Dematerialisation — turning paper into balances

Fungibility is the whole idea

Dematerialisation is the process of holding securities in a fungible form. 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".

Once shares are dematerialised they lose their identification features — share certificate number, distinctive numbers and folio numbers. Title to the securities owned is in terms of number of securities and not in terms of distinctive numbers or certificate numbers.

That is a bigger change than it sounds. In the paper world, your 100 shares were those 100 shares, printed on numbered certificates. In the depository world you simply own 100 units of a thing, and the thing is identified by an ISIN and a short name.

Reading an ISIN

The International Securities Identification Number is a unique identification number for each security issued in any ISO member country, in accordance with the ISIN Standard ISO 6166. ISO 6166 was developed for cross-border as well as domestic trades.

An ISIN is 12 characters long and has three components:

Take the workbook's own example, INE 475C 01 012:

• IN — India
• E — company type
• 475C — company serial number
• 01 — equity (it could also be mutual fund units, debt or government securities)
• 01 — issue number
• 2 — check digit

In an ISIN number, it is important to pay special attention to the third digit. It can be E, F, A, B or 9:

Who allots the ISIN

• In India, SEBI has delegated the assigning of ISIN of various securities to NSDL.
• For securities getting admitted on CDSL, the ISIN is allotted on receiving a request from CDSL — so CDSL asks, NSDL allots.
• Allotment of ISIN for G-Secs is done by the Reserve Bank of India.

One more rule that catches people: securities issued by the same company, issued at different times or carrying different rights, terms and conditions, are considered different securities for the purpose of allocating ISIN and are allotted distinct ISINs. One company, many ISINs.

Which securities can be dematerialised

Under the SEBI (Depositories and Participants) Regulations, 2018, the following are eligible:

1. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of similar nature of any incorporated company or other body corporate, including underlying shares of ADRs and GDRs
2. Units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securitised debt, money market instruments, government securities and unlisted securities

But eligibility in the regulations is not enough. Physical securities can be converted into book-entry form only if the company which has issued the securities has entered into an agreement with the depositories to offer demat facility.

The April 2019 line

The SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2018 specify that the transfer of securities shall not be processed unless the securities are held in the dematerialised form with a depository. The notification was dated June 8, 2018 and was originally to take effect from December 5, 2018, but the date was extended and it became effective from April 1, 2019.

SEBI then issued four clarifications, and every one of them is testable:

1. Any investor desirous of transferring shares held in physical form after April 01, 2019 can do so only after the shares are dematerialised.
2. The decision does not prohibit the investor from holding shares in physical form. The investor has the option of holding shares in physical form even after April 01, 2019.
3. The amendment is not applicable to transmission (transfer of title by way of inheritance or succession) or transposition (re-arrangement or interchanging of the order of names of shareholders).
4. A transfer deed lodged prior to the deadline and returned due to deficiency in the document may be re-lodged for transfer even after the deadline of April 01, 2019.

So the rule bites on transfer. It does not bite on holding, on demat itself, on transmission or on transposition — all of which can be done in physical shares even after April 1, 2019.

Five prerequisites before a demat request can even start

1. The registered holder of the securities should make the request. Not the company, not the DP, not the depository.
2. The security must be recognised by the depository as an eligible security — in other words, only those securities whose ISIN has been activated by the depository can be dematerialised.
3. The company/Issuer should have established connectivity with the depository. Only then are its securities "available for dematerialisation".
4. The holder should have a beneficiary account in the same name as it appears on the security certificates.
5. The request should be made in the prescribed dematerialisation request form.

The dematerialisation journey

Step 1 — the DP gives the client a Dematerialisation Request Form (DRF).

Step 2 — the client completes the DRF in all respects and submits it with the security certificates.

