Private companies are required to 'demat' their shares by September 30, 2024. Here is a FAQ covering the basics for your guidance. Needless to say, this information is for general purposes only and does not constitute legal advice.
The conversion of physical certificates of securities into an electronic form is known as dematerialisation. These electronic holdings are then stored in a demat account managed by a depository. India's two principal depositories, the National Securities Depository Limited and the Central Depository Services (India) Limited, are responsible for maintaining these electronic records.
Only those securities, which are admitted into the CDSL or NSDL system are available for dematerialisation to the holders of such securities or can be allotted in electronic record form by the company. Thus, a company will have to admit to CDSL or NSDL to dematerialise their securities.
2. Who has to apply for dematerialisation of securities?
A company is required to make an application to secure ISIN (explained below) with a depository, such as CDSL, for each type of securities and inform all its existing security holders about such a facility. Then, the shareholders will have to open a demat account with a Depository Participant and undertake the process of demat by submitting the Demat Request Form (DRF) along with the share certificates for dematerialisation.
3. What is ISIN?
International Securities Identification Number (ISIN) is a 12-character alphanumeric code that uniquely identifies securities globally for trading, clearing, and settlement purposes. ISINs are assigned by designated national numbering agencies in each country, such as stock exchanges, central banks, or financial regulators. The Association of National Numbering Agencies (ANNA) governs the ISIN system globally. The ISIN allows standardised identification of different types of securities like stocks, bonds, derivatives, and others.
An ISIN consists of: (a) The first 2 characters indicate the country where the security issuer is legally registered or domiciled. (b) The next 9 characters are a national securities identification number that identifies the specific security. Leading zeros are added if needed to make it 9 characters long. (c) The final character is a numerical check digit calculated using a standard formula.
4. Are private companies required to demateralise their securities?
A new rule 9B was inserted to Companies (Prospectus and Allotment of Securities) Rules,2014 (“Rules”) on October 27, 2023 pursuant to which every private company, other than a small company is required to
issue the securities only in dematerialised form; and
facilitate dematerialisation of all its securities.
The amendment specifically excludes small companies. Small companies are defined under Section 2 (85) of the Companies Act, 2013, and refer to a company, other than a public company, having a maximum paid up share capital of Rs. 4 crores and a maximum turnover of Rs. 40 crores. A holding company or a subsidiary company, a non-profit company (registered under Section 8 of the Companies Act, 2013), or a company or body corporate governed by any special Act will not be considered as a small company and will have to comply with the mandatory demat norms.
5. What is the timeline to comply with the requirement for dematerialisation?
All private companies (except small companies), are required to dematerialise the securities within 18 months of the close of the financial year ending on 31st March 2023- i.e. by 30th September 2024.
6. If all the securities have not been dematerialised by the shareholders by September 30, 2024, will a private company still be able to issue new securities?
A private company can only issue securities after September 30, 2024 only if the promoters, directors and key managerial personnel have dematerialised their securities holding in the company. Subscribers to an issue will only be able to apply if the subscribed securities will be held in dematerialised form. Further, if any shareholder intends to transfer their holdings on or after 30th September, 2024, they would have to get them dematerialised before the transfer.
7. Can a shareholder hold the shares in physical form, even after September 30, 2024?
An ordinary shareholder can continue to hold shares in physical form even after September 30, 2024. However, for these shares to become transferable, they would have to be dematerialised. Further, the shareholder will not be able to subscribe to issues till their shares are dematerialised. In contrast, if a shareholder is a promoter, director or KMP in a private company, then they have to mandatorily dematerialise their shares by the due date.
8. What is the documentation involved in dematerialisation by the issuer company- in admitting the issued securities to CDSL?
As per Central Depository Services Limited (“CDSL”), the documents and steps required to be followed to dematerialise the shares with CDSL are as follows:
Tripartite agreement (for franking and e-stamping / on stamp paper) - kindly execute the same on non-judicial stamp paper or franking value of Rs.600/- duly applied DSC on the first and last page.
