Dematerialisation of Shares

Dematerialisation is the process of transferring physical shares into a digital account, known as a Demat account, which simplifies managing and trading shares. Converting physical shares to Demat enhances security, reducing the risks associated with physical shares like loss or theft. It also makes trading faster and more efficient and simplifies share management. Previously required mainly for public companies, the dematerialisation process is now mandatory for private limited companies. All private limited companies, except small ones must convert physical shares to Demat by September 30, 2024.  

IndiaFilings is well-equipped to support companies in this transition, helping them convert their physical shares into electronic ones through expert guidance and streamlined processes.

Looking to convert physical shares to Demat? Contact our experts today for a smooth and hassle-free transition!

What is Dematerialisation of shares?

Dematerialisation refers to the process of converting physical securities, such as share certificates and other documents, into electronic format. These securities are then held in a demat account.

A depository, responsible for maintaining securities in electronic form, can hold various types of securities, including bonds, government securities, and mutual fund units. These are managed by a registered Depository Participant (DP), which acts as an intermediary offering depository services to investors and traders in accordance with the Depositories Act of 1996.

In India, two depositories are registered with SEBI and are authorised to operate:

• NSDL (National Securities Depository Ltd.)
• CDSL (Central Depository Services (India) Ltd.)

Dematerialisation of Shares of Private Companies

In October 2023, the Ministry of Corporate Affairs (MCA) introduced an amendment to the Companies (Prospectus and Allotment of Securities) Rules 2014, known as the Companies (Prospectus and Allotment of Securities) Second Amendment Rules 2023. This amendment included the addition of Rule 9B, which now requires all private limited companies, except small and government companies, to dematerialise their securities.

MCA's Rule 9B - Dematerialisation of Shares of Private Companies

Before the introduction of Rule 9B by the Ministry of Corporate Affairs (MCA), dematerialisation of shares was not compulsory for private limited companies. The mandate previously applied only to publicly traded companies and certain large private entities. Most private companies continued to rely on physical share certificates, which were susceptible to loss, theft, and forgery.

In October 2023, the Ministry of Corporate Affairs (MCA) revised the Companies (Prospectus and Allotment of Securities) Rules, 2014, by implementing Rule 9B. This regulation mandates that all private companies, except those classified as small companies (those with a paid-up capital below Rs.4 crore and a turnover less than Rs.40 crore), must dematerialise their shares by September 30, 2024.

The critical elements of Rule 9B are as follows:

• Issuance of Securities: Private companies must issue securities solely in dematerialised form.
• Conversion of Existing Shares: All physical share certificates must be converted into electronic form.
• Preparation by Promoters and Directors: Before any new securities are issued, private companies must ensure that shares held by promoters, directors, and key managerial personnel are dematerialised.
• Transfer and Subscription of Shares: Any transfer or subscription of securities by the company must be conducted in dematerialised form.
• Compliance Deadline: Companies that no longer meet the "small company" criteria based on their financial records after March 31, 2023, have 18 months to comply with these requirements.

Applicability of Dematerialisation of Shares  

The dematerialisation of Shares applies to a wide range of entities in the securities market.

• Public Companies: All public companies in India are required to dematerialise their shares.
• Private Limited Companies: Private limited companies, except those categorised as small companies, must also comply with dematerialisation regulations. 
• Holding and Subsidiary Companies: Regardless of the financial thresholds set for small companies, any private limited company that is a holding company or a subsidiary of another corporate body must convert physical shares to Demat.

Small Companies Exception

 A small company is a private limited company with a paid-up capital of INR 40,000,000 or less and a turnover not exceeding INR 400,000,000 in the preceding financial year. These companies are exempt from mandatory dematerialisation unless they are holding or subsidiary companies of other corporations, in which case they must comply regardless of their financial metrics.

Advantages of Dematerialisation of Shares

Converting physical shares to a Demat (dematerialised) account offers several compelling advantages for shareholders and companies alike:

• Enhanced Security: Dematerialization eliminates the risks associated with physical certificates, such as theft, loss, or damage. Electronic shares are securely stored in a digital format, reducing the potential for fraud.
• Ease of Transactions: Buying and selling shares become significantly quicker and easier when they are held in a Demat account. This streamlined process enhances the efficiency of trading activities, making it possible to execute transactions at the click of a button.
• Reduced Costs: Handling physical documents often involves higher costs due to stamp duties, handling charges, and other overheads. Dematerialisation reduces these expenses, as electronic records do not incur such costs.
• Convenience: Managing a Demat account is simpler compared to handling physical papers. Shareholders can access their holdings anytime and from anywhere, using online platforms provided by their depository participants.
• Automatic Updates: Corporate actions like dividends, stock splits, and bonus issues are automatically updated in the Demat account, ensuring shareholders always have up-to-date information and receive their entitlements without any need for physical intervention.
• Loan Collateral: Shares held in Demat form can easily be pledged as collateral to secure loans, often facilitating quicker loan approvals compared to physical shares.

