Depositories Act, 1996 and Dematerialisation
Scope
The Depositories Act, 1996 created the legal basis for holding securities in electronic form. Questions test the depository–participant–beneficial owner chain, dematerialisation, transfer, pledge and the rights of the beneficial owner.
Core rules
- A depository holds securities in electronic form. A depository participant (DP) is the investor-facing intermediary. The registered owner is the depository; the investor is the beneficial owner.
- Dematerialisation converts physical certificates into electronic balances. The investor submits a dematerialisation request through the DP; the company cancels the certificates and credits the depository’s account. Rematerialisation reverses the process.
- Securities in a depository are fungible and transferred by book entry. Transfer does not require a physical instrument. Pledges are recorded electronically, and corporate benefits - dividends, bonus, rights - flow to the beneficial owner.
- The depository must maintain records, reconcile holdings and comply with SEBI’s Depositories and Participants Regulations. The DP must follow know-your-client and segregation norms.
Worked example
An investor holds 500 physical shares and opens a demat account. She submits a DRF for all 500. The DP sends the request to the depository, the company cancels the certificates, and 500 shares are credited to her demat account. She sells 200 through a broker. On settlement, 200 shares are debited from her account and credited to the buyer’s account; the depository remains the registered owner of the entire holding, while beneficial ownership of 200 shares passes to the buyer. A pledge of 100 shares can be created by an electronic pledge instruction.
Traps
Do not say the DP is the depository. Do not say dematerialisation changes beneficial ownership. Do not assume physical certificates and demat holdings have different voting or dividend rights. Do not overlook that rematerialisation is possible.