Dematerialization of Shares: A Step-by-Step Guide for Companies & Shareholders

Understanding Dematerialization:

Dematerialization of shares is the process of converting physical share certificates into an electronic format, held in a Demat account. This account is managed by a Depository Participant (DP)/(Brokers), a registered intermediary with a depository like NSDL or CDSL.

Regulatory Requirement for Dematerialization of Shares:

As per the Ministry of Corporate Affairs (MCA) Circular and applicable regulations, every private company, other than a small company, and every public company must issue securities only in dematerialized form and not in physical form. Additionally, they are required to facilitate the dematerialization of all their securities. This regulatory mandate aims to enhance transparency, ensure operational efficiency, and standardize compliance practices across companies.

Key Points under this Circular and applicable regulations:

1.Dematerialization Mandate:

• Previously, this requirement applied to public companies.
• Now, it extends to private companies (excluding small companies) to ensure transparency and ease of transactions.

2. Facilitation, Not Compulsion:

• Companies are required to facilitate the process of dematerialization for their shareholders.
• However, shareholders cannot be compelled to convert their physical shares into dematerialized form.

3. No Physical Issuance:

• Any issuance of securities by private companies (other than small companies) must be done exclusively in dematerialized form.
• This includes new shares issued under private placement, rights issues, or bonus shares.

4. Promoter and Key Managerial Shares:

• Before issuing any securities, companies must ensure that shares held by promoters, directors, and key managerial personnel have already been dematerialized.

For Companies: Step-by-Step Guide to Facilitate Dematerialization:

Step 1: Engage a Registrar and Transfer Agent (RTA):

• Appoint an RTA to manage shareholder records, dematerialization, and liaison with depositories.
• Charges: Maintenance Fee: ₹5,000 annually + one-time fee of ₹5,000.

Step 2: Facilitate ISIN Creation to Depositories (NSDL/CDSL):

• Collaborate with the RTA to create ISIN through NSDL and/or CDSL.
• Apply for ISIN with the depositories where shareholders have demat accounts.
• Charges: Annual Custody Fee: ₹5,000 annually, ₹15,000 joining fee, and ₹10,000 security deposit (per depository).

Step 3: Notify Shareholders:

• Inform shareholders about the creation of the ISIN to facilitate the dematerialization process. Include the ISIN number in the notification for their reference.

Step 4: Process Dematerialization Requests:

• Shareholders submit a Dematerialization Request Form (DRF) along with their physical share certificates to the brokers where they hold their Demat accounts.
• The brokers then forward the DRF and physical share certificates to the Registrar and Transfer Agent (RTA) for further processing. The RTA submits the documents to the company for verification.
• Once the company verifies the details, it returns the verified request to the RTA. The RTA then intimates the depository to credit the shares into the shareholders’ Demat accounts and cancels the physical share certificates.

Step 5: Maintain Records:

• • Company Shall Keep a record of approved dematerialization requests for compliance and reference.

For Shareholders: Step-by-Step Guide to Dematerialization:

Step 1: Open a Demat Account:

• Make sure shareholders have an active demat account. If not, they should open a demat account with a registered Depository Participant (DP) (Broker), such as a bank or a brokerage firm.

Step 2: Submit a Dematerialization Request:

• Shareholders fill out a Dematerialization Request Form (DRF), which is available from their broker. The form requires shareholders to provide details of the physical shares they wish to dematerialize, such as the company name, certificate numbers, and the quantity of shares.
• Along with the DRF, shareholders must also submit their KYC (Know Your Customer) documents for verification purposes.

Step 3: Surrender Physical Share Certificates:

• Shareholders needs to submit the physical share certificates along with the Dematerialization Request Form (DRF) to their Depository Participant (DP).
• It is essential to ensure that the certificates are endorsed with a signature that matches the one registered with the shareholder’s demat account.

Step 4: Verification:

• The Depository Participant (DP) will verify the documents and share certificates submitted by the shareholder.
• After verification, the DP sends the documents to the company for further verification.

Step 5: Dematerialization:

• Upon successful verification, the DP will initiate the dematerialization process with the respective depository (NSDL or CDSL).
• The physical share certificates will be cancelled, and an equivalent number of shares will be credited to your demat account.

Step 6: Confirmation:

• Shareholder will receive a confirmation of dematerialization from your DP or Broker once the process is complete.
• The dematerialized shares will reflect in Shareholder’s demat account statement.

Things to Remember During the Dematerialization Process:

Verify Demat Account with Depositories:

• Before applying for ISIN, verify the depositories where shareholders hold their demat accounts. For example, Sharekhan typically uses NSDL, while Zerodha uses CDSL.
• If shareholders hold demat accounts with both depositories, the company must apply for ISIN with both NSDL and CDSL.
• Alternatively, the company can request shareholders to open a demat account with a specific broker who holds accounts with a particular depository (CDSL or NSDL) to reduce costs, as approximately Rs. 30,000 is required per depository.
• • If the DP ID of the demat account of the shareholder starts with “IN”, the depository is NSDL. If it starts with a number, the depository is CDSL.

Pay Annual Fees on Time:

• Ensure the company pays annual custody fees and charges to both the depositories and the RTA on time. Late payments may result in penalties or interest charges.

Check BENPOS Regularly:

• After dematerialisation, shareholders can transfer shares directly without intimating the company.
• Track Beneficiary Position (BENPOS) reports weekly to stay updated on any share transfers.

File PAS-6 Form:

• Ensure the company files Form PAS-6 with the Ministry of Corporate Affairs (MCA) on a half-yearly basis, as it is a mandatory compliance requirement.

Ensure Correct Signature: 

• Shareholders should ensure their Delivery Instruction Slip (DIS) is submitted to the broker with a signature matching the one on record with their demat account.

Provide Contact Details: 

• The company should provide clear and accessible contact details for shareholders. This ensures they can address any issues or queries they might face during the dematerialization process.

Portfolio and Reports: 

• Sometimes, shares of unlisted companies (Public or Private) may not reflect in the shareholder’s portfolio or broker app. In such cases, shareholders should check the Holding Report, DPSR Report, or NSDL Consolidated Account Statement (CAS) to confirm the holding of these shares.

Shareholder Choice: 

• Shareholders may choose not to dematerialize their physical shares. As per the MCA Circular, companies can only facilitate dematerialization but cannot compel shareholders to convert their physical shares into demat form.
• However, shareholders holding physical shares will face certain restrictions:
• They will not be able to transfer shares.
• They will not be eligible to subscribe to private placement, bonus shares, or rights offers.