December 10, 2018

Dematerialization of Shares: Applicability & Procedure

Applicability: The Ministry of Corporate Affairs (MCA) has notified the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 by inserting Rule 9 (A) on 10th September, 2018 making the Dematerialization of Securities of an Unlisted Public company mandatory. The said Amendment Rules came into Force on 02nd October, 2018.

 

Contents:

·       Dematerialization of Shares.

·       Major Highlights of Amendments.

·       Process of dematerialization.

·       Purchasing & Selling of dematerialized securities

·       Benefits of dematerialization.

 

Dematerialization of Shares:

Dematerialization offers flexibility along with security and convenience. Holding share certificates in physical format carried risks like certificate forgeries, loss of important share certificates, and consequent delays in certificate transfers. Handling of paperwork related to shares in the physical format often led to errors and unforeseen mishaps in the past. The authorities in charge of updating these documents could not keep up with the increasing volume of share papers, which, if left unchecked, could cripple the financial base of the Indian share market and associated businesses. Dematerialization eliminates these hassles by allowing customers to convert their physical certificates into electronic format.

 

Major Highlights of Amendments:

As per Rule 9(A)(1), an Unlisted Public Company is required to issue the securities only in dematerialized form and facilitate Dematerialization of all its existing Securities as per provisions of the Depositories Act, 1996 and regulations made there-under.

Further, every Unlisted Company has to ensure that entire holding of securities of its Promoters, Directors, and KMPs is in dematerialized Form, at the time of making an offer for issue or buyback of securities or issue of bonus shares or Rights. Rule 9(A)(2)

Rule 3 of the amendment specifies that every holder of Securities who intends to transfer securities or who intends to subscribe to any securities of an unlisted public company has to make sure that all their existing Securities are held in dematerialized form before such transfer or subscription to the Securities;

Rules 4 of the amendment Rules mandates every Unlisted Public Company to facilitate dematerialization of all its existing securities by making necessary application to a depository and to secure International Security Identification Number (ISIN) for each type of security and to inform all its existing security holders about such facility.

Rule 5 & 6 requires for the timely fee payment by the Public Company to the Depository and registrar to an issue and Share Transfer Agent and to maintain security deposit of minimum 2 years’ fee and in case default is made in payment of fees then not to issue Shares until the fees is paid.

Half Yearly Audit Report (Rule-8): The Unlisted Public companies are required to submit a half-yearly Audit Report to the ROC as provided under regulation 55A of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 on a Half-yearly basis.

Grievances: “Unlisted public companies are expected to facilitate the dematerialization of their securities in coordination with depositories and share transfer agents,” the release said, while adding that grievances would be handled by the Investor Education and Protection Fund (IEPF) Authority. (THE HINDU Date 11th Oct, 2018).

Process of dematerialization:

·   Dematerialization starts with opening a Demat account. For opening a demat account shortlist a Depository Participant (DP) that offers Demat services.

·   To convert the physical shares into demat form, A Dematerialization Request Form (DRF), which is available with the Depository Participant (DP), has to be filled in and deposited along with share certificates. For each ISIN, a separate DRF has to be used. If the Beneficial Owner has free as well as lock-in shares of the same ISIN, separate demat request has to be set up for free shares and lock-in shares.

·   The Depository Participant DP needs to process this request along with the share certificates to the company and simultaneously to RTA through the depository.

·    Issuer/RTA would verify the genuineness of the certificates and confirms the request.

·   Once the request has been successfully made, DP would deface and mutilate the physical certificates, generate a Demat Request Number (DRN) and send an electronic communication to the depository and courier the DRF and the share certificate to the company by courier.

·   The depository will electronically download the details of the demat request and communicate the same to the electronic registry maintained by the ROC and will then confirm the dematerialization of shares to the DP. Once this is done, a credit in the holding of shares will reflect in the investor's account electronically.

·   This cycle takes about 15 to 30 days from the submission of dematerialization request.

·   Dematerialization is possible only with a Demat account, therefore it is essential to learn how to open a demat account to understand dematerialization.

Purchasing dematerialized securities:

·        Choose a broker who can facilitate the purchase of the securities.

·        Make a payment to the broker who will then arrange for the payment to the clearing corporation on the pay-in day.

·        The securities are credited to the broker’s clearing account on the pay-out day.

·        The broker will give instructions to its DP to debit the clearing account and credit the same to Buyer’s account.

·        Buyer will receive shares into his account.

Selling dematerialized securities:

·        Choose a broker and sell the securities in a stock exchange linked to the NSDL

·        The DP needs to be instructed to debit Seller’s account with the number of securities sold and credit the broker’s clearing account.

·        Seller need to send the delivery instruction to his DP using the delivery instruction slips.

·        The broker will give instructions to its DP for delivery to the clearing corporation before the pay-in day.

·        Seller will receive the payment from the broker for the sale of your securities



Benefits of dematerialization:



There is a wide range of benefits of dematerialization of securities. Some of them are as follows:

·        Security Holder can conveniently manage your shares and transactions from anywhere.

·        Stamp duty is not levied on the electronic securities.

·        Holding charges levied are nominal.

·        Risks involved with physical securities such as theft, loss, forgery or damage are eliminated.

·        One can buy securities in odd lots and buy a single security.

Due to the elimination of paperwork, the time required for completing a transaction gets reduced.

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