Introduction
In the digital age, the dematerialisation of shares has transformed how securities are traded and held in India. The Companies Act, 2013, along with the regulations by the Securities and Exchange Board of India (SEBI), provides the framework for this transition. Dematerialisation refers to the process of converting physical share certificates into electronic form, which can then be traded, held, or transferred more efficiently. This article explores the dematerialisation of shares under the Companies Act, 2013, its importance, and its impact on corporate governance and investor protection.
Background
Under the Companies Act, 2013, listed companies have been required to maintain their shares and securities in dematerialised form for seamless trading on stock exchanges. This was a step toward modernising the trading and ownership of securities in India. Subsequently, the MCA, through a notification dated September 10, 2018, inserted Rule 9A in the Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘PAS Rules’), mandating every unlisted public company to issue and hold its securities only in demat form.
Recently, with the Companies (Prospectus & Allotment of Securities) Second Amendment Rules, 2023 (‘Present Amendment’), the MCA extended this requirement to private companies. Rule 9B was inserted into the PAS Rules, making it mandatory for private companies to hold their securities in demat form as well.
What is Dematerialisation?
Dematerialisation refers to the process of converting physical share certificates and securities into electronic or digital format. This transformation allows shares to be held, traded, transferred, and managed seamlessly through electronic means. The primary purpose is to make transactions cost-effective, efficient, and secure, eliminating the risks associated with physical shareholding such as loss, theft, forgery, or damage.
In dematerialisation, all securities are held in a digital format, ensuring ease in transferring ownership, reducing paperwork, and making processes more transparent.
Which companies are required to demat securities?
The requirement for dematerialisation applies to all
- Public company
- private limited companies in India,
except small companies and Government Companies i.e. small and government companies are excepted from facilitate their securities into demat form.
A small company, as per the Companies Act, 2013, is defined as one having a paid-up share capital not exceeding ₹4 Crores or a turnover not exceeding ₹40 Crores as of March 31, 2023. If a private company exceeds these thresholds, it is categorised as a non-small company and must comply with the dematerialisation mandate.
Exceptions to Small Company Criteria
Certain entities, regardless of their size in terms of capital or turnover, are required to comply with the demat requirement. These include:
- Holding companies and subsidiary companies
- Companies registered under Section 8 of the Companies Act (non-profit entities)
- Companies or bodies corporate governed by any special Act
Securities Covered under Dematerialisation
The term “securities” in the dematerialisation context includes all forms of securities such as equity shares, preference shares, debentures, and warrants. This broad definition ensures that various instruments of ownership and debt are subject to the demat process.
Deadline for Compliance
Private companies classified as non-small must ensure their securities are dematerialised by September 30, 2024. This deadline provides ample time for companies to transition to the digital format and adapt their processes for compliance.
Consequences of Non-Compliance
Failure to comply with the dematerialisation requirement will attract penalties under the Companies Act, 2013. Although Section 29 of the Act does not specify a particular penalty, Section 450 of the Act applies.
Under Section 450:
- The company and every officer in default will be liable to a penalty of ₹10,000.
- In the case of continuing contravention, there is an additional penalty of ₹1,000 per day, subject to a maximum of ₹2,50,000 for the company and ₹50,000 for each officer or person in default.
These penalties emphasize the importance of compliance and ensure that companies adhere to the dematerialisation mandate in a timely manner.
Conclusion
The dematerialisation of shares under the Companies Act, 2013, is a major step toward modernising the Indian securities market and corporate governance. It has brought numerous benefits to companies, investors, and regulators alike. By transitioning to a paperless system, India has created a more transparent, efficient, and secure environment for the trading and holding of securities.
As companies increasingly adopt this system, the regulatory framework will continue to evolve, promoting further reforms that enhance investor protection and ensure the integrity of the corporate sector.
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Disclaimer: The information provided in the above article has been prepared with careful consideration of the key provisions and fundamental questions related to the Companies Act, 2013, and the Companies (Prospectus and Allotment of Securities) Rules, 2014. However, under no circumstances shall the author be held liable for any direct, indirect, special, or incidental damages arising from or in connection with the use of the information provided.
For inquiries, the author can be contacted via email at [email protected].
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