Dematerialization of Unlisted Securities in India

The Ministry of Corporate Affairs (‘MCA’) through modifications to the Companies (Prospectus and Allotment of Securities) Rules, 2014 dated 27 October 2023, has made it mandatory for private limited companies, except small companies, to dematerialize their securities. This amendment reduces the time required, mitigates fraud, risk of loss or theft and transparency in the issuance or transfer of securities.

Dematerialization of Securities

Dematerialization is a process through which physical share certificates are converted into electronic format and held in a Demat Account.

• Every private company, excluding small companies, is to issue securities only in dematerialized or electronic form and convert all their existing securities within 18  months, i.e., before 1 October 2024.
• Issuance of securities, buyback of securities, bonus share issuance, or rights offer must ensure that all the securities have been dematerialized or in electronic form.
• Transfer of securities is done in dematerialized or electronic form.

Applicability

The dematerialization of securities is required to be done by all private companies other than small companies. The ‘small company’ refers to a company other than a public company that has paid up capital of more than INR 4 crores and a turnover of more than INR 40 crores.

• Regardless of its paid-up capital or turnover requirement, a holding company or a subsidiary company, a company registered under Section 8 under the Companies Act 2013 or a company or body corporate governed by any special Act would be considered as companies other than small companies.

Requirements for Dematerialization of Unlisted Securities of Private Company

Following documents from the company and the shareholder are required for dematerialization of unlisted securities of private companies:

• From the Company: PAN Card, Memorandum of Association (MOA), Articles of Association (AOA), Certificate of Incorporation (COI), and the Audited Annual Report for the last financial year.
• From the Shareholder: Photo, Know Your Customer (KYC) documents, Original Share Certificate, Mobile Number, and Email ID.

The KYC documents that need to be submitted by the shareholders may vary depending upon whether the shareholder is an individual or a company. Following KYC documents need to be submitted if the shareholder is a company:

• Foreign Company: Apostille COI and Charter Documents.
• Domestic Company: Self-attested COI, MOA, AOA, and PAN Card.

In case of individuals, following KYC documents shall be required:

• Foreign National: Identity Proof (Apostille Copy of Passport and PAN Card) and Residence Proof (Apostille Copy of Driving License and Bank Statement).
• Indian National: Self-attested copy of PAN Card, Self-attested copy of Aadhar Card and Bank Statement.

Procedure for Dematerialization of Securities

Private Companies

Private companies are required to take the following steps for the dematerialization of securities:

• Hold the Board Meeting to consider and approve the dematerialization of securities with depositories such as Central Depository Services Limited (CDSL)/National Securities Services Limited (NSDL).
• Appoint a Registrar and Transfer Agent.
• Post-appointment of the Registrar and Transfer Agent, the company shall make the application for the dematerialization of securities with relevant documents.
• The Depository shall allocate an International Securities Identification Number (ISIN) to the securities of the company.

Shareholders

The shareholders of the private company shall approach the Registrar and Transfer Agent for the dematerialization of their securities with the steps below:

• Obtain the Permanent Account Number under Income Tax Act, 1961.
• Shareholders are required to open a DEMAT account with the same depository to allocate ISIN to the securities of the company.
• Shareholders are required to submit the Demat Request Form along with the original share certificates.
• The depository shall verify the documents and dematerialize the securities of the shareholders.
• The securities will be credited to the DEMAT account of the shareholders and intimation will be sent to the company.

Conclusion

The amendment of dematerialization of securities shall provide the tracking of ownership of securities on real time basis, enhance transparency, protect investors, and improve governance in the corporate sector.


We can address your concerns related to Dematerialization of Unlisted Securities. You can get in touch with us by filling the form below.