Demat of Shares Mandatory for Private Companies – Practical Guide and Process

The Ministry of Corporate Affairs (MCA) has mandated all private companies, except small companies, to issue securities only in dematerialized form within 18 months from March 31, 2023. This means that after September 30, 2024, all private companies, except small companies, will only be able to issue shares and other securities in electronic form.

This mandate is part of the government’s efforts to promote ease of doing business and reduce the use of physical certificates. Dematerialization of securities offers a number of advantages, including:

• Reduced risk of loss or theft of certificates
• Faster and more efficient transfer of ownership
• Easier to track and manage shareholdings
• Reduced costs of printing and issuing certificates

The MCA has also issued guidelines to help private companies comply with the new mandate. These guidelines cover a variety of topics, such as the process of dematerializing securities, the role of depositories, and the rights and obligations of shareholders.

Private companies that are not yet compliant with the new mandate should take steps to do so as soon as possible. The MCA has advised companies to contact their depository participants (DPs) for assistance.

Legal Provision: The new Rule 9B, effective from 27th October 2023, mandates that every private company (excluding small companies) must issue securities only in dematerialized form and facilitate the dematerialization of all its securities.

Exemption from Above

The following are exempt from the mandatory dematerialization of shares for private companies in India:

• Small companies: Small companies are defined as companies with a paid-up capital of not more than ₹4 crore and a turnover of not more than ₹40 crore in the previous financial year.
• Government companies: Government companies are exempt from the mandatory dematerialization requirement under Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014. However, a wholly owned subsidiary of a government company is not exempt from the mandatory dematerialization requirement under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

All other private companies are required to dematerialize all of their securities within 18 months from March 31, 2023. This means that after September 30, 2024, all private companies, except small companies and government companies, will only be able to issue shares and other securities in electronic form.

Benefits to Private Companies

There are a number of benefits for private companies that dematerialize their shares:

• Reduced risk of loss or theft of certificates: Dematerialized shares are stored electronically in a depository, which reduces the risk of loss or theft.
• Faster and more efficient transfer of ownership: The transfer of ownership of dematerialized shares is much faster and more efficient than the transfer of physical share certificates. This is because the transfer is done electronically through the depository.
• Easier to track and manage shareholdings: Dematerialized shares are easy to track and manage through the demat account. This is because the demat account provides real-time information on the shareholder’s holdings.
• Reduced costs of printing and issuing certificates: Dematerialization of shares reduces the costs of printing and issuing physical share certificates.
• Improved corporate governance: Dematerialization of shares improves corporate governance by making it easier to track and manage shareholdings. This also makes it more difficult to engage in fraudulent activities, such as benami transactions.

In addition to these benefits, dematerialization of shares also makes it easier for private companies to raise capital and attract investors. This is because investors are more likely to invest in companies whose shares are dematerialized, as this makes the investment process more convenient and secure.

Overall, the benefits of dematerializing shares far outweigh the costs. For this reason, the Ministry of Corporate Affairs (MCA) has mandated all private companies, except small companies, to dematerialize their shares within 18 months from March 31, 2023.

Problems to Private Companies

While there are a number of benefits to dematerializing shares, there are also some potential problems:

• Costs: There are some costs associated with dematerializing shares, such as the fees charged by depository participants (DPs).
• Complexity: The dematerialization process can be complex for companies and shareholders who are not familiar with it.
• Lack of awareness: Some companies and shareholders may not be aware of the benefits of dematerialization or the mandate to dematerialize shares.
• Technology risks: Dematerialized shares are stored electronically, which means that they are vulnerable to cyber attacks and other technology risks.
• Digital divide: Some companies and shareholders may not have access to the internet or other digital technologies required to dematerialize their shares.

The Ministry of Corporate Affairs (MCA) has taken steps to address some of these problems. For example, the MCA has reduced the fees charged by DPs for dematerializing shares. The MCA has also issued guidelines to help companies and shareholders comply with the dematerialization mandate.

However, there are still some challenges that need to be addressed. For example, the MCA needs to do more to increase awareness of the benefits of dematerialization and the mandate to dematerialize shares. The MCA also needs to work with stakeholders to develop measures to mitigate the technology risks associated with dematerialized shares.

Overall, the dematerialization of shares is a positive development. However, it is important to be aware of the potential problems and to take steps to mitigate them.

Here are some additional steps that private companies can take to mitigate the problems associated with dematerializing shares:

• Choose a reputable DP.
• Educate shareholders about the benefits of dematerialization and the process involved.
• Develop a contingency plan in case of a cyber attack or other technology failure.
• Assist shareholders who do not have access to the internet or other digital technologies.

