Dematerialization: The Shift from Physical to Electronic Shareholding
The advent of digital technology has revolutionized various aspects of our lives, and investing is no exception. While physical share certificates were once the norm, the inherent challenges of managing and safeguarding these documents have led to a paradigm shift towards electronic shareholding. This process, known as dematerialization, offers a host of advantages including enhanced security, speed, and convenience.
Dematerialization involves converting physical share certificates into electronic form, which are then held in a demat account maintained by a depository participant (DP). This transition eliminates the risks associated with physical certificates, such as loss, theft, or damage. Additionally, it streamlines the process of share transfer, making it more efficient and secure.
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By embracing dematerialization, investors can enjoy the benefits of a paperless investment portfolio, facilitating seamless trading, dividend payouts, and corporate action participation.
Why is Dematerialization Mandatory for Private Companies?
Dematerialization is the process of converting physical share certificates into electronic form. These electronic shares are held in a demat account with a depository participant (DP) just like shares of publicly listed companies.
Enhanced Security: Electronic records are more secure than physical certificates, reducing the risk of loss, theft, or forgery.
Efficient Transactions: Transfer of shares becomes quicker and simpler with electronic records.
Transparency: Accurate and up-to-date records of shareholding are maintained.
Ease of Management: Streamlined processes for share issuance, transfer, and record-keeping.
Applicability of Dematerialization for Private Companies
The mandate for dematerialization applies to all private companies except:
Small companies (paid-up capital of ₹4 crore or less and turnover of ₹40 crore or less)
Steps Involved in Dematerialization for Private Companies
Amendment of Articles of Association (AoA): The company’s AoA needs to be modified to authorize holding shares in dematerialized form.
Appointment of Registrar and Transfer Agent (RTA): An RTA is responsible for maintaining shareholder records.
Obtaining International Securities Identification Number (ISIN): A unique ISIN is required for each share class.
Opening Demat Account: The company needs to open a demat account with a depository participant.
Dematerialization of Existing Shares: Physical share certificates must be converted into electronic form.
Dematerialization for Promoters, Directors, and Key Managerial Personnel (KMP): Shares held by these individuals must also be dematerialized.
Regular Reporting (PAS 6): Companies need to file Form PAS 6 with the Registrar of Companies (ROC) to report dematerialization details.
Compliance to be done by private Companies
A private company, covered under the provisions of mandatory dematerialisation shall –
- Issue all securities in dematerialised form only;
- Facilitate dematerialisationof all existing securities (as and when request is received from the holder of such securities);
- Ensure that the entire holding of its promoters, directors and KMPs are held in dematerialised form only, prior to making any offer for issuance or buyback of securities
Apart from the aforesaid, the compliances applicable to an unlisted public company under sub-rule (4) to (10) of Rule 9A are also applicable to private companies. These include –
- Application with depository for dematerialisation of all existing securities and securing ISIN for each type of security
- Inform the existing security holders about the facility of dematerialisation;
- Make timely payment and maintenance of security deposit with the depository, RTA and STA as may be agreed between the parties;
- Complies with all applicable regulations, directions and guidelines with respect to dematerialisation of securities of a private company;
- File a return in form PAS-6 with ROC on a half yearly basis within 60 days from conclusion of each half of the financial year, with respect to reconciliation of the share capital of the company;
- Bring to the notice of the depositories, any difference in the issued capital by the company and the capital held in dematerialised form;
- The grievances of any security holders under this rule (Rule9B) to be filed with IEPF Authority, and the same, in turn, shall initiate any action against a depository or depository participant or RTA or STA, as may be required, after prior consultation with SEBI.
Action to be taken by holders of securities of a Private Limited
As for persons holding securities of a private company, while the mandatory dematerialisation cannot be enforced by the private company, the same is expected to be taken care of by way of sub-rule (4) of Rule 9B that requires –
- Dematerialisation of securities by the securityholder, before the transfer of such securities; and
- Subscription to the securities issued by a private company, in dematerialised form only
Common Reason for Rejection of Demat Request
- Incorrect Holder(s) name / Pattern
- Certificate details mismatch
- Transmission Form / Death Certificate not submitted
- Signature mismatch
- Mismatch between share quantity received and DRF quantity
- Shares under stop transfer / court injunction
- Allotment / Call Payment receipt not attached
- Certificates sent are reported stolen
- Duplicate certificates already issued
- Old defunct certificates surrendered for demat
- Forfeited securities surrendered for demat
- Forged endorsement on certificate
What to do in case of Rejection of Demat Request
- Your DP will inform you about the rejection of demat request.
- You can also see the transaction status in your statement of transactions.
- Understand the reason for rejection from Objection Memo sent by Issuer / RTA.
- Rectify the errors / remove the deficiency in the documentation.
- Submit demat request once again through your DP.
- Conclusion
Consequences of non-compliance
There are no specific penal provisions governing the non-compliance with the provisions of section 29 of the Act read with Rule 9B of the PAS Rules, and therefore, general penal provisions under section 450 of the Act should apply.
Hence, Dematerialization is a significant step towards improving corporate governance and investor protection in India. While it may present challenges, the long-term benefits are substantial. By embracing this change, private companies can enhance their operational efficiency, transparency, and overall investor confidence. As one of the Best strategy consulting firms in Calicut, we provide expert guidance to ensure seamless compliance and smooth transition to digital asset management