Certified true copy of GST certificate, PAN Card of company, TAN.
Company to appoint Registrar and Transfer Agent who will be the party in the point number 10 above in the tripartite agreement.
9. What is the documentation involved in dematerialisation by the issuer company- in admitting the issued securities to NSDL?
As per National Securities Depository Limited (“NSDL”), the documents and steps required to be followed to dematerialise the shares with NSDL are as follows:
Tripartite agreement (for franking and e-stamping / on stamp paper) - kindly execute the same on non-judicial stamp paper or franking value of Rs.600/- duly applied DSC on the first and last page.
Certified true copy of GST certificate, PAN Card of company, TAN.
Company to appoint Registrar and Transfer Agent who will be the party in the point number 10 above in the tripartite agreement.
10. What are the approximate expenses to be incurred in the process of dematerialisation of securities by the company?
Application Processing Fee:
A non-refundable processing fee of Rs. 15,000/- shall be payable by Issuer companies for admission of unlisted securities along with GST at 18% applicable to the above charges.
Security Deposit:
The unlisted public and private companies to maintain a security deposit of not less than two years annual custodial fees. Issuer companies will be charged two years of annual custodial fees as applicable in the first year of admission till there is a change in the capital slab. In the event of a change in the applicable capital slab the security deposit will be enhanced by the difference in charges (for two years).
Stamping Fees:
Tripartite agreement (for franking and e-stamping / on stamp paper) – To be executed on non-judicial stamp paper or franking value of Rs.600/-
Annual Custodial Fees:
Issuers to pay @ Rs. 11.00 (*) per folio (ISIN position) to CDSL/NSDL, subject to a minimum as mentioned below:
Nominal value of admitted securities
Annual custodial charges payable by an Issuer to CDSL/NSDL
Upto 2.5 crore
5,000
Above 2.5 crore and upto 5 crore
9,000
Above 5 crore and upto 10 crore
22,500
Above 10 crore and upto 20 crore
45,000
Above 20 crore
75,000
GST at 18% applicable to the above charges.
RTA Fees:
RTA - Tariff for all unlisted companies (Private Limited – only electronic connectivity) varies depending on the chosen RTA. Typically, annual fee ranges between INR 20,000 and INR 25,000. Please confirm the fees with your RTA.
11. Who is a Depository Participant (DP) and what are the steps to be followed by the security holders to dematerialise their securities?
An individual cannot directly open an account with a depository like CDSL/NSDL. A depository participant, thus, is an agent of the depository and provides link between the investor and the depository. DPs are Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent registered with SEBI. Opening an account with a depository participant allows an individual to gain access to the services provided by the Depository.
Steps to be followed by the security holders are as follows:
One needs to open a demat account with the depository participant.
Once the demat account has been opened, fill up the 'Dematerialisation Request Form' in prescribed form and submit it to their respective depository participant along with the physical security certificates.
The depository Participant will forward the demat request to the concerned issuer company or its Registrar and Transfer Agent for further processing.
Once the request is confirmed by the concerned issuer company or its Registrar and Transfer Agent, it results in credit of electronic securities in the demat account of the respective security holder demat account.
12. Who is a Registrar and Transfer Agent?
A Registrar and Transfer Agent (RTA) is an intermediary that handles back end process of the various financial and non-financial transactions for corporates. They handle the transfer or issue of securities in a transaction. RTA records the changes in ownership, maintain the issuer’s security holder records, cancel and issue certificates and distribute dividends.
13. How long the whole process of dematerialisation take?
Generally, it takes around 30 days for a company to create ISIN for issued securities with the depository. Once the ISIN is created security holders can initiate the process by submitting Dematerialisation Request Form along with the physical security certificates to their respective depository participant which generally take another 10-20 days to complete the entire process. Therefore, in the aggregate, the whole process can be completed within 40-50 days.