Dematerialisation of Shares in India
Dematerialisation is the process of converting physical shares into electronic form, stored in a Demat account. This transformation reduces the risks associated with physical shares, such as loss or theft, and enhances the efficiency of managing and trading shares. Previously mandatory for public companies, dematerialisation is now compulsory for private limited companies, with a deadline of 30th September for all companies except small ones.
At FilingIn, we offer expert assistance to facilitate the smooth transition of your physical shares into electronic form, ensuring compliance and a hassle-free experience.
What is Dematerialisation of Shares?
Dematerialisation is the process of converting physical securities, such as share certificates and other related documents, into an electronic format. Once dematerialised, these securities are stored in a Demat Account, allowing investors and traders to manage their holdings seamlessly and securely.
A Depository is responsible for maintaining and holding these securities in electronic form. These depositories can hold various types of securities, including shares, bonds, government securities, and mutual fund units. To facilitate this process, a Depository Participant (DP), registered under the Depositories Act of 1996, acts as An intermediary that offers depository services to investors and traders.
SEBI-Registered Depositories in India:
In India, two major depositories, registered with the Securities and Exchange Board of India (SEBI), are authorised to operate:
- NSDL (National Securities Depository Ltd.)
- CDSL (Central Depository Services Ltd.)
Who Does Dematerialisation Apply to?
- Public Companies: All public companies in India are required to dematerialise their shares.
- Private Limited Companies: Private companies, except small companies, must dematerialise their shares. Small companies are exempt unless they are holding or subsidiary companies.
- Holding and Subsidiary Companies: These companies must comply, regardless of their size.
Converting physical shares to Demat offers numerous benefits:
- Enhanced Security: Dematerialisation eliminates risks like theft, loss, and forgery.
- Faster Transactions: It simplifies the trading process, making buying and selling more efficient.
- Cost Reduction: Eliminates costs associated with stamp duties, handling, and storage of physical documents.
- Convenience: Shareholders can access their Demat accounts anytime, anywhere, through online platforms.
- Automatic Updates: Corporate actions like dividends, bonus issues, and stock splits are automatically updated.
- Loan Collateral: Shares held in Demat form are easily pledged as collateral for loans.
- Demat Account Opening Form: A form required to open a Demat account with a Depository Participant (DP).
- KYC Documents: Proof of identity and address such as:
- Aadhaar card
- PAN card
- Passport
- Voter ID
- Utility bills (e.g., electricity or water bill)
- Share Certificate(s): Original physical share certificates that need to be dematerialized.
- Transmission Request Form (if applicable): Required if shares are being transferred due to inheritance, death, or other reasons.
- Bank Account Proof: A canceled cheque or a bank statement to link the Demat account with the bank account for crediting shares.
- Power of Attorney (if applicable): Required if someone other than the account holder is submitting the request.
- Delivery Instruction Slip (DIS): A form used to instruct the DP for transferring shares from physical certificates to the Demat account.
To qualify for 80G registrations, your organization must meet the following requirements:
- Legal Structure: The organization must be registered as a trust, society, or non-profit company.
- Non-Profit Objective: The organization must be focused on charitable activities rather than profit generation.
- Proper Documentation: Accurate accounting records must be maintained, with audited accounts for transparency.
- Adherence to Income Tax Compliance: The organization must comply with Sections 11 and 12 of the Income Tax Act.
- Non-Exempt Business Income: The organization should not generate non-exempt income from business activities.
- Darpan Portal Registration: If your NGO receives government grants, registration with the Darpan portal is mandatory.
- Audit Reports: If the NGO's income exceeds the threshold specified by the Income Tax Act, its accounts must be audited by a chartered accountant.
- Utilization of Funds: At least 85% of income must be spent on the organization's charitable objectives in India.
Here’s how to dematerialise your shares:
- Open a Demat Account: Choose a Depository Participant (DP) like a bank or brokerage firm to open a Demat account.
- Submit a Demat Request Form (DRF): Fill out the DRF, ensuring your details match those on the share certificates.
- Verification and Conversion: Your DP will send the documents to the Registrar and Transfer Agent (RTA) for verification.
- Dematerialisation Request Number (DRN): Upon approval, you’ll receive a DRN as confirmation.
