Dematerialization in Indian Securities Market

Settlement of trades in securities market involve two main steps: i) transferring securities and funds and ii) transferring ownership. During the era of physical share certificates, both of these steps had anomalies, as every transfer required sending physical securities along with a transfer form etc, to the issuer company or registered share transfer agents. This transfer process was time consuming and many times took longer than the period of sixty days prescribed in the Companies Act 2013 (earlier Companies Act, 1956). The post-liberalization period also witnessed a significant increase in both primary and secondary market activity. Though, the stock exchanges transitioned trade entries by the end of the 1990s, the automation of post-trade settlement was imperative due to the increase in investor complaints arising mainly from the physical transfer of shares and transfer documents. The challenges were bad delivery, signature mismatches, postal delays, loss of documents in transit, etc. To resolve the challenges, the Depositories Act of 1996 was enacted with the overarching goal of facilitating seamless, prompt, and secure transferability of securities through the process known as demateralisation.