Requirements of Dematerialisation of Shares of Private Companies

To align with Rule 9B, private  limited companies should follow these step-by-step procedures for dematerialisation:

• Amend Articles of Association (AoA): Modify the AoA to enable shareholders to hold shares in dematerialised form. This legal foundation ensures that electronic holding of shares is permissible under your company's charter.
• Appoint a Registrar and Transfer Agent (RTA): Select a SEBI-registered RTA to oversee the dematerialisation process. This agent will act as the intermediary between the shareholders and the depositories.
• Obtain International Securities Identification Number (ISIN): Each type of share that the company issues must be assigned an ISIN, which is a unique code required to identify the shares in the electronic space.
• Open Demat Accounts: Direct shareholders to open Demat accounts with a Depository Participant (DP), which could be a bank or brokerage firm. This account will hold the shares in electronic form.
• Dematerialize Existing Shares: Coordinate with your RTA to convert all existing physical share certificates into electronic form. This involves validating the authenticity of the certificates and their ownership before they are converted.
• Ensure Compliance for Key Personnel: Verify that all shares held by promoters, directors, and key managerial personnel are dematerialised.
• Filing Form PAS 6 to MCA: File half-yearly returns using the PAS 6 form to report the details of dematerialisation to the MCA.

Last Date for Dematerialisation of Physical Shares

The physical shares to demat deadline depends on the company's financial year-end date. If the company follows the standard financial year ending on March 31,  the physical shares to demat last date is 18 months later, September 30, 2024. 

However, if a company's financial year ends on December 31, as with a financial year ending on December 31, 2023, the Last Date for Dematerialisation of Physical Shares would be 18 months after that, falling on June 30, 2025.

How to Convert Physical Shares into Demat?

The process of dematerialisation of shares is straightforward and typically completed within a few days. Here's a step-by-step guide on how to dematerialise shares:

Opening a Demat Account

The first step in dematerialising your shares is to open a Demat account with a Depository Participant (DP). DPs typically act as intermediaries between you and the depository and are often share brokers. To open an account, you’ll need to complete an account opening form, providing clear and legible details, including your bank account number, IFSC code, bank name and branch, and branch address.

Once your Demat account is set up, you should convert your physical share certificates into electronic form

Submit a Demat Request Form (DRF)

Obtain a DRF from your DP, complete it, and sign it. Ensure the names and signatures match those on the share certificates and the company's records.

Verification and Conversion

The concerned authorities will verify the details after submitting the DRF along with your physical share certificates.

Dematerialisation Request Number (DRN)

Once your DP approves the documents, you will receive a Dematerialization Request Number (DRN) as confirmation of your request.

Forwarding to Registrar and Share Transfer Agent (RTA)

The DP will then send your dematerialisation request to the respective company's Registrar and Share Transfer Agent (RTA).

Conversion to Electronic Form

After the RTA approves your request, your physical share certificates will be converted into electronic format and destroyed to prevent misuse.

Credit to Your Demat Account

The shares, now in electronic form, are credited to your Demat account. You can then sell these shares or transfer them to other accounts as needed.

Penalties for Non-Dematerialisation of Shares for Private Companies

The penalties for not completing the dematerialisation of shares of private companies can be quite stringent under Rule 9B. Here are the potential consequences:

• Restrictions on Securities Transactions: Companies that fail to meet the requirements will be barred from issuing or allotting any securities, including those involved in bonus share schemes and buybacks.
• Limitations for Shareholders: Shareholders who do not convert their physical shares into dematerialised form will face restrictions, such as being unable to sell their shares or participate in new subscriptions.
• Monetary Fines for Companies: Companies in violation of Rule 9B can be fined INR 10,000, with an additional INR 1,000 for each day the violation continues, accumulating to a maximum penalty of INR 200,000.
• Penalties for Officers in Default: Officers of the company found in default may incur fines up to INR 50,000.

Easily Convert Physical Shares to Demat with IndiaFilings!

IndiaFilings offers comprehensive support to companies looking to dematerialise their shares through NSDL/CDSL. We take charge of the entire dematerialisation process, handling all the necessary procedures and documentation to ensure a smooth and efficient transition. With our expert guidance, your company can seamlessly shift to a digital shareholding structure, enhancing the security and accessibility of your securities. 

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