Under Indian law, shares of an unlisted company may be held either in physical form (i.e., denoted by letters of allotment/share certificates issued against such shares) or in dematerialized form (i.e., with the depository participant by opening an account, “Demat account”). Section 29 (1) and Section 29 (IA) of the Companies Act, 2013 talks about the issue of securities by unlisted public company in demat form, promoters by unlisted public company and demat of all existing securities of Key Managerial Personnel or KMP, action by the holder of securities of unlisted company, received through a public company. The Ministry of Corporate Affairs or the MCA has made changes to its mission to promote corporate governance in the country and can be described as a part of “The Swachh Corporate Abhiyan”.
What is meant by Dematerialization of Securities?
Under dematerialization of securities, physical certificates of securities are converted into an electronic form in an equivalent number of securities of the investor.
The promoters of each public company making a public offer of any convertible securities may hold such securities only as securities:The initial holdings of the convertible securities of the company by the promoters are held until the date of the initial public offer, before such offer will be converted into dematerialized form and thereafter shareholding of such promoter will be held in dematerialized form only.
Elaboration of the term securities
The term securities is defined under the Companies Act, 2013 as well as the Securities Contracts (Regulation) Act, 1956.
Section 2 (81) of the Companies Act, 2013 defines the term: “Securities” means the securities as defined in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). It says: “securities” include—
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
The key change
Section 29 of the Act mandates public companies or classes of public companies to issue their securities in dematerialized form as prescribed by the Central Government. The new amendment removes the term “public” from section 29 (1)(b), and this section now applies to all “other classes or classes of companies as may be applicable” by the central government.
In addition, a new section 29 (1A) has been added, stating: “In the case of such class or classes of unlisted companies, the securities will be held or transferred in dematerialized form only in the prescribed manner as prescribed in The Depository Act, 1996.
Thus, non-listed companies, public or otherwise, will be required to mandatorily transfer those shares to be dematerialized in the form of government-determined shares and must comply with the provisions of the Depository Act, 1996 and its rules.
However, the Central Government is yet to notify the class of companies prescribed under this Act which will be affected by this amendment, as well as the related rules. Having said this, it remains to be seen whether private unlisted companies will form part of the defined list of companies, and if yes, whether the government will cover only large-sized private companies or set other criteria for applicability. Small private companies, especially early-stage start-ups that are not wealth/cash-rich, may be affected by the lack of any eligibility criteria, as the cost of dematerialization and compliance can be significant in proportion to their operations. Register to destroy your securities with the respective securities if necessary.
Applicability of Dematerialization of Securities
It is applicable on every unlisted public company with effect from 2nd October 2018 with respect to the issuance of securities in dematerialized form and dematerialization of existing shares.
If we talk about the applicability on debentures, preference shares then we have to look after the definition of securities defined under securities contract (regulations) act, 1956.
Major benefits of Dematerialization of Securities of Unlisted Public Companies?
- Reduce the risk of duplication, fraud, loss or theft, delays in respect of securities held in physical share certificates.
- Enhance the transparency and increase the investor protection.
- Prevent from malpractices and issuance of backdated
- Eliminate the payment of stamp duty on share transfer.
- Now it will ease the securities transfer.
- There will be less paperwork in the transfer of securities.
- It is a more safe & convenient way of holding securities.
- Nomination Facility
- It will reduce the transaction cost
- Immediate transfer of securities
Process of dematerialization
- Shortlisting of a Depository participant
- Depository Participant (DP) is an intermediary between a depository and investors.
- The list of DPs has been made available on the websites of Central Depository Services (India) Limited (CDSL) and National Securities Depository Limited (NSDL).
- The first step in dematerializing shares is to open an account with a DP offering DPT services.
- On opening such an account, investors should not open separate accounts for trading in loans, bonds or any other financial instrument.
- Filling the dematerialization request form
- A Dematerialization Request Form (DRF) available with the DP is required to be filled and submitted by the investor as shown in the image below. With a duly filled DRF form, investors have to hand over their physical share certificates.
- It is important to ensure that on each share certificate, it is surrendered for dematerialization.
- Processing the request
- On submission of DRF and physical certificate, the application is processed by the DP.
- Physical share certificates are presented to the registrar of the issuing company.
- The registrar confirms the dematerialization request.
- Receiving an approval of the request
- After the request is approved, the registrar informs the DP of the completion of the process.
- All share certificates held in physical form are then destroyed.
- The investor’s account will then show the credit of the shares.
- After submitting a dematerialization request, it generally takes about 15 to 30 days for the shares to be transferred electronically.
- This cycle takes about 15 to 30 days after submitting a dematerialization request.
Compliance requirements for unlisted public companies in respect of Dematerialization of Securities
- They have to make the payment of fees on time.
- They are also required to maintain the security deposit of at least 2 years fees according to the agreement made with the depository, registrar & share transfer agent.
- Unlisted Public Companies have to comply with the regulation, guidelines, circulars issued by the SEBI (Securities Exchange Board of India) from time to time.
- It is also required for Unlisted Public Companies to submit audit report half yearly as per regulation 55A of the SEBI (Depositories and Participants) Regulations, 1996 to the registrar under whose jurisdiction the registered office of the company is situated.
- In case of any default made by the unlisted public company in complying with the requirements then they are not eligible to offer securities, issue bonus shares or right issue of shares, buy-back of securities if the payment is not made to the depositories or registrar or share transfer agent.
Offer of sale of shares by certain members of the company
Where certain members of a company make proposals, in consultation with the Board of Directors, in accordance with the provisions of any law, the whole or part of the holding of their shares to the public, they may do so by following certain procedures.
Any document by which the sale is offered to the public shall, for all purposes, be considered a prospectus issued by the company and all laws and rules shall be made in accordance with the contents of the prospectus and the liability in relation to the omission or omission of the prospectus or the prospectus. Relating to otherwise shall apply as a prospectus issued by the company.
Audit report in Form PAS 6 (Reconciliation of Share Capital Audit Report):
Every unlisted public company is required to submit Form PAS 6 within 60 days from the conclusion of each half year duly certified by a company secretary in practice or chartered accountant in practice.
FAQs
What is dematerialization of securities?
Dematerialization is the process of converting physical securities into electronic form. In the context of the Companies Act 2013, it involves the conversion of physical share certificates into electronic or digital format.
Which securities can be dematerialized under the Companies Act 2013?
The Companies Act 2013 allows for the dematerialization of various securities, including shares, debentures, and other marketable securities.
What is a depository and how does it facilitate dematerialization?
A depository is an organization that holds securities in electronic form on behalf of investors. It facilitates dematerialization by providing a platform for the electronic storage, transfer, and settlement of securities.
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