So far, the concept of dematerialisation of shares has applied only to publicly listed companies that allow shareholders to hold their shares in a demat account. However, vide Notification dated 27 October 2023, the MCA has extended such a requirement to public unlisted companies and private companies as well, except in certain cases.

For dematerialisation of securities, companies are required to follow a procedure that will allow shareholders to hold their shares in demat form.

This article discusses the procedures required to be followed for dematerialisation of shares:

1. What procedure is to be followed by the company and shareholder to dematerialize shares?

The Company and shareholders are required to take the following quick steps for dematerialisation of securities:

1. Obtain ISIN (International Security Identification Number) for all existing securities issued by the company;
2. Provide securities of shareholder in dematerialised form as and when the request is received from the shareholder;
3. The companies are required to complete the demat procedure by 30th September 2024;

2. Procedure for allotment of ISIN?

2.1 Concept of Depository and Depository Participants

• A depository is an organization that holds securities (equity, preference, bonds, debentures, etc.) in dematerialised form. In India, NSDL and CDSL are two government-registered depositories. It facilitates the service of storage and trading of securities in electronic form.
• Such shares are held in demat form through Depository Participants.

• Depository participant is a registered intermediary between the company and the Depository and it facilitates the trading process by connecting investors to the depository in India.
• Depository participants are required to fulfill the net worth criteria specified by SEBI and depositories.
• There are many DPs in India such as Zerodha, Sharekhan, Groww, etc.

2.2 Appointment of Registrar and Share Transfer Agent (RTA)

• RTA acts as an intermediary between the company and the Depository (NSDL/CDSL) for facilitating dematerialisation and corporate actions undertaken by the issuer.
• RTA files an application for the allotment of an ISIN number to the Depository on behalf of the company.
• Further, it verifies the request received for dematerialisation of shares from the Depository participant and forwards the same to the company.

2.3 What is ISIN?

• An ISIN is a unique 12-digit alpha-numeric identification number allotted to any securities. E.g. INE081A01020.
• A different ISIN is allotted to different securities, i.e., if a company has Fully Paid Equity Shares, partially paid equity shares, preference shares, debentures, etc. then different ISIN shall be allotted for every security.
• Therefore, if a private company is having a different class of shares then ISIN should be applied for all securities by the due date.

2.4 Process of allotment of ISIN

• An application for allotment of ISIN is required to be filed by RTA to the depository on behalf of the company.
• The Company is required to submit the following documents to apply for allotment of ISIN:
  • Board Resolution authorising any director or any other person to sign the documents for ISIN allotment;
  • Net Worth Certificate
  • ISIN Activation form;
  • Tripartite Agreement executed between the Company, RTA, and NSDL/CDSL. Each party involved signs three copies of the agreement, including the Depository Participant, RTA, and Issuer.
  • Audited Financial Reports along with signed audit report.
  • GST Certificate.
  • Memorandum and Articles of Association (MOA/AOA) and Certificate of Incorporation or Conversion.

2.5 What is the fee applicable for the allotment of ISIN?

For allotment of ISIN, the Company is required to make payment of the amount of the following fee:

1. RTA Fee (as offered by RTA), 
2. CDSL/ NSDL Joining Fee (One Time) (Based on paid-up share capital)
3. CDSL/ NSDL Annual custody fee (based on paid-up share capital)
4. Security Deposit

3. Process of Dematerialisation of Shares

The shareholder and the company are required to follow the below-mentioned procedure for dematerialisation of securities:

3.1 Meaning of dematerialisation of shares

Dematerialisation is the process through which physically held shares are converted into electronic form and transferred to the Demat account of the shareholder. Dematerialisation only results in the conversion of the form of holding (from physical certificate to electronic share certificate).

3.2 Process of dematerialisation of shares?

• For dematerialisation, the shareholders are first required to open a Demat Account. If a shareholder is already having a Demat Account then no different account is required to be open.
• Then the shareholder shall fill out a “Dematerialisation Request Form” (DRF) and shall submit the same to the depository participant along with a physical copy of the share certificate.
• Such request shall be forwarded by the DP to the concerned issuer company or the RTA of the company for further processing.
• Once the confirmation is received from the Company or the RTA, the DP shall credit such securities in the Demat account of the shareholder.

Source: NSDL FAQs

3.3 What are the pre-conditions for dematerialisation of shares?

The following are prerequisites for dematerialisation of shares:

• Shares should be registered in the name of the shareholder in the record of the company or its RTA.
• The Company must have obtained the ISIN for such securities
• Shares must be free from any lien charge or encumbrance.

4. Other Issues

4.1 Can a private company issue shares in physical form?

• The due date for conversion of shares in Demat form is 30th September 2024. 
• Therefore, the company can issue shares in physical form till 30th September 2024 in physical form. However, such shares should be dematerialised by the due date.
• After 30th September 2024, the company shall be allowed to issue the shares in dematerialised form only.

4.2 Can new shares be issued in dematerialised form if the process is still not completed for existing shares?

• As per Rule 9B of PAS Rules, the company shall be allowed to issue new shares post-due only if the promoters, directors, and key managerial personnel have dematerialised their holding.
• The new shares are required to be issued in dematerialised form.

4.3 What are the penal provisions for non-compliance?

• No specific penalty is provided for the validation of demat provisions. Therefore, a general penalty clause, i.e., Section 450 of the Act will apply. 
• As per Section 450 of the Act, on the company and every officer in default, the following amount of penalty shall be levied:
  • INR 10000/-
  • In case of continuing contravention, a further penalty of INR 1000/- per day during which default continues

• Maximum penalty shall be levied of INR 2,50,000 in case of a company and INR  50,000 in case of an officer in default

5. Conclusion

Dematerialisation is a new concept for private companies, and the entire process of obtaining ISIN and dematerialising shares is time-consuming. Therefore, companies are required to initiate the process well in advance so that compliance can be completed by the due date.