Question

Study the following case: Mr. Z holds 50 shares of Peculiar Company Ltd. in physical mode and wishes to convert the same into electronic mode. (a) Mr. Z holds a Saving Bank Account with CFDH Bank Ltd. Can he deposit his shares into this account for demat? (b) What type of account is needed for the same? (c) Is it the RBI which will be the custodian of shares of Mr. Z after demating?

Hint:

Remember the key players in holding shares: {Investor} → opens a {Demat Account} with a {Depository Participant (DP)} → The {DP} connects to the central {Depository (NSDL/CDSL)}, which is the ultimate electronic record-keeper of the shares.

Answer 1

Analysis: This case is about the process of dematerialization, which is converting physical share certificates into electronic holdings. Clarifications:

[(a)] Using a Savings Bank Account: No, Mr. Z absolutely cannot deposit his physical shares into his Savings Bank Account for dematerialization. A savings account is meant for holding cash deposits and conducting banking transactions. Securities like shares require a specialized account.
[(b)] Type of Account Needed: To hold shares in electronic form, Mr. Z needs to open a Demat Account. This account can be opened with a Depository Participant (DP). Many banks (like CFDH Bank Ltd. in the example) and stockbroking firms function as DPs. So, Mr. Z can approach his bank to open a Demat account, which is separate from his savings account. He would then need to fill a Dematerialization Request Form (DRF) and submit it along with his physical share certificates to the DP.
[(c)] Custodian of Shares: No, the Reserve Bank of India (RBI) will not be the custodian. The RBI is India's central bank and regulates the banking system, not the securities market. After dematerialization, the shares are held electronically by a Depository. In India, there are two central depositories: the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL). These depositories are the primary custodians of all dematerialized securities. The DP simply acts as an agent or intermediary between the investor and the Depository.