By taking these steps, private companies can minimize the problems associated with dematerializing shares and reap the full benefits of this important reform.

Step by Step Process in Detail to be Done by Private Companies

The step-by-step process for private companies to dematerialize shares is as follows:

1. Pass a board resolution authorizing the dematerialization of securities.
2. Obtain ISIN
3. Appoint a depository participant (DP), if the company does not already have one.
4. Provide the DP with the necessary information and documentation, such as the company’s registered office address, the names and addresses of the directors, and the details of the securities to be dematerialized.
5. Instruct the DP to initiate the dematerialization process with the registrar and transfer agent (RTA).
6. Notify the company’s shareholders of the mandate to dematerialize shares and the process involved.
7. Cooperate with the DP and the RTA to ensure that the dematerialization process is completed smoothly.

Here is a more detailed explanation of each step:

Step 1: Pass a board resolution authorizing the dematerialization of securities

The board of directors must pass a resolution authorizing the dematerialization of the company’s securities. This resolution should authorize the company’s representatives to take all necessary steps to complete the dematerialization process.

Step 2 : Obtain ISIN

As per Rule 9B(5) and Rule 9A(4), every non-small private limited company must facilitate the dematerialization of all its existing securities by making the necessary application to a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996, and must secure an International Security Identification Number (ISIN) for each type of security and must inform all its existing security holders about such facility.

Step 3: Appoint a depository participant (DP), if the company does not already have one

A DP is a financial institution that acts as an intermediary between the company and the depository. The DP will be responsible for processing the dematerialization requests and crediting the electronic shares to the company’s demat account.

Step 4: Provide the DP with the necessary information and documentation

The company will need to provide the DP with the following information and documentation:

• The company’s registered office address
• The names and addresses of the directors
• The details of the securities to be dematerialized, including the ISIN number, the face value, and the number of shares

Step 5: Instruct the DP to initiate the dematerialization process with the registrar and transfer agent (RTA)

The RTA is a company that is appointed by the company to manage its share register. The DP will initiate the dematerialization process by sending a request to the RTA. The RTA will then verify the details of the request and the company’s share register.

Step 5: Notify the company’s shareholders of the mandate to dematerialize shares and the process involved

The company must notify its shareholders of the mandate to dematerialize shares and the process involved. This notification should be sent to the shareholders in writing and should be published on the company’s website.

Step 6: Cooperate with the DP and the RTA to ensure that the dematerialization process is completed smoothly

The company must cooperate with the DP and the RTA to ensure that the dematerialization process is completed smoothly. This includes providing the necessary information and documentation, and responding to any queries from the DP or the RTA.

Once the dematerialization process is complete, the company’s physical share certificates will be destroyed and the corresponding number of electronic shares will be credited to the company’s demat account. The company can then use the electronic shares to transfer shares to shareholders, issue new shares, or raise capital.

It is important to note that the dematerialization process can be complex and time-consuming. It is therefore advisable for private companies to seek professional advice from a DP or a lawyer.

Step by Step Process in Detail to be Done by Shareholder

Step 1: Open a demat account with a depository participant (DP)

A DP is a financial institution that acts as an intermediary between the investor and the depository. There are two depositories in India: National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). You can choose any DP to open your demat account.

Step 2: Fill out a dematerialization request form (DRF)

You can obtain a DRF from your DP. The DRF will require you to provide information such as your name, address, demat account number, and the details of the shares you want to dematerialize.

Step 3: Submit the DRF and your physical share certificates to your DP

Once you have filled out the DRF, you need to submit it to your DP along with your physical share certificates. It is important to note that your physical share certificates will be destroyed once the dematerialization process is complete.

Step 4: Your DP will verify the details and forward the DRF and share certificates to the company and the registrar and transfer agent (RTA)

The RTA is a company that is appointed by the company to manage its share register. The RTA will verify the details of your share certificates and the DRF. Once the verification is complete, the RTA will approve the dematerialization request.

Step 5: Once the company and RTA approve the dematerialization request, your physical share certificates will be destroyed and the corresponding number of electronic shares will be credited to your demat account

The dematerialization process usually takes about 15-30 days.

How We can Assist You

We can assist you in the following ways with the dematerialization of your company’s shares:

• We will help you to pass a board resolution authorizing the dematerialization of your company’s shares.
• We will help you to appoint a depository participant (DP), if you do not already have one.
• We will provide the DP with the necessary information and documentation on your behalf.
• We will instruct the DP to initiate the dematerialization process with the registrar and transfer agent (RTA).
• We will notify your company’s shareholders of the mandate to dematerialize shares and the process involved.
• We will cooperate with the DP and the RTA to ensure that the dematerialization process is completed smoothly.