Dematerialization of Shares of Unlisted Public Companies

Blog   wpadmin   April 13, 2021

Executive Summary:

      • Dematerialization of shares is the process of converting physical share certificates into electronic form.
      • Every unlisted public company has to issue securities only in dematerialized form and facilitate dematerialization of all its existing securities.
      • Every unlisted public company has to get secure ISIN for each type of security, enter into agreement with Depository, Registrar and Transfer Agents.

Introduction:

Dematerialization of shares is the process of converting physical share certificates into electronic form or electronic book-keeping of the shares, also referred to as demat. Once the process is completed, the physical certificates are destroyed and share transactions and transfers are processed electronically without involving any share certificate or transfer deed. Dematerialization aims to eliminate the complex processes of getting shares transferred, delay in recording transactions, theft and forgery and promotes paperless trading. The requirement of issuing securities was initially applicable to all listed companies but from October, 2018 all unlisted public companies are also required to issue securities in demat form.

Dematerialization of Shares of Unlisted Public Companies-Requirements:

All listed entities are mandated by SEBI to issue or trade in securities in dematerialized form and the Companies (Prospectus and allotment of securities) Third Amendment Rules, 2018 obligates the Unlisted Public Companies to issue securities in dematerialized form.

The entire dematerialization process is centered around the depository, the issuer, the beneficial owner and the depository participant. Issuers whose shares are eligible for dematerialization have to register with the depository for demat connectivity and enter into an agreement with an existing Registrar & Transfer Agent (R&T Agent) responsible for communicating with the depository for all share credits and transfers. Investors can avail such services through depository participants. Depository is an organization which holds securities with it in De-Mat form, for benefit of the beneficial owner. A beneficial owner is the person whose name is recorded with the depository and the securities are held by the depository for such owner.

Under the Companies (Prospectus and allotment of securities) Third Amendment Rules, 2018:

Every unlisted public company is required to:

  • a) issue securities only in dematerialized form and;
  • b) facilitate dematerialization of all its existing securities in accordance with provisions of the Depositories Act, 1996 and relevant regulations.

Further, before making any offer for issue of any securities, ensure that securities of its promoters, directors, key managerial personnel (KMP) are dematerialized. The issuer shall facilitate the dematerialization of shares by applying to the depository and shall also secure International Security Identity Number (ISIN) for each type of security. Such companies are required to timely pay fees, maintain security deposit and comply with all other requirements else such companies will not be permitted to make offer of any securities or buyback its securities or issue any bonus or right shares. Form PAS-6 has to be filed with the Registrar within sixty (60) days from the conclusion of each half year giving details of ISIN, shares held in dematerialized or physical form, shares held by promoters, directors and KMPs in the form of Demat or physical. Every holder of securities of an unlisted public company who intends to transfer securities or subscribe to securities has to ensure that his existing securities are dematerialized. Any grievances of the investors should be addressed to the Investor Education and Protection Fund Authority.

Conclusion:

The main motive of extending the responsibility of issuing demat securities to Unlisted Public Companies is to secure interests of investors. The overall benefits of dematerialization are also manifold. First, it is secured and convenient as no physical certificates are required, hence the issue of loss, theft or deterioration of certificates will not arise. It saves stamp duty on transfer in demat mode, benefits earned on the securities are credited to the demat account, makes it easier to keep transactions trail and eradicates cumbersome paperwork and manpower requirements to maintain, update physical records.

Regards, Legal Team Proind Business Solutions Private Limited 306, Tower B, I-thum, Plot No A-40, Sector 62, Noida, UP, India- 201301 No.: +91 120 4224203 Email: info@proindmail.in, website: www.proind.in

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