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.
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.
Share Dematerialisation applies broadly across the securities market:
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 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.
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.
The dematerialisation of shares offers several benefits, making it a preferred option for investors and companies alike:
Failure to convert physical shares into electronic form can lead to several disadvantages, including:
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.
Dematerialization of shares is a process by which your physical shares are converted into electronic format to be held in a Demat account.
Two central depositories authorized by SEBI are responsible for holding the securities in electronic form on behalf of the shareholder. All forms of investment instruments like securities, bonds, mutual funds, etc can be held in a Demat account. DP or Depository participant provides depository services to investors.