Dematerialisation is the process of transferring physical shares into a digital account, known as a Demat account, which simplifies managing and trading shares.
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Dematerialisation is the process of transferring physical shares into a digital account, known as a Demat account, which simplifies managing and trading shares. Converting physical shares to Demat enhances security, reducing the risks associated with physical shares like loss or theft. It also makes trading faster and more efficient and simplifies share management. Previously required mainly for public companies, the dematerialisation process is now mandatory for private limited companies. All private limited companies, except small ones must convert physical shares to Demat by September 30, 2024.
LegallensIndia is well-equipped to support companies in this transition, helping them convert their physical shares into electronic ones through expert guidance and streamlined processes.
Looking to convert physical shares to Demat? Contact our experts today for a smooth and hassle-free transition!
Dematerialisation refers to the process of converting physical securities, such as share certificates and other documents, into electronic format. These securities are then held in a demat account.
A depository, responsible for maintaining securities in electronic form, can hold various types of securities, including bonds, government securities, and mutual fund units. These are managed by a registered Depository Participant (DP), which acts as an intermediary offering depository services to investors and traders in accordance with the Depositories Act of 1996.
In India, two depositories are registered with SEBI and are authorised to operate:
In October 2023, the Ministry of Corporate Affairs (MCA) introduced an amendment to the Companies (Prospectus and Allotment of Securities) Rules 2014, known as the Companies (Prospectus and Allotment of Securities) Second Amendment Rules 2023. This amendment included the addition of Rule 9B, which now requires all private limited companies, except small and government companies, to dematerialise their securities.
Before the introduction of Rule 9B by the Ministry of Corporate Affairs (MCA), dematerialisation of shares was not compulsory for private limited companies. The mandate previously applied only to publicly traded companies and certain large private entities. Most private companies continued to rely on physical share certificates, which were susceptible to loss, theft, and forgery.
In October 2023, the Ministry of Corporate Affairs (MCA) revised the Companies (Prospectus and Allotment of Securities) Rules, 2014, by implementing Rule 9B. This regulation mandates that all private companies, except those classified as small companies (those with a paid-up capital below Rs.4 crore and a turnover less than Rs.40 crore), must dematerialise their shares by September 30, 2024.
The critical elements of Rule 9B are as follows:
The dematerialisation of Shares applies to a wide range of entities in the securities market.
A small company is a private limited company with a paid-up capital of INR 40,000,000 or less and a turnover not exceeding INR 400,000,000 in the preceding financial year. These companies are exempt from mandatory dematerialisation unless they are holding or subsidiary companies of other corporations, in which case they must comply regardless of their financial metrics.
Converting physical shares to a Demat (dematerialised) account offers several compelling advantages for shareholders and companies alike:
To align with Rule 9B, private limited companies should follow these step-by-step procedures for dematerialisation:
The physical shares to demat deadline depends on the company's financial year-end date. If the company follows the standard financial year ending on March 31, the physical shares to demat last date is 18 months later, September 30, 2024.
However, if a company's financial year ends on December 31, as with a financial year ending on December 31, 2023, the Last Date for Dematerialisation of Physical Shares would be 18 months after that, falling on June 30, 2025.
The process of dematerialisation of shares is straightforward and typically completed within a few days. Here's a step-by-step guide on how to dematerialise shares:
The first step in dematerialising your shares is to open a Demat account with a Depository Participant (DP). DPs typically act as intermediaries between you and the depository and are often share brokers. To open an account, you’ll need to complete an account opening form, providing clear and legible details, including your bank account number, IFSC code, bank name and branch, and branch address.
Once your Demat account is set up, you should convert your physical share certificates into electronic form
Obtain a DRF from your DP, complete it, and sign it. Ensure the names and signatures match those on the share certificates and the company's records.
The concerned authorities will verify the details after submitting the DRF along with your physical share certificates.
Once your DP approves the documents, you will receive a Dematerialization Request Number (DRN) as confirmation of your request.
The DP will then send your dematerialisation request to the respective company's Registrar and Share Transfer Agent (RTA).
After the RTA approves your request, your physical share certificates will be converted into electronic format and destroyed to prevent misuse.
The shares, now in electronic form, are credited to your Demat account. You can then sell these shares or transfer them to other accounts as needed.
The penalties for not completing the dematerialisation of shares of private companies can be quite stringent under Rule 9B. Here are the potential consequences:
LegallensIndia offers comprehensive support to companies looking to dematerialise their shares through NSDL/CDSL. We take charge of the entire dematerialisation process, handling all the necessary procedures and documentation to ensure a smooth and efficient transition. With our expert guidance, your company can seamlessly shift to a digital shareholding structure, enhancing the security and accessibility of your securities.
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