An Overview Of The Rule Regarding Dematerialization

Dematerialisation

Maintaining a record of all paper-based documents is consistently challenging. Furthermore, the growing volume of paperwork each day can lead to the misplacement of essential documents, potentially triggering disruptions in the stock market and its associated businesses. Additionally, when shares are held in Demat form, the transferor is not required to pay stamp duty. This system is designed to facilitate hassle-free security transfers with minimal paperwork and increased speed in financial trading.

The term “Dematerialisation” is not explicitly defined in the Depositories Act, 1996, or the Companies Act, 2013. Nevertheless, in common usage, it refers to the process of converting physical shares into electronic form. The primary objective is to streamline the procedures involved in buying, selling, transferring, and holding shares while also making these processes more cost-effective and secure.

Process of Dematerialisation: Dematerialisation can be done via opening a Demat Account. This account can be opened in a registered depository via a depository participant. Currently, in India, there are two registered depositories namely;

1. National Security Depository Limited (NSDL), and
2. Central Depository Security Limited (CDSL).

A depository participant can process the request for Demat account by filling out the Dematerialization Request Form (DRF), which is available with the depository participant, Share certificates, and other required documents.

After all the verification and documentation process the registered depository provides an ISIN Code for every registration. This code is nothing but a unique 12-digit alphanumeric code to identify the shares.

PAS-6 Form: Form PAS-6 is a form that must be filed with the Registrar of Companies (ROC) by every unlisted public company within 60 days of the end of each half-year (i.e. 30th September and 31st March). The goal of submitting this form is to give the Registrar of Companies information about the shares that were allotted and/or transferred over the half-year period. The due date for filing this form is 29th November (for the April-September Period) and 30th March (for the October to March Period)

Documents to be verified / examined: The following documents need to be verified by the registered depository before issuance of Dematerialised shares[1]:

1. Documents

1.1 Appointment letter.

1.2 Certified copy of memorandum and articles of association.

1.3 Latest audited account(s).

1.4 Letter of intent / Master Creation Form submitted to depository.

1.5 Confirmation letter from depositories for admission of sharesfor demat (which also gives ISIN).

1.6 Copy of latest annual return filed with the Registrar ofCompanies.

1.7 Copy of e-Form No. PAS -3 filed with Registrar of Companiesfor allotment of shares.

1.8 Copy of e-Form No.SH-7 filed with Registrar of Companies forchange in authorized share capital.

1.9 Return of buy-back of shares filed with Registrar of Companies.

1.10 Certified copy of the resolution passed by the Board forforfeiture and re-issue of forfeited shares.

1.11 Certified copy of the NCLT order and e-Form INC 28 filed withRegistrar of Companies for reduction of capital.

1.12 Certified copy of the order issued by NCLT for Amalgamation Scheme / Restructuring and e-Form INC 28 filed with Registrar of Companies.

2. Registers

2.1 Minutes of the board meeting and general meeting.

2.2 Register of Members.

2.3 Register of Demat / Rematerialisation.

2.4 Beneficiary details furnished by Depositories.

3. DRF form and Correspondence with the client
4. Annual Report of the company

Legal Framework

Initially, Sub-section (1A) was inserted under Section 29 of the Companies Act 2013[2] (“the Act”) in facilitating the Central Government to prescribe such class or classes of “unlisted companies” for which the securities shall be held and/ or transferred in dematerialized form only. The word “unlisted companies” has been inserted by omitting the word “Public Companies” vide notification dated 14 August 2019.

[Image Sources: Shutterstock]

Furthermore, Rule 9A was inserted by the Companies (Prospectus and Allotment of Securities) Third Amendment Rules,2018[3] vide notification dated 10^th September 2018. This rule imposes a mandate upon every unlisted public company in regard tothe issuance and facilitation of any shares or securities in dematerialized form only. This dematerialization needs to be done in accordance with the provision of the Depository Act 1996 and regulations made there.

Now, The MCA vide notification dated 27 October 2023[4] notifies mandatorydematerialization for securities of private companies. After Rule 9A It inserted a new Rule Namely Rule 9B, which requires every private company to dematerialize its shares before issuance or any facilitation of such shares. However, it Excludes all the Small Companies and Government Companies from this mandate.  The provisions are applicable with immediate effect, and a timeline of 18 months is provided from the closure of the financial year (i.e. 31^st March 2023) in which a private company is not a small company for compliance with the mandatory dematerialization requirements.

Further, it mandates the shareholders to follow two conditions that are:

1. If a shareholder wants to transfer his Shares he shall get all his shares dematerialized beforehand;
2. If a person wants to subscribe to any share he shall ensure that all his existing shares are in dematerialised form only.

As per section 2(85) of the Companies Act, 2013[5], any private company can be considered a small company, if the following two conditions are met:

1. If the paid-up share capital of a company does not exceed Four Crore rupees, and
2. If the Annual Turnover of the company does not exceed Forty Crore rupees.

As per our understanding of Rule 9B, the following entities are required to dematerialize all their shares:

1. Every Private Companies (except small companies);
2. Subsidiaries of any foreign company (irrespective of the paid-up share or annual turnover)
3. Non-profit organization, as per Section 8 of the Companies Act, 2013 (irrespective of the paid-up share or annual turnover)

This notification expressly mentioned that the provisions of sub-rule (4) to (10) of Rule 9A shall, be applicable to all the private companies as well. In case of any queries or clarification, you may reach out to us at Khurana & Khurana Advocates and IP Attorneys.

Conclusion:

Earlier all listed companies and unlisted public companies were being covered by this rule of dematerialisation. Now, by the issuance of a new notification dated 27^th October 2023, all private companies except small companies will be falling under the ambit of this mandate of dematerialization of shares. This notification will majorly impact all private companies, their shares, and their shareholding pattern. It introduced a new task for private companies in dematerializing their Shares and imposed strict provisions in regard to dematerialization. And, for effective implementation of Rule 9B, the Government has provided a period of 18 months (from the closure of the financial year (i.e. 31^st March 2023) to convert their physical shares into dematerialized form. This dematerialization process will ease the process of the handling of shares, and will definitely reduce the clerical and paperwork.

Author: Dishi Mishra, in case of any queries please contact/write back to us via email to [email protected] or at IIPRD. 

[1]Referencer on E-Form PAS-6, The Institute of Company Secretaries of India, 24 (2020).

[2]The Companies Act, 2013, § 29, No. 18, Acts of Parliament, 2013 (India).

[3] The Companies (Prospectus and Allotment of Securities) Rules, 2014, Notification No. 626, Dated 10 Sep 2018.

[4]The Companies (Prospectus and Allotment of Securities) Rules, 2023, Notification No. 624, Dated 27Oct 2023.

[5]The Companies Act, 2013, § 2 (85), No. 18, Acts of Parliament, 2013 (India).