In the modern era of the business world, the way we hold and transfer shares has evolved drastically. One of the most significant changes is the shift from physical share certificates to electronic shares through a process called dematerialisation. While dematerialisation has been common for listed companies for many years, it has now become mandatory for many private companies in India as well. In this article, we will explain everything you need to know about the dematerialisation of shares for a private company, including what it means, its benefits, the legal requirements, the step-by-step process, and key points to keep in mind.
What is Dematerialisation?
Dematerialisation, often called “demat,” is the process of converting physical share certificates into electronic form. Once converted, these shares are held in a digital account called a Demat Account with a depository like the National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL). This eliminates the need for physical certificates and makes buying, selling, and transferring shares easier and safer.
Why is Dematerialisation Important for Private Companies?
For a long time, private companies were allowed to continue issuing and holding physical share certificates. However, with amendments in the Companies Act, 2013, and SEBI regulations, many private companies are now required to dematerialise their shares, especially if they meet certain thresholds like paid-up capital or turnover.
Even if it is not mandatory, rather optional for your company, dematerialisation offers several advantages:
- Enhanced transparency: Digital records reduce the chances of fraud, forgery, or loss of share certificates.
- Easy transferability: Transferring shares becomes a quick and hassle-free electronic process.
- Compliance with regulatory requirements: Aligns the company with the latest legal norms.
- Investor confidence: Electronic shares inspire greater trust among current and potential investors..!
- No risk of damage or theft: Physical certificates can be damaged, lost, or stolen, but demat shares remain safe.
Legal Framework for Dematerialisation in India
The legal foundation for the dematerialisation of shares in India comes from:
- Companies Act, 2013: Section 29 mandates certain companies to issue securities only in dematerialised form.
- Depositories Act, 1996: Governs the depositories, participants, and processes involved in dematerialisation.
- SEBI Regulations: Securities and Exchange Board of India (SEBI) has issued regulations to ensure the smooth functioning of the depository system.
As per the Ministry of Corporate Affairs (MCA) notification dated October 27, 2023, all private companies (except small companies and government companies) must issue and hold shares in demat form if they meet the prescribed thresholds.
When Does Dematerialisation Become Mandatory for Private Companies?
According to the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, private companies are required to dematerialise their shares if:
- Their paid-up share capital is ₹4 crore or more, or
- Their annual turnover is ₹50 crore or more.
Such companies must ensure that all their existing securities are converted into demat form within 18 months from the end of the financial year in which they cross these thresholds.
Step-by-Step Process of Dematerialisation for Private Companies
1. Board approval:
The company’s Board of Directors should pass a resolution to initiate dematerialisation and appoint a Registrar and Transfer Agent (RTA).
2. Register with a Depository:
The company must register with NSDL or CDSL through a Depository Participant (DP) or RTA.
3. Sign tripartite agreement:
A tripartite agreement must be signed between the company, the depository (NSDL/CDSL), and the RTA.
4. Obtain ISIN:
The International Securities Identification Number, viz. (ISIN), is a unique code assigned to the company’s shares. It is necessary for identifying and trading securities in electronic form.
5. Notify shareholders:
The company must inform all existing shareholders about the dematerialisation process and ask them to convert their physical share certificates into dematerialized form.
6. Shareholder action:
Shareholders must open a Demat Account with a DP (if they do not have one) and submit the Dematerialisation Request Form (DRF) along with original share certificates to their DP.
7. Verification and approval:
The DP sends the DRF and shares certificates to the RTA, which verifies the details and confirms the dematerialisation.
8. Credit of shares:
Once approved, the shares are credited to the shareholders’ Demat Accounts electronically, and physical certificates are destroyed.
9. Ongoing compliance:
All future share issues, transfers, or allotments must be in demat form.
Benefits of Dematerialisation for Companies and Shareholders
- Convenience: Eliminates paperwork and simplifies record-keeping.
- Cost-effective: Reduces the costs of printing, stamping, and storing physical certificates.
- Speed: Share transfers are processed much faster.
- Accuracy: Electronic records prevent errors common in manual record-keeping.
- Better governance: Helps companies maintain clean and updated records, improving corporate governance.
- Easier fundraising: Attracts investors who prefer shares in electronic form.
Challenges and How to Overcome Them
Some private companies and shareholders face challenges in dematerialisation:
- Lack of awareness: Some shareholders may not understand the need or the accurate process. Companies should conduct awareness sessions or send detailed guides to convey better knowledge about it.
- Resistance to change: Shareholders accustomed to physical certificates may hesitate. Companies must explain the benefits and regulatory necessity.
- Cost concerns: Initial costs of appointing an RTA and obtaining an ISIN may worry small companies. However, these are one-time expenses that are outweighed by long-term benefits.
Key Points for Private Companies to Remember
- Dematerialisation is not optional once your company crosses the threshold; it is a legal requirement.
- All new securities issued after mandatory demat applicability must be in electronic form only.
- The company must update its statutory registers and filings with the Registrar of Companies (ROC) accordingly.
- Any delay or failure to dematerialise shares after the due date may lead to penalties and restrictions on issuing or transferring shares.
- Small companies (with paid-up capital less than ₹4 crore and turnover below ₹50 crore) are currently exempt, but voluntary dematerialisation is still recommended for ease of doing business.
Conclusion
Dematerialisation of shares is a major step towards modernising and simplifying shareholding for private companies. It not only aligns companies with evolving or current legal requirements but also brings numerous benefits like security, transparency and convenience in the company structure. While the process may seem complex initially, careful planning, professional assistance and clear communication with shareholders can make the transition smooth.
Private companies should act intensely to complete the process of dematerialisation on time and avoid non-compliance. In the long run, this digital shift will make companies more effective and efficient, investor-friendly, and also help them to strengthen their reputation and readiness for future growth.
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