Dematerialisation of shares

What is Dematerialisation?

Dematerialisation is the process of converting physical securities, like share certificates, into an electronic format, which is then held in a Demat account. These securities are managed by a depository through a registered Depository Participant (DP). In India, the main depositories are NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.).

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Dematerialisation of Shares in Private Companies:

In October 2023, the Ministry of Corporate Affairs (MCA) amended the Companies (Prospectus and Allotment of Securities) Rules, 2014 by adding Rule 9B, which mandates private limited companies (except small ones) to dematerialise their shares by September 30, 2024.

Key Features of Rule 9B:

Issuance of Securities: Private companies must issue all securities only in electronic form.
Conversion of Physical Shares: All existing physical share certificates must be converted into electronic format.
Shares of Promoters and Key Personnel: Shares held by promoters, directors, and key managerial personnel must be dematerialised before issuing new securities.
Share Transfers and Subscriptions: All share transfers and subscriptions must be done in electronic format.
Compliance Deadline: Companies exceeding the small company threshold must comply by September 30, 2024, or within 18 months of meeting the criteria.

Who Must Comply?

Public Companies: All public companies are required to dematerialise their shares.
Private Companies: Private limited companies, except small companies, must adhere to the dematerialisation rules.
Holding/Subsidiary Companies: Private companies that are holding or subsidiary companies must also comply, regardless of their size.

Small Company Exemption:

Small companies (with a paid-up capital under ₹4 crore and turnover below ₹40 crore) are exempt from the dematerialisation requirement, unless they are a holding or subsidiary company, in which case they must comply.

Benefits of Dematerialisation:

Improved Security: Eliminates the risks of loss, theft, or forgery associated with physical certificates.
Streamlined Transactions: Enables faster, simpler share trading and transfer processes.
Cost Efficiency: Reduces costs linked to physical share certificates, such as stamp duties and handling fees.
Convenience: Shareholders can access and manage their holdings online through Demat accounts.
Automatic Updates: Corporate actions like dividends, stock splits, or bonus shares are automatically reflected in the Demat account.
Collateral for Loans: Shares held in Demat form are easier to pledge as collateral for loans.

Steps for Private Companies to Dematerialise Shares:

1. Amend the Articles of Association (AoA): Update the AoA to allow shareholders to hold shares in electronic form.
2. Appoint a Registrar and Transfer Agent (RTA): Select a SEBI-registered RTA to manage the dematerialisation process.
3. Obtain ISIN: Apply for an International Securities Identification Number (ISIN) for each class of shares issued by the company.
4. Open Demat Accounts: Instruct shareholders to open Demat accounts with a Depository Participant (DP).
5. Convert Physical Shares: Work with the RTA to convert all physical shares into electronic form.
6. Dematerialise Shares of Promoters and Key Personnel: Ensure shares held by promoters, directors, and key management personnel are dematerialised.
7. File PAS 6 Form: Submit half-yearly compliance reports to the MCA, outlining the progress of the dematerialisation process.