Dematerialized shares are electronically held securities that have largely replaced physical share certificates in modern financial markets. It simplifies share transactions, provides a secure way to hold and manage investments and ensures compliance with stock exchange and regulatory requirements. After the recent MCA Notification, it is mandatory for certain classes of private companies to dematerialise their shares.
For a private limited company to convert its shares into demat form, the company and the investors must engage with a depository participant (“DP”) and create a corporate demat account.
What is a Depository Participant?
India has two primary depositories – National Securities Depository Limited (“NSDL”) and Central Depository Services Limited (“CDSL”). These depositories facilitate the holding, safekeeping, and electronic transfer of securities and financial instruments. Since it isn’t possible to open an account and trade directly with either of these bodies, DPs step in, which act as a mediator between the Depositories and the investors. Their primary role is to facilitate the opening and maintenance of Demat accounts for investors.
The Procedure to be followed by Private Companies for dematerialising their shares is as follows:
Step – 1: Open a Corporate Demat Account
What is a Corporate Demat Account?
A corporate Demat account is an electronic account held by a company or a corporate entity to hold and manage its financial securities and investments in electronic form. It is similar in concept to an individual Demat account but is designed for business and corporate use. This account can be opened with any DP. Some prominent DPs to open demat account are SBICAP Securities Demat Account, HDFC Securities Demat Account, Kotak Securities Demat Account, Zerodha and IIFL Securities.
A corporate account can only be opened offline, unlike resident individual accounts that can be opened online. But the procedure may vary based on which DP is chosen.
Documents required for opening the Account:
1. Board Resolution indicating the decision and authorization to open a corporate Demat account.
2. List of authorized signatories to operate the corporate Demat account.
3. Document containing the shareholding pattern of the company, outlining its ownership structure.
4. Copy of the PAN card of the Company
5. Proof of address which can be shown by bank statements, electricity bills, any notices issued by the government or any other appropriate evidence.
6. Self-attested copies of the PAN card and Aadhar Card of authorized signatories and directors.
7. Copy of the certificate of incorporation.
8. Memorandum of Association (MOA) and the Articles of Association (AOA) of the company.
9. Copy of the balance sheet of the latest two financial years, attested by a Chartered Accountant.
10. A Printout of the Company’s data present in MCA’s Company Master data.
While these are some of the basic documents, the DP might as for additional documents while opening the Account.
Step – 2: Request the DP for dematerialisation
After the account has been created, a request for dematerialisation can be made by filing the Demat Request Form (“DRF”) which will be available with the DP. It must be submitted along with physical certificates of the shares to be dematerialised. A separate DRF must be filed for each ISIN (International Securities Identification Number), i.e., for each specific security.
Step – 3: Wait for the DP to undertake the process of dematerialization
After filing the DRF form with the chosen DP, the Company has to surrender all of its physical share certificates for the dematerialisation process to begin. Subsequently, the following processes will take place:
1. The DP will intimate the Depository (either NSDL or CDSL) about the request.
2. DP will submit the certificates to the registrar of the Issuer Company.
3. The Registrar will confirm the demat request to the depository
4. After dematerialising the certificates, Registrar updates the accounts and informs the depository regarding the completion of dematerialisation.
5. Following the dematerialization, the Depository will update its accounts and inform the DP who will then inform the Company and update its demat account.
Hence, the Demat process will be complete.