securities held as physical certificates into book-entry holdings: the certificates are defaced, mutilated and surrendered to the issuer, and an equivalent quantity is credited to the holder's demat account.
- Bad deliverySecurities that are delivered for settlement but rejected by the depository for technical reasons such as incorrect signatures, names or details — treated like a short delivery and closed out through auction.
- ISINThe 12-character code (ISO 6166) that identifies one specific security in the depository system — country prefix, nine-character basic number and a check digit, as in INE475C01012.
- Book entryRecording ownership and transfer of securities as electronic entries in a depository's records, instead of on paper certificates that move physically between parties.
- ImmobilisationHolding physical securities in a central depository vault while transferring them by book entry — the model India did not adopt, choosing dematerialisation, which destroys the certificate, instead.
- Odd lotA holding of physical securities smaller than the market's standard tradable lot — a problem the workbook says dematerialisation eliminated by reducing the tradable lot to one unit.
- RematerialisationThe reverse of dematerialisation — the demat account is debited and the issuer prints fresh physical certificates for the same quantity, to be despatched within 30 days.
- Temporary ISINA new ISIN, frozen for debit, in which a listed company's shares from rights, bonus, merger or capital reduction are first credited, so they cannot be transferred until trading approval is received.
- Registered ownerThe depository itself, recorded in the issuer's books as the holder of dematerialised securities — while the investor, recorded by the depository as Beneficial Owner, retains all the actual rights and benefits.
- Multi-depository systemThe Depositories Act, 1996 arrangement under which more than one depository can operate in India, so that no single depository holds a monopoly over the market — currently NSDL and CDSL.
- Jumbo lotA single certificate covering an entire rematerialisation request, one of two delivery options a client can choose on the RRF — the other being separate certificates in ordinary market lots.