Step 3 — the DP checks the DRF for validity, completeness and correctness. Specifically:

• The certificates sought to be dematerialised are attached to the DRF
• The certificates are not mutilated or defaced in a manner affecting any material information
• The name of the holder(s) on the DRF and the certificates is exactly the same as in the BO's account. Minor variation in name is permitted — initials in place of a first name or middle name, a minor spelling mistake, initials not being spelt out fully or put before rather than after the surname. In such cases, if the signature on the DRF matches the specimen signature available with the DP, the securities can be considered for demat.
• Details like security type, face value, paid-up value, pari-passu status, certificate numbers, distinctive numbers, number of certificates, total quantity and lock-in status are filled in correctly

Separate DRFs have to be submitted for each of these:

Who signs the DRF:

• The sole holder in case of single holding
• All joint holders in case of joint holdings
• Constituted signatories in the case of corporate accounts
• The Power of Attorney holder

If the signatures do not match the DP's records, the DP should satisfy itself about the identity of the client and may insist on attestation of the DRF from the client's bankers. If the client's signature registered with the company differs from the specimen given to the DP, the client may be allowed to affix both signatures on the DRF, or submit a Signature Variation Form as per Form 42 along with the DRF. In CDSL, the DRF itself asks the BO to sign "as per the signature recorded with the DP" and "as per the signature recorded with the company", and the DP official verifies the first against its own records.

Step 4 — if not in order, the DP returns the DRF and certificates.

Step 5 — if in order, the DP accepts the DRF and issues an acknowledgement to the client.

Step 6 — the DP enters the request in the DP system following the maker-checker concept. The system generates a Dematerialisation Request Number (DRN), which is written on the DRF.

Step 7 — the DP defaces and mutilates the certificates before sending them.

• Defacing: the certificates are marked with the words "Surrendered for Dematerialisation", along with DP name and BO ID. The DP must ensure the certificates bear the DP name, DP ID and Client ID — a precautionary measure to prevent misuse of share certificates by anyone.
• Mutilating: punching two holes at the top of the certificates using a normal office perforator.
• As per CDSL Operating Instructions, the DP should deface and mutilate the certificates, and not the client.

Step 8 — the DP forwards the DRF and certificates to the Issuer or its R&T Agent, within seven days of accepting them from the client, to the "address to which physical certificates to be sent" communicated by the depository. The forwarding letter refers to the allotted DRN. Alongside, the DP encloses either:

• a duly certified Client Master Report (CMR) printed from the NSDL system or the DP's back-office system, OR
• a covering letter generated from the NSDL system or the DP's back-office system

carrying the client's address and contact details, account status, account type and sub-type, PAN of all the holders and bank account details — so the Issuer/RTA can do its due diligence.

Step 9 — the Issuer or its R&T Agent verifies the DRF and certificates and matches the details with the intimation received from the depository against the same DRN.

Step 10 — on an objection, the DP informs the client and removes the objection or supplies information within 15 days of receiving the objection memo.

Step 11 — if the DP fails to remove the objections within 15 days, the Issuer/RTA may reject the request and return the DRF and certificates to the DP, who informs the client, returns the certificates and obtains an acknowledgement.

Step 12 — the DP may, if the client requires, generate a new demat request and send the securities again.

Step 13 — if the DRF is in order, the Issuer/RTA informs the depository and authorises it to create the credit balance. The DP system automatically credits the client's account when DM is updated. Note the tax point: for the purpose of income tax calculations, the date of credit of securities by dematerialisation is taken as the date of acquisition of shares.

Step 14 — the DP informs the client through the monthly transaction statement.

Step 15 — an R&T Agent is required to confirm or reject a demat request within 15 days from the date of receipt of physical shares.

Two checklists worth knowing

For the investor: obtain the DRF from your own DP; fill it in duplicate or triplicate as the DP requires; fill in all the information asked, since it is mandatory; separate forms for separate ISINs and for lock-in versus free securities; all holders sign, matching the account opening form specimens; the order of the holders should be the same as in the account opening form — if the order differs, a transposition request form must be filed along with the DRF; and collect the acknowledgement slip duly signed by the DP.

One special form to remember: the demat request form for dematerialising government securities is different and is called "DRF-GS".

For the DP: the additional duties are the interesting ones. No dematerialisation request other than one from a registered holder is to be entertained. The depositories from time to time issue circulars cautioning DPs with respect to shares belonging to some companies — such circulars should be referred to before accepting a demat request, and the list of such companies is on the depositories' websites. The safety and security of the certificates until they are forwarded has to be ensured. And the DRF is forwarded only after ascertaining that the number of certificates annexed tallies with the number mentioned on the DRF, within 7 days of its receipt.

