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Dematerialisation of Company Shares

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Mandatory Dematerialisation of Shares for Private Companies

Dematerialisation of shares is the process of converting physical share certificates into electronic form. Under the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, this process is now mandatory for most private limited companies in India. This new regulation, Rule 9B, aims to enhance security, transparency, and efficiency in managing share ownership.

FileMyFirm offers expert services to help your company comply with the new rules and convert physical shares to Demat.

Dematerialisation Deadline and Penalties

The deadline for private limited companies to complete the dematerialisation of shares is September 30, 2024.

Failure to comply with Rule 9B can lead to severe consequences:

  • Restrictions on Company Activities: Non-compliant companies will be barred from issuing new shares, including bonus shares, or buying back existing shares.
  • Shareholder Limitations: Shareholders will be unable to sell or transfer their physical shares.
  • Monetary Fines: The company can be fined ₹10,000, with an additional penalty of ₹1,000 per day for continued non-compliance. Company officers can also face fines of up to ₹50,000.

Who Must Comply?

The dematerialisation mandate applies to all private limited companies except those classified as “small companies.” However, a private company that is a subsidiary or a holding company must comply regardless of its size.

A “small company” is defined as a private company with a paid-up capital of ₹4 crore or less and a turnover of ₹40 crore or less in the preceding financial year.

The Dematerialisation Process

The conversion of physical shares to Demat involves a two-part process: the company’s preparation and the shareholder’s request.

For the Company
  1. Amend Articles of Association (AOA): Ensure the company’s AOA permits the electronic holding of shares.
  2. Appoint an RTA: Appoint a SEBI-registered Registrar and Transfer Agent (RTA) to manage the dematerialisation process.
  3. Obtain ISIN: The company must obtain a unique International Securities Identification Number (ISIN) for each type of share it has issued.
For the Shareholder
  1. Open a Demat Account: The shareholder must open a demat account with a Depository Participant (DP), such as a bank or brokerage firm.
  2. Submit Request: The shareholder submits a Dematerialisation Request Form (DRF) along with their physical share certificates to the DP.
  3. Verification and Conversion: The DP and the company’s RTA verify the documents. Once approved, the physical certificates are destroyed, and the shares are credited to the shareholder’s demat account.

Simplify Your Dematerialisation with FileMyFirm

The dematerialisation process is complex and requires careful coordination between the company, its RTA, and its shareholders. FileMyFirm provides end-to-end support, handling everything from obtaining an ISIN to coordinating with DPs and ensuring all necessary filings with the MCA are completed accurately and on time.

Frequestly asked questions ( FAQ )

What is Dematerialisation of Shares?

Dematerialisation of shares is the process of converting a company’s physical share certificates into an electronic form. Once dematerialised, the shares are held in a Demat account with a Depository Participant (DP), eliminating the need for physical paperwork.

Is Dematerialisation mandatory for Private Limited Companies?

Yes. Under the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (specifically Rule 9B), dematerialisation is mandatory for most private limited companies in India.

Who is exempt from the Dematerialisation mandate?

The mandate generally does not apply to a company classified as a “small company.”

  • A small company is defined as a private company having a paid-up capital of ₹4 crore or less and a turnover of ₹40 crore or less in the preceding financial year.

  • Important Note: A private company that is a subsidiary or a holding company must comply regardless of its size.

What is the deadline for compliance?

The deadline for private limited companies that fall under the mandate to complete the dematerialisation of their shares is September 30, 2024.

What are the consequences of non-compliance (Penalties)?

Failure to comply with Rule 9B by the deadline can lead to severe consequences:

  1. Company Restrictions: The non-compliant company will be barred from issuing new shares (including bonus shares) or buying back existing shares.

  2. Shareholder Limitations: Shareholders of non-compliant companies will be unable to sell or transfer their physical shares.

  3. Monetary Fines: The company faces a fine of ₹10,000, with an additional penalty of ₹1,000 per day for continued non-compliance. Company officers can also face fines of up to ₹50,000.

What are the key steps for the Company in the Dematerialisation Process?

The company-level preparation involves:

  1. Amend AOA: Amending the Articles of Association (AOA) to permit the electronic holding of shares.

  2. Appoint RTA: Appointing a SEBI-registered Registrar and Transfer Agent (RTA) to manage the process.

  3. Obtain ISIN: Obtaining a unique International Securities Identification Number (ISIN) for each type of share issued by the company.