What Are Dematerialised Shares and How Do They Work?

Stock ownership has transitioned from paper certificates to digital records, making transactions faster and more secure. This shift eliminates risks like loss, damage, or forgery while simplifying buying, selling, and transferring shares.

Investors need to understand how electronic shareholding works and what it means for them.

Conversion from Physical Certificates

Investors with paper stock certificates must convert them into electronic form through a registered depository participant (DP). This involves submitting the original certificates for verification before they are forwarded to the issuing company or registrar for validation.

Once confirmed, the shares are credited to the investor’s dematerialized account, removing risks associated with physical handling. Investors receive confirmation upon completion.

Before conversion, regulatory requirements must be met. The investor’s name on the certificates must match their dematerialized account details. Discrepancies, such as name changes due to marriage or legal modifications, require supporting documents like a marriage certificate or notarized affidavit. Some jurisdictions impose a stamp duty based on the shares’ market value.

Opening an Electronic Account

To hold dematerialized shares, investors must open an account with a DP registered with the central securities depository. This account functions like a bank account but is used exclusively for securities. Investors must submit an application along with identity and address proof, such as a passport or utility bill. Some jurisdictions also require a tax identification number.

Once approved, investors receive a unique account number, enabling them to buy, sell, and hold shares electronically. This account links to their trading account for stock exchange transactions. When shares are purchased, they are credited to the dematerialized account; sales result in a debit of the corresponding securities.

To prevent unauthorized access, many DPs implement two-factor authentication, requiring passwords and one-time verification codes. Investors receive periodic statements detailing their holdings and activity, helping them track investments and identify discrepancies.

Fees and Charges

Maintaining a dematerialized account involves costs that impact overall returns. Some DPs charge an account opening fee, though many waive it to attract customers. Annual maintenance fees typically range from $10 to $50, with lower fees sometimes available for higher-value portfolios.

Transaction charges apply when shares are credited or debited. Buying shares usually incurs minimal or no fees, while selling often carries a charge per transaction, either a flat fee or a percentage of the trade value, typically between 0.01% and 0.05%. Bulk transactions may qualify for discounts, benefiting active traders.

Additional fees may apply for services like physical account statements or duplicate transaction records. Some DPs impose inactivity fees if an account remains dormant for an extended period, which can be avoided through occasional transactions. Late payment penalties on maintenance fees can lead to account suspension.

Ownership Transfer Steps

The process of transferring dematerialized shares depends on whether the transaction occurs through a stock exchange or as an off-market transfer.

For exchange-based trades, once a seller executes a transaction, the central securities depository moves shares from the seller’s dematerialized account to the buyer’s. A clearing corporation ensures securities are delivered only after payment is confirmed, reducing counterparty risk. Settlement typically follows a T+1 cycle, meaning the transfer is completed one business day after the trade date.

Off-market transfers, such as gifting shares or private sales, require both parties to submit a delivery instruction slip (DIS) to their respective DPs. The DIS includes details such as the International Securities Identification Number (ISIN) of the shares, the quantity being transferred, and the recipient’s dematerialized account number. Some jurisdictions impose securities transaction tax (STT) or capital gains tax on these transfers. The DP verifies the instructions before processing the transfer, which usually takes one to two business days.

Dividend Access

Investors with dematerialized shares receive dividends directly into their linked bank accounts via electronic transfers, eliminating the risk of lost or delayed payments. To ensure smooth transactions, shareholders must keep their bank details updated with their DP.

Some companies offer dividend reinvestment plans (DRIPs), allowing shareholders to reinvest payouts into additional shares, often at a discount or with waived brokerage fees. Tax treatment varies by jurisdiction, with some countries imposing withholding taxes on dividends, while others require investors to report them as taxable income.

Tax Aspects

Taxation on dematerialized shares depends on transaction type and holding period. Capital gains taxes apply when shares are sold at a profit, with different rates for short-term and long-term holdings. Short-term capital gains—typically for shares held under a year—often face higher tax rates, exceeding 15-20%, while long-term gains may be taxed at lower rates or exempt under certain conditions.

Dividend taxation also varies. Some jurisdictions tax dividends at the shareholder level, while others impose corporate taxes before distribution. Tax treaties may provide double taxation relief, allowing investors to claim credits for taxes paid abroad. Investors should also account for securities transaction taxes (STT) or stamp duties at the time of purchase or sale, as these affect overall returns. Consulting a tax advisor ensures compliance with local regulations and optimizes tax efficiency.

Statement and Record Requirements

Maintaining accurate records of dematerialized shares is essential for tracking investments, verifying transactions, and fulfilling tax obligations. DPs provide periodic account statements detailing holdings, transfers, and corporate actions such as stock splits or bonus issues. These statements serve as proof of ownership and may be required for tax filings or dispute resolution.

Investors can access real-time portfolio updates through online platforms or mobile apps provided by their DP. Some jurisdictions mandate record retention for a specific period—often five to seven years—for audit and compliance purposes. Keeping digital backups of statements and transaction confirmations ensures accessibility and prevents issues related to lost documentation. Regularly reviewing records helps investors detect discrepancies early and take corrective action if needed.