Share Dematerialisation

What is the Dematerialisation of Shares?

Dematerialisation of shares refers to the process of converting physical share certificates into electronic form. This system, widely adopted by the Indian stock market, is crucial for the seamless trading and transfer of securities. In India, shares are held in a Demat Account, which acts as an electronic storehouse for securities, replacing traditional physical certificates. This digitalisation has simplified the process of shareholding, making it safer and more efficient.

The term dematerialisation of shares can be understood as eliminating the need for paper-based share certificates, thus allowing shareholders to manage their portfolios electronically. In addition to shares, other securities like bonds, mutual funds, and government securities can also be dematerialised.

Dematerialisation of Shares in Private Companies

Before Rule 9B, private limited companies weren't required to dematerialise their shares, a mandate that applied mainly to public and large private entities. As a result, many private limited firms used physical certificates, which were prone to theft and forgery.

On October 2023, the Ministry of Corporate Affairs (MCA) introduced Rule 9B by revising the Companies (Prospectus and Allotment of Securities) Rules, 2014. This Rule 9B requires private companies (except small ones) to dematerialise shares by September 30, 2024.

Key points include:

• Securities must be issued in electronic form.
• Existing physical shares must be converted.
• Promoters' and directors' shares must be dematerialised before issuing new securities.
• Transfers and subscriptions must be electronic.
• Non-small companies have 18 months to comply if they exceed thresholds after March 2023.

Scope and Applicability of Dematerialisation

Share Dematerialisation applies broadly across the securities market:

• Public Companies: All public companies in India must dematerialise their shares.
• Private Limited Companies: Private companies, except those classified as small, must also adhere to dematerialisation rules.
• Holding and Subsidiary Companies: Regardless of their financial size, private limited companies holding companies or subsidiaries of other corporations must dematerialise their shares.

Exception

Small companies, defined as those with paid-up capital of ₹40,000,000 or less and turnover below ₹40,000,000, are exempt from mandatory dematerialisation. However, this exemption does not apply to holding or subsidiary companies, which must comply.

Step-by-Step Process of Shares Dematerialisation

Step 1 - Open a Demat Account: To begin, you need to open a Demat account by selecting a Depository Participant (DP) that offers dematerialisation services.

Step 2 - Fill out a Dematerialisation Request Form (DRF): Obtain a DRF from your DP, fill it out, and submit it along with your physical share certificates. Each certificate should be marked as ‘Surrendered for Dematerialisation.’

Step 3 - Submit to DP: The DP forwards the DRF and shares certificates to the company, as well as the Registrar and Share Transfer Agent (RTA) through the depository.

Step 4 - Approval Process: Upon approval, the physical share certificates are destroyed, and confirmation of dematerialisation is sent to the depository.

Step 5 - Credit to Demat Account: The depository confirms the dematerialisation to the DP, and your shares are credited to your Demat account in electronic form.

This process typically takes 15 to 30 days. Since dematerialisation requires a Demat account, it’s crucial to understand how to open one before starting the process.

Deadline for Conversion of Physical Shares

The deadline for converting physical shares to Demat depends on a company's financial year-end. For companies with a standard financial year ending on March 31, the deadline is 18 months later, i.e., September 30, 2025.

For companies whose financial year ended on December 31, 2024, the last date for dematerialisation is June 30, 2026, 18 months after their year-end.

Advantages of Dematerialisation

The dematerialisation of shares offers several benefits, making it a preferred option for investors and companies alike:

• Enhanced Security: Electronic shares are less prone to theft, loss, or damage compared to physical certificates.
  
• Simplified Transfers: Transferring ownership of dematerialised shares is seamless and instantaneous.
  
• Lower Costs: Holding shares in a Demat Account reduces the cost associated with physical certificates, such as stamp duty and handling fees.
  
• Improved Transparency: Dematerialisation ensures accurate record-keeping and enhances regulatory oversight, reducing fraudulent activities.
  
• Convenient Portfolio Management: Investors can manage multiple securities under a single Demat Account, making portfolio management more efficient.

Consequences of Non-Dematerialisation

Failure to convert physical shares into electronic form can lead to several disadvantages, including:

• Inability to Transfer Shares: Shareholders holding physical shares may not be able to transfer or sell them until they are dematerialised.
  
• Non-Compliance Penalties: Companies that do not comply with dematerialisation rules may face fines or penalties from regulatory bodies.
  
• Decreased Liquidity: Physical shares may become illiquid, limiting the shareholder's ability to trade them in the open market.

Conclusion

The dematerialisation of shares has revolutionised the way securities are held and traded, offering numerous advantages to investors and companies. As regulatory frameworks evolve, the shift from physical to electronic shareholding is becoming mandatory for most companies, especially in India. Whether you're an individual investor or part of a private company, embracing share dematerialisation ensures greater security, efficiency, and compliance with legal standards.