Issue, Hold, or Transfer of Securities in Dematerialized Form

Are you a company or an investor feeling uncertain about issuing, holding, or transferring securities in dematerialized form?

Let’s break down dematerialization and its requirements for companies and investors.

What is Dematerialization?

Dematerialization is the process of converting physical certificates of financial securities—such as shares, bonds, or mutual funds—into an electronic format. Investors can hold these electronic securities in a demat account (short for “dematerialized account”). Depositories serve as intermediaries between investors and companies, managing this process.

Benefits of Dematerialization:

For Companies:

• Cost Savings: No need for physical share certificates.
• Streamlined Process: Simplified record-keeping and issuance.
• Faster Transactions: Quick securities issuance.

For Investors:

• Elimination of Risks: No worry of loss, theft, or damage to physical certificates.
• Fraud Prevention: Reduced chances of forgery.
• Quick Settlement of Trades: Faster transaction processing.
• Instant Credit: Immediate credit to the account after selling securities.
• Easy Transferability: Seamless transfer of securities between accounts.

Applicable Provisions:

• Section 29 of the Companies Act, 2013;
• Rules 9A and 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014; and
• Regulation 40 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Which Companies require to issue securities in Dematerialization form?

According to section 29 read with Rule 9A and 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the following companies shall issue securities merely in dematerialization form: –

• every private company other than small company;

(It means that every private company other than small company as on March 31, 2023 (or last date of fY 2023 (if company is following different fY)) or company ceases to be a small company on the end of financial year after March 31, 2023 (or on last date of fY after 2023 (if company is following different fY)) on the basis of audited financial statements for such financial year shall ensure the compliance with in eighteen months from the end of such financial year for issuance and facilitating the dematerialization of securities)

• unlisted public company; and
• listed company shall issue securities merely in dematerialization form.Whether is it mandatory for investors to hold securities in dematerialization form?  As per Section 29 of the Companies Act, 2013 read with the Rules 9A and 9B of Companies (Prospectus and Allotment of Securities) Rules, 2014 Regulation 40 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, an investor may hold the securities either in physical or demat form.

  Except, prior to subscribing the securities either of an unlisted public company or private company, it must ensure that all his existing securities shall be held in demat form.

  Whether is it mandatory for investors to hold securities in dematerialization form for transferring the same?

  As per Section 29 of the Companies Act, 2013 read with the Rules 9A and 9B of Companies (Prospectus and Allotment of Securities) Rules, 2014 and Regulation 40 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015:-

  • For Unlisted Public Company or Private Company

  Every holder of securities of an unlisted public company or private company who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialized before the transfer.

  • For Listed Company

  The listed entity shall not process the request for effecting transfer of securities unless the securities are held in the dematerialized form with a depository.

  (It means that prior to transfer the securities either of unlisted public company, private company or listed company, it is mandatory to hold the securities in demat form).

  Conclusion

  In today’s digital age, dematerialization plays a vital role in ensuring a smooth, secure, and efficient process for managing financial securities. For both companies and investors, shifting from physical to electronic forms offers numerous benefits such as cost savings, fraud prevention, faster transactions, and easy transferability.

  Companies, whether private, unlisted public, or listed, are increasingly required to issue securities in demat form, while investors must also comply with holding and transferring their securities electronically. This transformation minimizes risks associated with physical certificates and aligns with regulatory requirements.

  As we move forward, embracing dematerialization will not only streamline your processes but also provide a secure platform for the transfer and management of your investments.