Why demat requests get rejected

Both depositories have adopted common rejection reasons under SEBI guidelines. The main grounds:

There are also miscellaneous grounds: recovery pending from the client for double or excess dividend/interest paid by the RTA; duplicate interest warrants issued where bank reconciliation is incomplete; certificates held under different holding basis (single or joint) received under the same DRN; certificates sent to an incorrect address or office of the RTA; and certificates that do not relate to the ISIN mentioned in the DRN or form.

The DP has to inform his client about the rejection if and when the R&T Agent has rejected the DRF.

Disputes after credit

Any dispute regarding the title of securities in physical form, after they have been dematerialised and credited to a client's account, has to be settled amongst the DPs, clients and Issuer or its R&T Agent. The procedure is laid down in SEBI Guidelines for Good and Bad Delivery of documents, exactly as in the case of physical securities.

Three special demat routes

Transposition cum dematerialisation. Investors holding shares as Mr. A & Mr. B but with a certificate reading Mr. B & Mr. A used to have to open multiple accounts for each sequence, or transpose with the Issuer/RTA first. The depositories amended their bye-laws so that the client can get securities dematerialised in the same account if the names on the certificates match the names in which the account was opened but are in a different order — by submitting the certificates along with the Transposition Form and the DRF.

Transmission cum dematerialisation. On the death of one or more joint holders, the surviving joint holder(s) can get the deceased's name removed from the certificates and get them dematerialised by submitting the certificates with the Transmission Form and the DRF, plus the original or a copy of the death certificate duly notarised or attested by a Gazetted Officer or by a notary public. The DP should ensure the demat account is in the name of the surviving holders only.

More than three names on the certificate. A demat account supports three holders; a certificate may carry more. The DP processes the request as usual, ensuring the main BO name is the first account holder and the balance joint holders are accommodated in the two joint holders' fields, with the pattern of holding matching. For Mr. A, Mr. B, Mr. C and Mr. D: first holder Mr. A, second holder Mr. B, third holder Mr. C and Mr. D together. Because such an account is irregular, it is locked down: standing instructions to receive credits, receipt instructions, new issue applications and any other instruction having the effect of crediting this account should not be accepted. An undertaking must be obtained from the client that he will not use this account for allotments in the primary market or purchases from the secondary market, and that no instructions other than for dematerialisation, bonus, rights and preferential offer will be given. Once all certificates have been dematerialised, such an account should be closed and the shares transferred to a new account opened in the name of a maximum of three holders.

When certificates are lost in transit

The Issuer/RTA has the electronic request but no paper. The procedure:

• The DP provides the Issuer/RTA proof of dispatch and confirms the certificates were not returned undelivered at its end
• If they were not returned undelivered and are not traceable at the Issuer/RTA's office, it is assumed that the certificates have been lost in transit. The DP shall then execute an Indemnity Bond in favour of the Issuer/RTA
• If the original demat request has already been rejected, the DP sets up a fresh demat request and submits the duly executed Indemnity Bond with a new DRN. The Issuer/RTA accepts the request and dematerialises on the basis of the Indemnity Bond given by the DP
• Where the Issuer/RTA rejected the request for a reason the BO/DP can rectify and the certificates were lost on the way back, an Indemnity Bond is executed and submitted with a new DRN — and here the DP must obtain prior consent from the Issuer/RTA for execution of the Indemnity
• Where the rejection was for a reason that cannot be rectified — fake, forged, duplicates already issued, court injunctions — the Issuer/RTA retains the documents. The DP must obtain rejection letters and hand them to the BO so the BO can take the matter up directly

Enhanced due diligence on remaining physical shares

Because transfer of physical securities has not been permitted since April 01, 2019, SEBI tightened the demat gate for whatever paper is left (SEBI circular No. SEBI/HO/MIRSD/DOS3/CIR/P/2018/139 dated November 06, 2018 set the standardised norms).

