Benefits of Demat
In the depository system, the ownership and transfer of securities
takes place by means of electronic book entries. At the outset,
this system rids the capital market of the dangers related to
handling of paper. NSDL provides numerous direct and indirect
benefits, like:
· elimination of bad deliveries -
In the depository environment, once holdings of an investor are dematerialized, the question of bad delivery does not arise i.e.
they cannot be held "under objection". Statistically, in
the physical environment, about 20% of delivered stock constitutes
bad deliveries. Of these, about 1% is ultimately absorbed by the
system as bad delivery cost. Rectification of objection usually
involves extensive follow up by the investor. Also, the investor
cannot sell the securities till they are registered. This means
that in the physical environment, every fifth person taking
delivery of stock gets securities, the genuineness to which there
is a doubt whereas he parts with genuine funds.
· elimination of all risks associated with physical certificates
-
Dealing in physical securities have associated security risks of
theft of stocks, mutilation of certificates, loss of certificates
during movements through and from the registrars, thus exposing
the investor to the cost of obtaining duplicate certificates and
advertisements, etc. This problem does not arise in the depository
environment.
· no stamp duty for transfer of equity instruments & units of
mutual funds in the depository
(In case of physical shares, stamp duty of 0.5% is payable on
transfer of shares).
· immediate transfer and registration of securities -
In the depository environment, once the securities are credited to
the investors account on pay out, he becomes the legal owner of
the securities. There is no further need to send it to the
company's registrar for registration. Having purchased securities
in the physical environment, the investor has to send it to the
company's registrar so that the change of ownership can be
registered. This process usually takes around three to four months
and is rarely completed within the statutory framework of two
months thus exposing the investor to opportunity cost of delay in
transfer and to risk of loss in transit. To overcome this, the
normally accepted practice is to hold the securities in street
names i.e. not to register the change of ownership. However, if
the investors miss a book closure the securities are not good for
delivery and the investor would also stand to loose his corporate
entitlements.
· faster settlement cycle -
The exclusive demat segments follow rolling settlement cycle of
T+5 i.e. the settlement of trades will be on the 5th working day
from the trade day. This will enable faster turnover of stock and
more liquidity with the investor.
· pay in & pay out of securities & funds is on the same
day for scrip less trades -
In the exclusive demat segments the settlement of trades (both
securities and funds) is on the 5th working day from the trade
day. This means that a buyer who parts with funds on the 5th
working day, gets the securities on the same day evening and a
seller who parts with securities on the 5th working day gets funds
on the same day evening. This reduces the funding cost of 5-6 for
a broker (in case of institutional trades) that they have to bear
in the physical segment. In the physical segment, the settlement
period is spread over a period of three to four days.
· faster disbursement of non cash corporate benefits like rights,
bonus, etc. -
NSDL provides for direct credit of non cash corporate entitlements
to an investors account, thereby ensuring faster disbursement and
avoiding risk of loss of certificates in transit
· reduction in rate of interest on loans granted -
This benefit is provided by some banks against pledge of dematerialized
securities as dematerialized securities eliminates
the following hassles/ risks: getting securities registered in
their name at the time of book closure and risk of stocks coming
under objections when they are send to the company's registrar for
registration if the pledge defaults in repayment.
· increase in maximum limit of advances from Rs. 10 lakh to Rs.
20 lakh per borrower and reduction in minimum margin from 50% to
25% by banks for advances against dematerialized securities as per
the Monetary and Credit Policy for the first half of 1998-99
announced by the Reserve Bank of India.
· reduction in brokerage of 0.25% to 0.5% by many brokers for
trading in dematerialized securities - Brokers provide this
benefit to investors as dealing in dematerialized securities
reduces their back office cost of handling paper and also
eliminates the risk of being the introducing broker.
· reduction in handling of huge volumes of paper
· periodic status reports to investors on their holdings and
transactions, leading to better controls
Dematerialized securities can be delivered in the dematerialized or physical segment from April 1998 at those stock exchanges where
trading in dematerialized securities is allowed. But physical
securities are not allowed to be delivered in dematerialized segment, making
dematerialized stocks held with the investors more
liquid than physical stocks
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