Page 1 - Lesson Note 4

SAI INTERNATIONAL SCHOOL

Class-12
th
Business studies

Chapter – 10, Financial Market

Topics: SEBI, Its Functions, Objectives
(Lesson Note - 39)

Dematerialization and Depositories All trading in securities is now done through computer terminals.

Since all systems are computerized, buying and selling of securities are settled through an electronic
book entry form. This is mainly done to eliminate problems like theft, fake/forged transfers, transfer
delays and paperwork associated with share certificates or debentures held in physical form. This is a

process where securities held by the investor in the physical form are cancelled and the investor is given

an electronic entry or number so that she/he can hold it as an electronic balance in an account.

This process of holding securities in an electronic form is called dematerialization.

For this, the investor has to open a demat account with an organization called a depository. In fact, now

all Initial Public Offers (IPOs) are issued in dematerialization form and more than 99% of the turnover is
settled by delivery in the demat form. The Securities and Exchange Board of India (SEBI) has made it

mandatory for the settlement procedures to take place in demat form in certain select securities.
Holding shares in demat form is very convenient as it is just like a bank account. Physical shares can be

converted into electronic form or electronic holdings can be reconverted into physical certificates
(rematerialisation).

Dematerialization enables shares to be transferred to some other account just like cash and ensures
settlement of all trades through a single account in shares. These demat securities can even be pledged

or hypothecated to get loans. There is no danger of loss, theft or forgery of share certificates. It is the

broker’s responsibility to credit the investor’s account with the correct number of shares.

Working of the Demat System