The Ministry of Corporate Affairs (MCA) has proposed vide notification dated 06.06.2011 that all public companies and their subsidiaries convert share certificates and bonds into an electronic (demat) form. The Companies (Dematerialization of Certificates) Rules, 2011, are proposed to come into force from October 1. All new issuances will also have to be in demat form. MCA has also proposed to make this mandatory for all existing paper certificates by September 30.

The rules will cover all public companies “which have raised money by issue of shares and debentures, by accepting public deposits, stock, bond or any other financial instruments from public,” said the MCA circular, issued this week.

Under the Companies Act, a public company is a voluntary association of members which is incorporated and, therefore, has a separate legal existence. The liability of its members is limited. It has to have at least seven shareholders.

The move could improve transparency and ease of transaction for both companies and investors, while making monitoring by regulatory bodies more organised, said experts.

R H Patil, chairman, Clearing Corporation of India, welcomed the move. “It’s a good move. It will help MCA monitor these companies better,” he said. Patil, who spearheaded the demat movement in the listed space as chief of the National Stock Exchange in the 90s, said the move must be implemented in phases. “The larger companies should be taken up first. When we did this for the listed firms, there were a few thousand companies. Here, the number could run into lakhs.”

The move could bring business for intermediaries such as depositories, depository participants and registrar and transfer agents. “We are talking about some 200,000 companies,” said Cyrus Khambatta, senior vice-president, Central Depository Services Ltd (CDSL), one of the two major depositories in the country.

DEMAT BENEFITS:

# Safe and convenient way to hold securities

# Elimination of risks in physical form (bad delivery, fake securities, delays, thefts, etc)

# Major reduction in paperwork

# Easy and instant transfer of securities

# No stamp duty on transfers

He said while the depositories were ready for this massive exercise, response from shareholders was critical. “Companies who have even 10-15 shareholders will have to appoint registrar and transfer agents or connect directly with the depositories. The difficult task will be to get investors holding these instruments to present them for dematerialisation.”

NSDL chief Gagan Rai did not respond to calls and text messages.

Registrars say they will get more business but will keep fingers crossed until the norms are finalised. MV Ramanarayanan, director, Link Intime Ltd, a registrar and transfer agent, said, “It is an opportunity. But we will have to wait for the final norms.”

According to him, service providers like depositories, depository participants and registrar and transfer agents may have to provide concessional rates for smaller companies. “Size of capital could be a factor,” he said.

Companies will have to pay an annual fee based on the number of folios to the several intermediaries.

A registrar, who did not want to be named, said a number of companies which had private equity investments were already holding shares in demat form. Even high-value debentures and bonds issued by companies are usually in demat form.

There are also apprehensions that 90 per cent companies are dormant and will not respond to the call at such a short notice.

MCA has invited comments from all stakeholders by June 30.

Source- Business Standard

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