Draft Rules for mandatory dematerialisation of share certificate by Public Companies

The Ministry of Corporate Affairs (MCA) has issued a draft of Companies Dematerialisation of Certificates) Rules, 2011 (Draft Rules) on 6 June 2011 for public comments. Comments are to be sent to MCA latest by 30 June 2011.

Key highlights of the Draft Rules are as under:

1. The Draft Rules are proposed to be made effective from 1 October 2011.

2. The Draft Rules will be applicable to all public companies and their subsidiaries which have raised money by issue of shares, debentures, by accepting public deposits, stock, bond or any other financial instruments from public, other than from directors of the company.

3. The Draft Rules provides that such companies shall issue and keep share certificates, debenture certificates and certificates issued for receipt of deposits, stock, bond or any other financial instruments only in dematerialised form as prescribed in the Depositories Act, 1996.

4. The Companies falling in above categories are required to convert their existing certificates in the dematerialised form by 30 September 2011.

Our Comments

Dematerialisation process primarily involves appointment of a registrar and share transfer agent and setting up of the connectivity with the depositories (National Securities Depository Limited / Central Depository Services Limited) by the company. In addition, each shareholder will need to open the Demat Account with the Depository Participant. This is a time consuming process and involves cost.

Time limit for conversion of existing shares into dematerialised form appears impracticable. Besides other procedures, companies may also need to amend their Article of Association. Further, the rules are yet in draft form. Assuming final rules are notified by July / August, all the covered companies will need to dematerialise their shares within 1-2 months timeframe.

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June 2021