Dematerialization of Unlisted Shares- Is it next weapon to crack down on black money??

Introduction

Is after denomination of rupee, dematerialization of shares is next weapon? The government is planning to dematerialize the shares of unlisted limited companies to as a part of the broader the crack down on black money. There is still a very little understanding about dematerialization of shares. Even in today where our PM is trying to connect India digitally, there are still many small shareholder holding shares of even listed company in paper form. According to recent study the person holding share in paper form are either don’t have the knowledge or have used black money to purchase the shares. If an unlisted shares want it can issue shares in dematerialize form.

In India, a depository is an organization which holds securities of investors in electronic form at the request of the investors. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are currently the two registered depositories with SEBI. However, investors cannot directly trade through depositories and must interact through a depository participant. A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services. Many public financial institutions, commercial banks, stock-brokers, clearing corporations /clearing houses and NBFCs complying to the requirements of SEBI are registered as Depository Participants. Both the NSDL and CDSL has hundreds of depository participants through whom investors can deal. To convert shares of a private limited company into demat form, the company and the investors of the company must enter into an agreement with depository participants.

NSDL:

A company has to join the NSDL as Issuer where an Issuer may offer demat facility to its shareholders by admitting the securities in NSDL. Issuer should obtain electronic connectivity with the existing Registrar & Transfer Agent (R&T Agent) or by obtaining In-House connectivity.

After submitting the requisite set of documents to NSDL, NSDL will send blank copies of Tripartite Agreement (3 copies with franking of Rs 200/- each) to the R&T Agent. The 3 copies of agreement should be sent to NSDL after signing by R&T Agent & Issuer.

ISIN (International Securities Identification Number) generated by NSDL for the security will be conveyed to the Issuer.

Documentation

Below are the list of documents that are required for creating company demat account.

• Letter of intent cum Master Creation Form (MCF – https://nsdl.co.in/downloadables/word/MCF%20for%20Equity%20Shares.doc)
• Audited Balance Sheet for last two years – Certified to be true copies.
• Certified true copy of Memorandum & Articles of Association
• Copies of listing/trading permission/confirmation letter received from the stock exchanges with Distinctive Number Range (DNR) for listing of all its shares (If company is listed).
• Copy of the latest Reconciliation of Share Capital Audit report submitted to the stock exchanges (If company is listed)
• Confirmation letter from Registrar and Transfer Agent for common registry (https://nsdl.co.in/downloadables/word/Common-Registry-Confirmation-Letter.DOC)
• Net worth certificate from a Chartered Accountant (https://nsdl.co.in/downloadables/word/Networth-Certificate.doc)
• Undertaking from (If company is private limited – https://nsdl.co.in/downloadables/word/Undertaking-from-co.doc)).
• If company has issued equity shares after latest balance sheet in that case company has to provide certified to be true copy of form no.2.
• List of Authorized signatory with Board Resolution with specimen signature
• If there is any variation in face value of shares or reduction in capital after the last balance sheet d ate in that case company has to provide us certified to be true copy of form no.5.
• If the company is already admitted in CDSL, the ISIN activation letter from CDSL to be submitted.

Fees and Charges for NSDL

(a) Joining Fee by Issuers

• An Issuer of unlisted securities shall pay a joining fee of Rs. 30,000 plus taxes at the applicable rate at the time of joining NSDL, for the purpose of making its shares available for dematerialization.
• Provided however that in case the Issuer gets its securities listed on any recognized stock exchange within one year of joining NSDL, the joining fee paid by the Issuer will get adjusted against the one-time custody fee or Annual Custody Fee, as the case may be.
• If an issuer gets its securities delisted from all stock exchanges where its securities were listed, it shall pay joining fee of Rs. 30,000 plus taxes at the applicable rate. If an Issuer fails to pay the fees, the Depository may stop providing details of clients/ clearing members/ clearing corporation/ intermediary to the Issuer and / or its Registrar and Transfer Agent as mentioned in the Bye Laws and Business Rules. Provided further that the Depository may not permit the Issuer to use its infrastructure including for issue of further securities in electronic form.

(b) Annual Custody Fee:

• An Issuer of listed securities shall pay an annual custody fee at the rate of Rs. 11 per folio (ISIN position) in NSDL, subject to a minimum amount as mentioned below, plus taxes as applicable:

The fee will be based on average number of folios (ISIN positions except temporary ISINs) during the previous financial year. Average number of folios (ISIN positions) will be arrived at by dividing the total number of folios (ISIN positions) for the entire previous financial year by the total number of working days in the said previous financial year. In case the issued capital or ISIN positions increase during the financial year due to issue of further shares, by way of public offer, the custody fee would be charged on a pro-rata basis, at the time of such issue.

• The above fee would be applicable on all securities i.e. equity (except for temporary ISINs), debt, units of mutual funds, pass through certificates, certificates of deposit, commercial papers, preference shares etc., except Government securities.
• The fee will be based on average number of folios (ISIN positions) during the previous financial year. Average number of folios (ISIN positions) will be arrived at by dividing the total number of folios (ISIN positions) for the entire previous financial year by the total number of working days in the said previous financial year.

Provided however that, in case the issued capital or ISIN positions increase during the financial year due to issue of further shares, by way of public offer, the custody fee would be charged on a pro-rata basis, at the time of such issue.

• The fee will be charged every year on a financial year basis and shall be payable by April 30 of that financial year.

If an Issuer fails to pay the fees mentioned under “Annual Custody Fee” by the due date, the Depository may charge interest @ 12% p.a. on the amount, from the due date of payment till the payment is received by the Depository. Provided further that the Depository may stop providing details of clients / clearing members / clearing corporation / intermediary to the Issuer and / or its Registrar and Transfer Agent as mentioned in the Bye Laws and Busin Provided further that the Depository may not permit the Issuer to use its infrastructure including for issue of further securities in electronic form.