December 5, 2023

Dematerialisation of shares by Private Limited Company

Dematerialisation of shares is the process of converting physical shares and securities into digital or electronic form. Concept of dematerialisation of shares is so far applicable for public Listed companies only wherein shares are held in Demat account of the shareholder and no physical copy of shares is required to be held.

Basic agenda of dematerialisation is to smooth the process of transfer, issuance, buying, selling etc of shares without any requirement of physical transfer of shares and requirement of filing form with RoC on each transfer.

Ministry of Corporate Affairs (MCA) has made a major amendment in Company (Prospectus and allotment of securities) Rules, 2014 though second amendment rules dated 27th october, 2023. All private companies, other than small companies, are required to convert their securities into Demat form within 18 months from the end of the Financial Year ending on 31st March, 2023.

This article contains a detailed discussion about provision of dematerialisation of shares, who is required to convert, process of conversion, due date of conversion etc.

1. Which company is required to dematerialise their shares

As per newly inserted Rule 9B of Company (Prospectus and allotment of securities) Rules, 2014, every private company is required to convert their securities in dematerialised form except:

Small company
Government Company

Further, Status of the company as “Small Company” or not is required to be checked on the last day of the Financial year ending on or after 31st March, 2023.

Small company is defined under Section 2(85) of Companies Act, 2013 as a company, other than a public company, having:

Paid up share capital not exceeding INR 4 Crores; and
Turnover not exceeding INR 40 Crores.

However, this clause shall not apply to:

a holding company or a subsidiary company,
a company registered under section 8,
a company or body corporate governed by any special Act

2. Which shares are required to be dematerialised

Applicable private companies are required to dematerialise all securities held and are also required to issue new securities in dematerialised form only.

3. What is the timeline of dematerialisation of shares

As per Rule 9B(2), an applicable private company, i.e., which is not a small company as on the last day of a financial year, ending on or after 31st March, 2023,is required to dematerialise its securities within 18 months of closure of such a financial year.
E.g.

Status as on 31st March, 2023: Not a small company

Due date of dematerialisation of shares: 30th September, 2024

Status as on 31st March, 2023: Small Company

Status as on 31st March, 2024: Not a small company

Due date of dematerialisation of shares: 30th September, 2025

4. Other requirements

Every private company, which is required to dematerialise its securities, can make any issue of security or buyback or bonus shares issue or rights issue offer only after the entire holding of its promoters, directors, key managerial personnel are dematerialised in accordance with the provisions of the Depositories Act, 1996.

Further, a shareholder of a private company, which is required to dematerialise its securities, can make transfer of shares, subscribe any issue or bonus shares or right issue (through private placement or otherwise) is required to comply provisions of dematerialisation and shall ensure that all his securities are held in dematerialised form before such subscription or transfer.

5. Procedure of dematerialisation of shares

The company is required to follow below process of dematerialisation of securities:

Enabling provisions in Article of Association (AOA): The Article of Association (AOA) of a company provides power of dematerialisation of shares. Therefore, if AOA does not contain provisions related to Demateralisation, the company is required to make a corresponding amendment in AOA.

Convey of Board Meeting: The company is required to hold a Board Meeting to approve the dematerialisation of shares and appoint an authorised person to carry out the entire process.
Selecting Depository Participant (DP) and opening a Demat Account:

In dematerialisation of securities, the shares are held in an electronic account maintained by the Depository. Demat Accounts are as good as bank accounts wherein securities are held in electronic form and the same can be bought and sold with ease electronically. Depository Participant (DP) act as an intermediary between investor and Depositor. Depository Participant help in opening of Demat account with Depository and facilitate the entire dematerialisation process.

A list of registered DPs are available on the website of National Securities Depository Limited (“NSDL”) or Central Depository Services (India) Limited (“CDSL”).

Appointment of Registrar and Share Transfer Agent (RTA):

Registrar and Transfer Agents (RTA) are registered with the Securities and Exchange Board of India (SEBI). They provide services related to share registry maintenance and share transfer activities for companies that have issued shares to the public. The company will appoint the RTA from the list of registered RTAs.

Execute Tripartite Agreement

The company shall enter into a tripartite agreement between the company, the Depository and the RTA. Such agreement shall specify the scope of services to be undertaken by each of the party.

Activate International Securities Identification Number (ISIN)

An International Securities Identification Number (ISIN) is a unique 12-digit code that identifies a security. ISINs are used to facilitate the trading, clearing, and settlement of securities transactions, especially across borders.

Upon verification and submission of all the documents with the DP and RTA, the depository will issue the International Securities Identification Number (“ISIN”), i.e., a unique code for each and every security, These are essential for accurate and efficient tracking of securities on a global scale.

Inform and Assist the shareholder

Post opening the Demat account, the company inform the shareholders about dematerialisation and also shall inform the process to be followed. Such company should provide instructions and assistance to shareholders to open Demat accounts with DPs.

6. Procedure of dematerialisation of shares by shareholder

The Company has earlier issued physical shares to the shareholders. Now such shares are required to be converted into Dematerialised form. The shareholders are required to follow below process:

Selection of Depository Participant (DP)

Similar to the company, the shareholders are required to open their Demat Account where they can hold their shares. Therefore, first shareholder is required to select a depository participant who can help in opening a demat account. Few popular examples of Depositary Participants are Zerodha, Groww, HDFC Securities etc.

Opening a Demat Account

Shareholder is then required to open his Demat account with the help of Depository participant through submission of Know Your Customer (KYC) documents and other documents as may be required. Opening a Demat is account is now an easy process and entire process takes 2-3 days only.

Submission of Physical Copy of share certificate and file request for Demateralisation

The shareholder shall submit his physical copy of share certificate with Depository Participant alongwith Dematerialisation request form (DRF) and other supporting documents.

Verification of DRF

The DP shall verify the information furnished in DRF and documents provided. Once the verification is complete, the DP shall forward the dematerialization request to the respective depository (e.g., NSDL or CDSL in India).

Confirmation and Record Update

Once the depository verifies and approves the dematerialization request, the physical shares are canceled, and the equivalent electronic shares shall get credited in account of shareholder.

7. Conclusion

Dematerialisation of securities of unlisted companies is a welcome move as it will remove the requirement of keeping a physical copy of the share certificate and will ease the process of issuance and transfer of shares. However, it may be costly affair for the company.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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