• All listed companies or their RTAs were advised to provide data of members holding shares in physical mode — name, folio numbers, certificate numbers, distinctive numbers, PAN and so on (the "static database") as on March 31, 2019 — to the depositories, latest by December 31, 2019
• Depositories were required to put in place systems to validate any dematerialisation request received after December 31, 2019
• The depository system retrieves the shareholder names recorded against the folio and certificate number in the static data and validates them against the demat account holder names
• On a mismatch, the depository system generates a flag or alert, and documents are sought — a copy of the passport, a legally recognised marriage certificate, a gazette notification regarding change in name, or an Aadhaar card explaining the difference in name
• In case of complete mismatch, the applicant may approach the Issuer company/RTA for establishing his title or ownership

Rematerialisation — the trip back to paper

Rematerialisation is the reverse of dematerialisation. It is the process of issuing physical securities in place of securities held electronically in book-entry form with a depository. The account is debited and physical certificates for the equivalent number of securities are issued.

A beneficial owner has a right to get his electronic holding converted into physical holding at any time. The request goes to the Issuer or its R&T Agent through his DP in the prescribed Rematerialisation Request Form (RRF).

Two prerequisites only: the beneficial owner should make the request, and there should be sufficient free or lock-in balance of securities in the beneficiary account to honour it.

The process:

1. The DP provides the RRF. The client completes it and submits it.
2. The DP checks validity, completeness and correctness — free/lock-in balance available; the name of the client on the RRF is exactly the same as in the client account; in case of joint holding, the order of names on the RRF is the same as in the account; security type, face value, Issuer's name and lock-in status; and the client's option whether to receive the physical certificates in a jumbo lot for the entire quantity requested, or in market lot.
3. Separate RRFs are required for free and locked-in securities, securities locked-in for different reasons, each ISIN, and securities of different paid-up value.
4. The RRF is signed by the sole holder, all joint holders, authorised signatories for corporate accounts, or a constituted attorney in the case of NRI accounts.
5. If not in order, the DP returns the RRF for rectification. If in order, the DP accepts it and issues an acknowledgement.
6. The DP enters the request; the system generates a Remat Request Number (RRN), which is written on the RRF.
7. An authorised person other than the one who entered the details verifies the RRN and releases the request to the depository — this step is not in CDSL.
8. The DP forwards the RRF to the Issuer or its R&T Agent within seven days of accepting it from the client.
9. The Issuer/RTA verifies the RRF and matches the details with the depository's intimation against the same RRN. The depository sends this intimation to R&T Agents on a daily basis.
10. If in order, the Issuer/RTA confirms the request, issues the physical certificates and despatches them to the beneficial owner. On receipt of the acceptance, the depository removes the balances from the client's account by debiting it, and the client's name is entered in the Register of Members of the company.
11. If not in order, an objection memo is sent to the DP, with or without the RRF. RRFs are sent back on four grounds: incomplete or incorrect RRF; RRF details mismatch; RRF not received by registrar; rejected due to Auto Corporate Action.
12. The DP, on receiving confirmation of the debit entry, informs the client.
13. The Issuer/R&T Agent should send the certificate to the BO within 30 days from the date of confirming the request in the depository system — and equally, the certificate of securities should be sent to the client within a period of 30 days from receipt of the RRF by the Issuer or its R&T Agent.

Two consequences the client must be told about in advance:

• The new certificates may not necessarily bear the same folio or distinctive numbers as those he had before dematerialisation
• When a rematerialisation request is sent, the securities in the client account will not be available for delivery or transfer immediately. The client must wait for the physical certificates to reach him before they can be sold — a temporary illiquidity. No trading is possible on securities sent for rematerialisation.

Mutual fund units: destat and restat

De-statementization is the process enabling a BO to convert mutual fund units represented by a Statement of Account (SoA) in physical form into electronic form in his demat account. Restatementization is the reverse — MF units held in electronic form converted back into physical SoA or certificate form.

