Why Does Due Diligence Matter When Transferring Physical Share Certificates?

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Till a few years ago, physical share certificates were prevalent however, SEBI has now made it mandatory to dematerialise them. Whether to dematerialise physical share certificates or transfer them, due diligence is important. It allows you to secure profits and avoid major financial risks and damages. If you have to transfer your physical share certificates, due diligence plays a vital role.

Investment through simple online methods like demat is the prevalent method today. However, some traders continue to hold physical share certificates, and while they have pros, transferring physical share certificates involves multiple risks. Several instances of theft, damage, or misplacement amounted to huge losses to holders. However, this is not to create panic, but rather to take due diligence steps and avoid these risks. Let’s understand the importance of due diligence if you transfer physical share certificates.

What is Due Diligence in Share Transfers?

To begin with, due diligence is the process of ensuring deep research and analysis before performing any act. Share transfers mean transferring the ownership of shares to an opposite party. Here, the person transferring shares is called the transferor and the person at the receiving end is the transferee. Transferring shares involves multiple risks and therefore it is advised to perform due diligence i.e. act prudently.

Whether you are purchasing, selling or transferring shares, there is a vital share of your capital involved that you would not want to lose. Acting diligently while sharing transfers is a simple process of taking an extra effort to read documents, understand T&Cs, and analyze available records and data.

If you own physical share certificates, the process becomes a little twisted simply due to the unavailability of easy online transfers making it even more important to act diligently.

Risks of Not Performing Due Diligence

Transferring shares, especially physical share certificates, involves multiple risks because of the high stakes involved. There have been several instances where transferors have lost their shares while transferring due to reasons like non-compliance, fraud, misrepresentation and so on.

SEBI has strict rules that must be followed and a failure can get you into trouble of getting your registration or license invoked.

Failing to perform due diligence means that you are setting yourself up for fraud and misrepresentation traps. There are numerous companies established to conduct online fraud where you might end up losing all your shares.

Additionally, tax potholes have always been a worry for investors and traders. Not performing proper due diligence can get you into tax troubles leading to financial losses or worse a penalty.

Steps for Conducting Due Diligence

Now that you are well-versed with the risks involved if due diligence is not performed, let’s understand how you can perform due diligence while transferring your shares. Firstly, SEBI has made it mandatory to dematerialise physical share certificates. This means that you have to convert your physical share certificates into electronic form. You can either hold your shares electronically or deposit them into a depository in the form of shares, bonds etc.

If you are transferring your physical share certificates into your demat account, make sure to choose your demat account wisely. This involves researching how to transfer physical shares to demat account which involves- ease of opening, hidden charges, maintenance charges, and ease of buying/selling/transferring shares once they are moved into your demat account.

Depositories for your physical share certificates act like a bank where you can store share certificates in the form of shares, bonds etc. Make sure to evaluate the depository’s financial history, current status, charges, and ease of withdrawal to avoid losses. In addition, National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL) are the two government-authorised depositories that you can rely upon.

Benefits of Proper Due Diligence

There are numerous benefits that you get to enjoy if you are acting diligently while transferring your physical share certificates including:

  • Minimise risks

    Transferring physical share certificates involves financial risks that can be avoided with due diligence. This includes financial, tax and legal troubles.

  • Better decision making

    While performing due diligence, you are focused on in-depth research that gives you an upper hand in the trading and investment world. You can use the research data to create a personal data library for better decision-making.

  • Enhance trust and confidence

    Due diligence allows you to interact with multiple online and offline portals that give you an insight into the market helping you set a strong foot as an investor.

  • Legal compliance

    The world of trading requires you to comply with updated rules, laws and regulations. Due diligence ensures that all your steps comply with SEBI and other relevant laws.

  • Tax benefits

    Acting recklessly in the trading world can push you into situations where you are forced to pay taxes that could have been easily avoided with proper due diligence. Additionally, with due diligence, you get to understand tax exemptions in different types of shares, stocks and bonds.


The first step of transferring physical share certificates is dematerialisation either into your demat account or in a depository. Make sure to opt for a reliable portal to dematerialise physical share certificates.

All the above-discussed aspects of transferring physical share certificates with proper due diligence must have made the importance evident. Due diligence is not a concept that asks you to take big steps rather it is about a prudent approach to dealing with your shares. There are multiple benefits of acting diligently.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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