- Shares in Electronic Form: After verification, your shares will be converted into electronic format and credited to your Demat account.
Dematerialisation Deadline for Private Companies:
The last date for dematerialising physical shares for companies following the standard financial year (ending March 31) is 30th September. For companies with a financial year ending December 31, the deadline is 30th June
Penalties for Non-Dematerialisation of Shares:
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Penalty Type
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Details
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|---|---|
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Transaction Restrictions
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Companies unable to issue or allot securities.
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Shareholder Limitations
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Shareholders may be unable to sell shares or participate in new subscriptions.
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Monetary Fines
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Companies can face fines up to INR 200,000, with daily penalties for continued violations.
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Officer Penalties
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Officers may incur fines of up to INR 50,000.
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How to Dematerialise Shares for Private Companies:
To comply with Rule 9B, private limited companies need to follow the steps below:
- Amend Articles of Association (AoA): Modify the AoA to allow shareholders to hold shares in dematerialised form.
- Appoint a Registrar and Transfer Agent (RTA): Choose a SEBI-registered RTA to manage the dematerialisation process.
- Obtain ISIN (International Securities Identification Number): Obtain an ISIN for the shares being issued.
- Open Demat Accounts: Direct shareholders to open Demat accounts with a Depository Participant (DP).
- Convert Existing Shares: Coordinate with the RTA to convert all physical shares into electronic format.
- File Form PAS 6 with MCA: Submit half-yearly returns detailing the dematerialisation status.
Dematerialisation of Shares for Private Companies:
As per an amendment by the Ministry of Corporate Affairs (MCA) in October 2023, private limited companies, except for small companies, must dematerialise their shares by September 30, 2024. This requirement is detailed in Rule 9B of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules 2023.
Key points of Rule 9B include:
- Issuance of Securities: Private companies must issue securities in dematerialised form.
- Conversion of Existing Shares: All physical share certificates must be converted to electronic form.
- Key Personnel Compliance: Shares held by promoters, directors, and key managerial personnel must also be dematerialised before issuing new securities.
- Transfer and Subscription: All transfers or subscriptions of securities must be conducted in dematerialised form.
- Compliance Deadline: Companies that no longer meet the small company criteria after March 31, 2023, have 18 months to comply.
At FilingIn, we provide end-to-end support for converting physical shares to Demat. Our experts will guide you through every step, ensuring a smooth and efficient process. We handle everything from the initial documentation to the final conversion, making it easier for your company to meet the new MCA regulations.
Frequently Asked Questions in India
What is Dematerialisation of Shares?
Dematerialisation refers to the process of converting physical share certificates into electronic format, which is stored in a Demat account.
Why is Dematerialisation of Shares important?
Dematerialisation eliminates the risk of loss, theft, or damage of physical share certificates, ensuring that securities are held safely and securely in electronic form.
Who is responsible for managing the Demat accounts?
The securities in a Demat account are managed by depositories in India, namely NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).
Can I transfer my physical shares into a Demat account?
Yes, you can transfer physical shares into a Demat account by submitting a Dematerialisation Request Form (DRF) along with the original share certificates to your Depository Participant (DP).
What is a Depository Participant (DP)?
A Depository Participant (DP) is an intermediary that provides services to investors and traders in managing their Demat accounts. DPs are registered with SEBI and are part of the depository system.
Do I need to pay any fees for Dematerialisation?
Yes, there are fees for Dematerialisation, which may include charges for account opening, maintenance, and Demat request processing. These fees vary depending on the Depository Participant.
What documents are required to open a Demat account?
Typically, you need to provide proof of identity, proof of address, a passport-sized photograph, and a copy of your PAN card to open a Demat account.
What happens if I don’t convert my physical shares into Demat form?
If you don’t convert your physical shares into Demat form, you may face difficulties in trading or transferring those shares, as many stock exchanges now only allow electronic trading.
How long does the Dematerialisation process take?
The Dematerialisation process usually takes 7-10 business days from the date the Dematerialisation Request Form (DRF) and share certificates are submitted to the Depository Participant.
Can I dematerialise all types of securities?
Yes, various securities, including shares, bonds, government securities, and mutual fund units, can be dematerialised, depending on the specific securities and the policies of the depository.
