Dematerialisation of Securities in Private Companies

Dematerialisation of Securities in Private Companies refer to the process of converting physical securities such as share certificates, bonds into digital form.

What are the benefits of dematerialisation of securities?

• Reduced risk: Dematerialisation of Securities in Private Companies eliminates the risk of physical certificates being lost, damaged or stolen and provides more secure way of handling securities.
• Less Paperwork: Dematerialization expedites the ownership and transfer of securities by reducing the paperwork and time involved in physical share transactions.
• Cost saving: Since the use of paperwork is totally eliminated through dematerialization, it leads to cost saving as the expenditure incurred on printing, handling and storing physical certificates is eliminated.
• Transparency: Transactions taking place through digital platforms improves the efficiency and transparency.
• Easy Capital Market access: Since dematerialization is in conformity with the approaches of listed companies, it could improve a private company’s future access to capital markets.

Can share of private companies be dematerialized?

While the dematerialization process is commonly associated with public companies listed on stock exchanges, unlisted private companies can also opt for dematerialization of their securities. The Ministry of Corporate Affairs (MCA) in a recent amendment dated 27^th October 2023 in Companies (Prospectus and Allotment of Securities) Rules, 2014 stated that all the Private Limited Companies other than Small Company, are required to dematerialise all of its securities latest by 30th September, 2024.

Procedure for dematerialisation of shares of Private Company

• Submission of DRP to DP: The Registered owner need to submit a request to the Depository Participant(DP) in Dematerialisation Request Form (DRP) for dematerialization, along with the certificate of securities to be dematerialized.
• Verification by DP: The DP will then verify the details of the form i.e. the number of certificates, number and type of securities given in DRF. If the form is in order, the DP will issue an acknowledgement slip duly signed and stamped to the registered owner. However, if the securities are not in order they are rejected and returned to the client and acknowledgement is obtained for the same.
• Generation of DRN: If securities are in order, Dematerialization Request Number is generated by the system. The request is then released by the DP and forwarded electronically to Depository Module(DM), who further forwards the request to Issuer/R&T agent electronically.
• Acceptance by Issuer/R&T: The Issuer/R&T agent shall then confirm the acceptance of the request for dematerialisation in his system and forward to DM.
• Authorisation by DM: The DM will electronically authorise the creation and credit the client’s account automatically and inform about such changes to the Registered owner.

In this way, the process of dematerialisation of physical shares is completed and a demat share certificate is issued.

Timeline for Dematerialization

• A private company which as on 31^st March 2023 is not a small company shall within 18 months dematerialize its securities.
• Holding & Subsidiary companies of private companies which are not small company must also dematerialize its securities.
• Small and Government companies are exempt from this rule.

Mandatory Compliances

• Every private company before making any offer for issue of any securities or buyback of securities or issue of bonus shares or right offer must ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised.
• Every holder of securities of private company who wishes to transfer shares or subscribe shares by way of private placement or bonus shares or rights offer must ensure that securities are held in dematerialised form.

Dematerialisation Rules as per Companies Act 2013

According to Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, sub-rule 4-10 of rule 9A which is about dematerialization of unlisted public company, shall also apply to dematerialisation of securities of private company. They are:

• Facilitating Dematerialization: Every such company shall facilitate dematerialisation of all its existing securities and shall inform and secure International Security Identification Number (ISIN) for each type of security.
• Compliances: Every company shall ensure that:
• it makes timely payment of fees to depository and registrar to issue.
• it maintains security deposit of not less than two years fees with the depository and registrar to an issue and share transfer agent.
• it complies with the regulations or directions or guidelines or circulars issued by SEBI.
• Consequences of Non-compliance: The company shall not be able to make an offer of any securities or buyback its securities or issue any bonus or right shares if it has defaulted in the above rule and payment of the same has been made to registrar to issue/ share transfer agent.
• Applicability of other rules: The provisions of the Depositories Act, 1996, the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 and the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 shall mutatis mutandis apply.
• Audit Report: The audit report shall be submitted by company on a half-yearly basis to the Registrar under whose jurisdiction the registered office of the company is situated.
• Grievance Redressal: The grievances, if any, of security holders of unlisted public companies under this rule shall be filed before the Investor Education and Protection Fund Authority and it shall initiate any action against a depository or participant or registrar to an issue and share transfer agent after prior consultation with the Securities and Exchange Board of India.

 Conclusion

In summary, every private company which is not a small and government company must abide by the following above rules in order to avoid penalties and further consequences. Stay updated with rules with Legal Window and feel free to reach us at admin@legalwindow.in.