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The issue of securities in dematerialized form has been made mandatory for every unlisted public company (hereinafter referred as Company) by Ministry of Corporate Affairs (MCA) by inserting Rule 9A vide notification of the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 dated September 10, 2018 effective from October 2, 2018.

Post notification, the Companies are required to facilitate dematerialization of all its existing securities. Further, following are the action points to be kept in mind by the Companies after October 2, 2018:

Action points to be kept in mind by Companies after October 2, 2018 related to dematerialization

  • Any offer of securities will be in dematerialised form only and further there is no default in timely payment of fees and maintenance of security deposits of not less than 2 years with Depository & Registrar & Share Transfer Agent (RTA)
  • Dematerialisation of entire shareholding of its promoters, directors, key managerial personnel – A pre-requisite for any kind of offer of securities or buyback of securities or issue of bonus shares or rights offer.
  • All subscriptions and transfer of shares shall be done only in dematerialized mode.
  • Submission of Reconciliation of Share Capital Audit Report (as per regulation 55A of the SEBI (Depositories and Participants) Regulations, 1996) on half yearly basis to ROC within 30 days of end of each half year financial year i.e. September 30 & March 31.
  • Following provisions will be made applicable to the Company:
  • Grievances will be dealt by IEPF authority

First and Foremost Step to be done by the Company is to obtain ISIN from the depository, but prior to that let’s understand what dematerialisation is and why is it required?

Dematerialisation is a process through which physical securities such as share certificates and other documents are converted into electronic format and held in a Demat Account.

The aim is to make transactions more transparent. When shares in the electronic form are available with the depositories, it acts as primary evidence for those who hold the shares. Also, the fully automated-system for book-keeping will eliminate all the risks that came along with paper-based certificates.

It is not always possible to track the ownership of shares in the physical format. The move is likely to bring an end to benami transactions.

Are You Ready

Process of dematerialisation of Shares and Securities

  • The Company may offer demat facility to its shareholders by admitting the securities in depository as issuer of eligible securities by submitting application, fee and other documents. A depository is responsible for holding the securities of a shareholder in electronic form. These securities could be in the form of bonds, government securities, and mutual fund units, which are held by a registered DP. Currently, there are two depositories registered with SEBI and are licensed to operate in India:
    • NSDL (National Securities Depository Ltd.)
    • CDSL (Central Depository Services (India) Ltd.)
  • The Company should obtain electronic connectivity with the existing Registrar & Transfer Agent (RTA) or by obtaining In-House connectivity.
  • The depository will send blank copies of Tripartite Agreement (3 copies) to the RTA. The 3 copies of agreement should be sent to depository after signing by RTA & Issuer. ISIN (International Securities Identification Number) generated by depository for the security will be conveyed to the Issuer.
  • Post obtaining ISIN, the Company should facilitate the investors regarding the process of dematerialisation which may involve following steps:
    • Dematerialisation starts with opening a Demat account. For demat account opening, shareholders need to shortlist a Depository Participant (DP) that offers Demat services.
    • To convert the physical shares into electronic/demat form, a Dematerialisation Request Form (DRF), which is available with the DP, has to be filled in and deposited along with physical share certificates. On each share certificate, ‘Surrendered for Dematerialisation’needs to be mentioned.
    • The DP process this request along with the share certificates to the company and simultaneously to RTA through the depository.
    • Once the request is approved, the share certificates in the physical form will be destroyed, and confirmation of dematerialization will be sent to the depository.
    • The depository will then confirm the dematerialisation of shares to the DP. Once this is done, a credit in the holding of shares will reflect in the shareholder’s account
    • This cycle takes about 15 to 30 daysfrom the submission of dematerialization request.

Dematerialisation is possible only with a Demat account, therefore it is essential to learn how to open a demat account to understand dematerialisation.

The joining procedure to be followed by Issuer Company may vary for different depository & RTA. The joining fee and annual fee paid will also vary as per depository & RTA. Further, the company will also require to maintain security deposit, at all times, with depository & RTA, as may be agreed in tripartite agreement.

The Company will also require to comply with the regulations or directions or guidelines or circulars, if any, issued by the SEBI or Depository from time to time w.r.t dematerialisation of shares and matters incidental or related thereto.

Hope this article will provide the basic understanding!!

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April 2024