Dematerialisation of Shares – Another Step toward Digitalisation

Background

Another move of the Government towards digitization and reducing the paper work related to issue and transfer of securities. Earlier this year, Securities Exchange Board of India mandated that except in the case of transmission, every shareholder holding physical shares of listed company cannot transfer physical shares unless they are dematerialised. Extending this move, the Ministry of Corporate Affairs has introduced new rules applicable on unlisted public company to dematerialise their shares. This move will help not only to track records of shareholders digitally but will also ensure that the right person enjoys the benefit of being the shareholders. Let us more understand about the procedure to dematerialise the shares of the Company.

New Provision

The Ministry of Corporate Affairs (MCA), vide its Notification dated 10^th September 2018 has amended the Companies (Prospectus and Allotment of Securities) Rules 2014 by inserting Rule 9A therein, which mandates for issue of securities in demat form only unlisted public companies. As per the Amendment, with effect from 2nd October, 2018, issue of further shares and transfer of all shares by unlisted public companies shall be in dematerialized form only

Applicability

This rule shall be applicable with effect from 2^nd day of October, 2018 on every unlisted public company who shall issue further securities and transfer of all shares by exisiting shareholders.

Here, the Term “Unlisted Public Company” means a company whose securities are not listed with stock exchange and—

1. is not a private company [and];
2. has a minimum paid-up share capital, as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.

Important TimeLine under Dematerialisation of Securities

1. Companies cannot make any offer for issue of any Securities or Buy Back of Securities, or issue by way of Private Placement/ Rights Issue/ Bonus Issue till the exiting securities held by the Promoters, Directors and KMP are held in Demat form.
2. Transfer of securities held by existing shareholders on or after 2nd October, 2018, shall be allowed only in dematerialized form.
3. Even the existing security holders cannot apply / subscribe / receive any securities by way of Bonus Issue / Private Placement / Rights Issues till they get their existing securities are dematerialized.
4. In case of new allotment: only dematerialised shares shall be issued by a unlisted public Company.

Parties Involved under Dematerialisation of Securities

1. The Company: The Company who shares are to be dematerialised needs to get an ISIN (International Securities Identification Number) for each type of security from the Depository i.e. NSDL and/ or CDSL.
2. Registrar to Issue and Share Transfer Agent (RTA): RTA is the person who shall look after all the transaction related to issue and transfer of shares of the Company. The entire request shall regarding the issue and transfer shall be in his record and updated on behalf of the Company.
3. Depository: The Company shall become the member of Depository who shall issue ISIN  to the Company for the type of security.
4. Shareholder: All the shareholder need to have a demat account. If they do not have the Demat account, the Company can also provide a facility to open demat account of the Shareholders.
5. Depository Participant: It act as the agent of Depository and work as intermediaries between the Depository and Security Holder.

Procedure for Dematerialisation of Shares

1. Execute and submit Certified true copies of the following below mentioned documents along with the payment toward processing and Annual Issuer charges through NEFT/Demand Draft.
   • A triparty agreement is to be entered between the Company, Depository and RTA. Here it is pertinent to note down that date of execution of agreement should be left blank as the same will be inserted after signing of copy of agreement by Depository.
   • Master Creation Form.
   • Details of the Securities in the format as prescribed by Depository.
   • Copy of Board Resolution for admission of securities with Depository.
   • Undertaking cum indemnity bond.
   • Annual Report for last three years
   • Memorandum of Association and Article of Association along with Certificate of Incorporation.
2. Once the Depository would be satisfied about the completion of documents, it will issue the ISIN to the Company.

Payment of Fees

The unlisted public company shall ensure:

1. Timely payment of fees to Depository and RTA as per the agreement executed.
2. Shall make security deposit of fees which shall not be less than 2 year fees.
3. Shall comply with the regulations/ circulars/guidelines issued by SEBI/Depository
4. No offer of securities/buyback/right issue/bonus issue shall be made until all the default related to payments are made good to the Depositories/RTA

Compliance during the Year 

1. Every Unlisted Public Company shall submit the audit report provided under regulation 55A of the securities and Exchange Board of India (Depositories and participants) Regulations, 1996 on a half-yearly basis to the Registrar under whose jurisdiction the registered office of the company issituated.
2. The provisions of the Depositories Act, 1996, the securities and Exchange Board of India (Depositories and participants) Regulations, 1996 and the securities and Exchange Board of India (Registrars to an Issue and share Transfer Agents) Regulations, 1993 shall apply mutatis mutandis to dematerialisation of securities of unlisted public companies.

Grievances and Remedies

The grievances of security holders of unlisted public companies, if any, under this rule shall be filed before the Investor Education and protection Fund Authority.

The Investor Education and protection Fund Authority shall initiate any action against adepository or participant or registrar to an issue and share transfer agent after prior consultation with the securities and Exchange Board of India.

Benefits of Dematerialisation of Shares

1. FOR COMPANY
   • No issue of Physical shares/ physical transfer: The Company is not required to issue shares/ transfer shares in hard copies.
   • No maintenance of hard copies: The paper work related to issue and transfer of shares is eliminated.
   • Time saver and economical: The dematerialisation not only saves time but also reduce the cost of maintaining documents in hard copies.
   • More Liquidity: The demat shares are highly volatile and are more liquid.
2. FOR SHAREHOLDERS
   • Online facility: The shareholders are given the facility to maintain shares in soft form and can transact their deal online.
   • No threat of loss/ damage: Being demat in nature, there is no threat that the certificate are stolen/ multifaceted/damaged.
   • More liquidity:  Shares hold in demat form are more volatile as compared to physical shares.
   • No share transfer stamp duty: No stamp duty is to be paid on transfer of demat shares, hence will reduce the cost of transfer.

Conclusion

The compulsory dematerialisation of shares is a boon for both the Company as well as the Shareholders. This will not only reduce the cost involved in issue and maintenance of shares but will also reduce the number of disputes as compared to the physical shares. This will also restrict the methodology of transfer of shares back dated. The step of the Government indicates that the our Country is moving more towards digitization and corporate compliances which is actually depicting their ideology “SabkaSath, Sabka Vikas”.