Dematerialization of Securities by Unlisted Company

 Gone are the days of Physical Securities! (By CS Mallika Tayal) 

 Dematerialization of Securities: (Section 29 of the Companies   Act, 2013)

In order to enhance transparency in ownership at Corporates, curb benami transactions and to make the framework free from loopholes Ministry is coming up with many drives these days through different initiatives, may it be striking off of companies under section 248(1) and (2), disqualification of directors under section 164(2)(a) or the latest KYC updates of Directors.

What is the Concept of Dematerialization?

Dematerialization, or demat, in a very simple language involves conversion of the physical stocks into electronic form.

Scope of Dematerialization:

Till now, Dematerialization of Shares was a mandatory requirement for a listed entity to have its entire promoter shareholding and non-promoter shareholding in demat form but after the notification of September 10, 2018, (1),

Every unlisted public company shall:

(a)   issue the securities only in dematerialized form; and

(b)   facilitate dematerialization of all its existing securities

in accordance with the provisions of the Depositories Act, 1996 and regulations made thereunder.

Any such company can make any offer for issue, buyback or transfer of securities only after the of dematerialization of the entire holding of securities. Also, any holder of such securities intending to transfer or subscribe any securities by any way, on or after 2nd October,2018 shall ensure that all his existing securities are held in dematerialized form before such subscription or transfer.

Process of Dematerialization:

Currently, there are two depositories registered with SEBI and are licensed to operate in India:

1.       NSDL (National Securities Depository Ltd.)

2.      CDSL (Central Depository Services (India) Ltd.) 

Now, Dematerialization begins with

1.       Opening of Demat Account (which may take around a month’s time), for which one must shortlist a Depository Participant(DP) that offers Demat services. (2)

2.      To open a Demat Account, the following documents are required:

i.            Board Resolution of the company

ii.            PAN of the company/individual

iii.            Photographs of authorized signatory/individual

iv.             Latest Income Tax Returns of the applicant

v.             Proof of Identity & Proof of Residence, Spice 32/ INC-22 in case of company.

3.      Once the Demat Account is opened, the request for conversion of physical shares has to be made in “Dematerialization Request Form” (DRF) which has to be deposited along with the share certificates to the Depository Participant (“DP”).

4.      The DP shall process the request to the Company along with DRF and share certificates and once the request is accepted by the Company, the Company shall destroy the physical share certificates and confirm the dematerialization of shares to the concerned DP. Finally, a credit in the holding of shares will reflect in the investor's account electronically.

 (1)  http://www.mca.gov.in/Ministry/pdf/CompaniesProspectus3amdRule_10092018.pdf 
(2)https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpi=yes&intmId=15

Benefits of dematerialization

ü  Ease of managing shares and transactions conveniently from anywhere and at any time.

ü  No Stamp Duty, only handling charge is to be paid.

ü  Maintenance of physical shares from any sort of damage is done away with.

ü  Reduced time for completion of such transactions.