Dematerialisation of Shares by Private Limited Companies

The Ministry of Corporate Affairs (MCA) has introduced a significant regulatory change with the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, which will come into effect on September 30th, 2024. This amendment is poised to streamline the process of dematerialisation of shares, a move that promises enhanced transparency, efficiency, and security in the securities market.

Applicability

Every private company (other than government companies and small companies i.e. having paid up share capital of less than or equal to Rs. 10 Crores and Turnover of less than or equal to Rs. 100 Crores w.e.f. December 1, 2025) need to facilitate its shareholders to open DEMAT account in India.

Definition of Small Company under Companies Act, 2013

“small company” means a company, other than a public company, —

• paid-up share capital of which does not exceed Ten Crore rupees or such higher amount as may be prescribed, and
• turnover of which as per profit and loss account for the immediately preceding financial year does not exceed Hundred crore rupees or such higher amount as may be prescribed.

Provided that nothing in this clause shall apply to:

• a holding company or a subsidiary company.
• a company registered under section 8; or
• a company or body corporate governed by any special Act.

MCA has allowed Private Limited Companies a grace period of 18 months, from March 31, 2023, to September 30, 2024 for compliance with these provisions.

Step-by-Step Process for Dematerialisation of Shares by Private Companies

Step 1: Amendment of Articles of Association (AoA), if required

AoA needs to be updated to authorize shareholders to hold shares in dematerialised form.

Step 2: Appointment of Registrar and Transfer Agent (RTA)

Appoint a SEBI (Securities and Exchange Board of India) registered independent Registrar and Transfer Agent (RTA). They will act as intermediaries between the company and the depositories (CDSL or NSDL).

Step 3: Obtaining International Securities Identification Number (ISIN)

Apply for an ISIN number for each type of share your company has issued (e.g., common stock, preferred stock). This unique code identifies your company's securities globally.

Step 4: Opening Demat Account

The company needs to open a Demat account with a Depository Participant (DP). DPs are usually banks or brokerage firms authorized to facilitate dematerialisation.

Step 5: Dematerialisation of Existing Shares

Facilitate the conversion of existing physical share certificates held by shareholders into electronic form through the DP. This may involve shareholders submitting their physical certificates to the DP.

Step 6: Dematerialisation for Promoters, Directors & Key Managerial Personnel (KMP)

Ensure all promoters, directors, and KMPs hold their shares in dematerialised form before issuing any new securities. They need to link their Demat accounts with the company and have their shareholdings electronically credited to them.

Step 7: Regular Reporting (PAS 6)

Submit half-yearly returns in the form of PAS 6, notifying the Ministry of Corporate Affairs of the dematerialisation details.

Depositories, Depository Participants and RTAs

In the entire dematerialisation process, you will come across three key players who work together to manage and track ownership of dematerialised shares - Depositories, Depository Participants and RTAs.

Who is a Depository?

A depository is either National Securities Depository Limited (NSDL) or Central Depository Services (India) Limited (CDSL) in India. They act as a central electronic repository for holding securities in digital format.

They maintain accounts for Depository Participants (DPs) and their clients (beneficial owners). They also electronically settle trades and transfer securities between DPs and ensure safekeeping and record-keeping of dematerialised securities.

Who is a Depository Participant (DP)?

They act as an intermediary between the depository (NSDL or CDSL) and investors. It could include banks and brokerage firms. Depository participants open demat accounts for investors to hold their securities electronically. They allow the buying and selling of securities through the depository and provide account statements and other services to investors.

Who is the Registrar and Transfer Agent (RTA)?

They are appointed by the issuing company (whose shares are being held) to manage the company's shareholder records. They maintain records of shareholders and their holdings and process corporate actions like bonus issues, stock splits and dividend payments.

They act as a liaison between the company and the depository.

In short, the depository acts as the core infrastructure, holding the electronic records of securities. DPs act as access points for investors, allowing them to buy, sell, and hold their securities electronically. RTAs are responsible for maintaining accurate shareholder records and working with the depository to ensure smooth processing of corporate actions.

Procedure for Dematerialization of Shares for Shareholders Holding Shares in Physical Form

Step 1

Dematerialization starts with opening a Demat account. For demat account opening, you need to shortlist a Depository Participant (DP) that offers Demat services. A DP is an agent of the depository (NSDL or CDSL) providing depository services to investors.

Step 2

After Opening Account with DP, the shareholders need to submit the duly filled in Demat Request Form (DRF) (which is available with the Depository Participant), along with physical certificate(s) to the concerned DP.

Step 3

The DP will verify that the form is duly filled in and the number of certificates, number of securities and the security type (equity, debenture etc.) are as given in the DRF. If the form and security count is in order, the DP will issue an acknowledgement slip duly signed and stamped, to you.

Step 4

DP would setup a demat request on their (CDSL or NSDL) system and send the same to the Company/Registrar and Transfer Agent (RTA).

Step 5

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 dispatch the DRF and the share certificate to the Company/RTA.

Step 6

Company/Registrar and Transfer Agent (RTA) would verify the genuineness of the certificates and confirms the request.

Step 7

On receiving confirmation, depository will credit an equivalent number of securities in the demat account of the shareholders maintained with CDSL or NSDL.