De-statementization, in brief:

• The DP hands over a Mutual Fund De-statementization Request Form (MF-DRF)
• Separate MF-DRF for each account and for each RTA; separate entry for each lock-in reason/expiry date combination, ISIN-wise
• The BO may request the entire holding by mentioning quantity as "ALL" without entering any figure, or partial/entire holding by mentioning a quantity
• The BO submits the SoA, or a photocopy, or a copy downloaded from the internet
• The DP verifies eligibility, that the name and pattern of holding match, that separate MF-DRFs are filled for each RTA, that the form is completely filled and signed by all account holders, and that the number of pages of the SoA mentioned in the MF-DRF is verified against the SoA
• The DP captures the details and generates a Destatementization Request Number (DRN) for each ISIN, writes it on the form or sends a letter with the details, and gives the BO a system-generated acknowledgement duly stamped and signed
• The original MF-DRF and the SoA are sent to the AMC/RTA with a system-generated covering letter. A copy is retained by the DP. Defacing and mutilation of the SoA is not required — unlike share certificates
• The DP despatches the physical documents to the AMC/RTA within 7 days from the date of receiving them from the BO
• If the details tally, the BO's account is credited with MF units. Where the request was for "ALL", the AMC/RTA confirms or rejects the entire or partial balance available at the time of confirmation. On a quantity mismatch, the AMC/RTA credits such number of units as are requested by the BO and available in its records, and rejects the balance
• The AMC/RTA should complete processing of the conversion request within 15 days of receiving the physical documents
• If the request is not processed within 21 days after set-up, the DP should follow up with the AMC/RTA. If the DP does not get the documents within 30 days from the date of rejection, the DP should again follow up
• In case of rejection, the DP forwards the rejection letter to the BO within 7 days from receipt

A destat request may be accepted electronically without physical documents if three conditions hold: approval from the depository for accepting instructions through the DP's internet portal is on record; the BO is an individual sole holder; and the DP follows the operating instructions for destat to the extent applicable. The DP must then inform the RTA of the set-up, giving the destat request number and ISIN.

Restatementization, in brief:

• The BO fills the Restatementization Request Form (MF-RRF) in duplicate. All joint holders sign. The MF-RRF can be signed by the POA holder also, provided the POA is registered with the AMC/RTA
• Separate entry for free units and for each lock-in reason code and lock-in expiry date. Quantity may be "ALL" or a stated figure
• The ISIN should not be Inactive or Frozen for debits
• The DP generates the Restat Request Number (RRN); the original MF-RRF goes to the AMC/RTA, and the RRN is accessed by the AMC/RTA electronically
• Modification is not allowed in Restatementization. Deletion of the RRN is allowed if it has not been downloaded by the AMC/RTA — and if the restat was set up due to an erroneous request from the BO, the deletion must be authorised by the BO
• The DP shall follow up with the AMC/RTA if the restat request is not honoured within the prescribed time limit, i.e. within 30 days, and keep a record of the follow-up
• On rejection, the AMC/RTA intimates electronically and sends a rejection letter to the DP, who rectifies in consultation with the BO/RTA and sets up a fresh request

AIF units in demat form

SEBI's circular of February 2025 relaxed the earlier timeline: any investment made by an AIF on or after July 01, 2025 must be held in dematerialised form. Investments made before July 01, 2025 are exempt, except in two situations:

• (a) where the investee company is legally required to facilitate dematerialisation of its securities
• (b) where the AIF, alone or with other SEBI-registered entities mandated to hold investments in dematerialised form, exercises control over the investee company

For investors who have not yet given their demat details, units already issued are credited to a separate demat account named the "Aggregate Escrow Demat Account", opened by the AIF for the sole purpose of holding demat units of AIFs on behalf of such investors. New units in demat form are also allotted there.

• When such an investor provides his demat account details, the units are transferred from the Aggregate Escrow Demat Account to his own demat account within 5 working days
• No transfer of units from or within the Aggregate Escrow Demat Account is allowed other than for this purpose
• Units held there can be redeemed and the proceeds distributed to the respective investors' bank accounts, with a full audit trail
• Managers of AIFs must maintain investor-wise KYC details — name, PAN and bank account details — with an audit trail, and report the same to Depositories and Custodians on a monthly basis

Finally, a control point unique to AIFs: off-market transfer and pledge creation of AIF units in dematerialised form will get executed successfully only after the approval of the Investment Managers (IMs). Terms continue to be governed by the PPM, the agreements between the AIF and investors, and other fund documents, and separate logins are provided to IMs for approving off-market and pledge transactions.