Dematerialisation of sharestook place when the Securities and Exchange Board of India launched the Demat Account in 1996, completely changing the Indian stock market. The Demat account was designed to replace the physical trading method that required clients to physically visit stock exchanges to purchase and sell securities.
The present online trading format was created by SEBI with the help of Demat accounts, allowing investors to purchase and sell stocks virtually in the Demat account. However, what about shares held in the form of actual share certificates that purchasers purchased before 1996?
This is where investors may change their physical shares into electronic form via a Demat account, thanks to the shares dematerialization procedure that SEBI implemented. Dematerialization is the process of turning the shares you own as physical certificates into virtual shares so you may trade them in. This blog explains the Dematerialisation of shares and takes readers through the process in detail.
Understanding the Dematerialisation of shares
The Dematerialisation of shareshas become important for every Company. In contemporary financial markets, electronically stored assets known as “dematerialized shares” have essentially replaced physical share certificates. It makes share transactions easier, offers a safe means to store and manage investments, and guarantees regulatory and stock market compliance. Certain private companies must dematerialize their shares in light of the new MCA notification. A private limited business must open a corporate demat account and work with a depository participant (“DP”) in order to convert its shares into demat form.
What is a Demat Account?
Gaining an understanding of the Demat account idea is crucial before learning the dematerialization process, as creating a Demat account is the only way to dematerialize your physical shares. The term “demat” describes the process of converting physical securities into an electronic representation, also known as dematerialization. As a result, a trader can keep, transact, and transfer securities using a Demat account without having to cope with the difficulties associated with handling physical assets. Trading has, therefore, developed into a faster, safer, and more effective way to execute deals and store assets.
Your assets in bonds, mutual funds, and stocks are easier to handle with a Demat account. It is like having an account at a bank. The sole distinction is that a Demat contains securities, such as bonds, shares, or debentures, as opposed to cash in a bank account. If you have a Demat account, you may have your physical shares with you at all times.
Understanding the Dematerialisation of shares
It is imperative to understand the process of Dematerialisation of shares, as before the advent of online trading, share certificates were physically owned by individuals. Nonetheless, during the dematerialization process, physical share certificates must be transformed into virtual shares per SEBI’s mandate. The act of transferring your physical shares into an electronic format is known as dematerialization. The depository, issuer, beneficial owner, and depository participant are the four main persons involved in this.
In India, National Securities Depository Limited and Central Securities Depository Limited are the two depositories. The Company that floats the shares is known as the issuer, and the entity that serves as a middleman between the investor and the depository and is registered with SEBI is known as the depository participant. Depository agents are the only ones by whom investors may get depository services.
The Dematerialisation of securitiesis similar to storing cash in an account at a bank. In Demat form, electronic book entries take the place of your physical share certificates; purchases of shares appear as credits and sell as debits in your Demat account. Here are some guidelines for the shares dematerialization process:
- A company can issue shares in electronic form throughout the Dematerialisation of shares process by amending its Articles of Association by a special resolution passed at the general meeting.
- Therefore, private businesses need to register with both CDSL and NSDL. The issuer must adhere to the registration requirements set out by the depositories.
- The depositories provide each share a distinct ISIN after registration. A 12-digit identifier known as an ISIN is used to identify various instruments, including bonds and shares.
- Companies can only use a mediator to obtain depository services. The issuer must make arrangements for Demat connectivity from depositories to transmit the dematerialized shares.
Features of Dematerialisation of Shares
All investors must know the features of the Dematerialisation of shares. Many elements geared at investors are included in the dematerialization process, enabling them to trade profitably and make wise financial judgments. To enable investors to trade shares online through a Demat account, the physical shares are converted into an electronic format through the share dematerialization process. Investors may deal safely through dematerialization since the depository institutions would double-check the transactions. Additionally, because the dematerialization procedure involves creating a Demat account, investors may make use of additional special features, including stock research, data charts, financial reports, and simplicity of trading.
Benefits of Dematerialisation of Shares
The Dematerialisation of shares has a lot of benefits. Many investors who purchased their shares before 1996 still own actual share certificates. To transform physical shares into electronic form, SEBI has mandated that the share dematerialization procedure be followed. Therefore, let us first take a look at the benefits of dematerializing shares:
- Safety: By removing the possibility of shares being misplaced, forged, or lost, dematerialize shares increases holding safety. Since they are kept in safe deposit boxes, theft is no longer an issue.
- Convenience: The issues surrounding the storage and upkeep of dematerialized shares have been resolved due to their electronic nature. Certificates that become lost or destroyed won’t be an issue for you anymore.
- Accessibility: All shared records are kept online and in electronic format. This enables you to use the internet to access dematerialised shares virtually anywhere, at any time.
- Cost-effectiveness: The absence of laborious paperwork associated with electronic trading results in significant cost savings.
- Flexibility: As a result of the Dematerialisation of shares, small investors now have better access due to the greater flexibility. Currently, there are no restrictions on the quantity when buying or selling a single share.
Governing Rules and Laws on Dematerialisation of Shares
The Dematerialisation of shares is a process that has to be followed by all private companies. Therefore, there are a few rules and laws that govern this process. Let us understand such laws and rules in brief:
Section 29 of Companies Act, 2013: In accordance with the Companies Act of 2013, securities may only be issued in dematerialized form by businesses that make public offers and any other class or classes of public companies that may be specified. With MCA, the term “public” was removed. In light of the aforementioned, the government may mandate the Dematerialisationof securities for a class or classes of private companies.
Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules 2014: Under the Companies Act 2013 via MCA requires all unlisted public companies (apart from Nidhi, government companies, or wholly owned subsidiaries) to issue securities in dematerialized form as of right now and to facilitate the dematerialization of all of their existing securities.
Offer for Issue of Securities: Before making any offer for the issuance of securities, repurchase of securities, bonus share issuance, or rights offer, any unlisted public business must ensure that all of the securities held by its directors, promoters, and key managerial personnel have been dematerialized.
Transfer or Subscription: On or after October 2, 2018, each security holder must dematerialize their securities before transferring or subscribing to any securities.
Application to Depository: To facilitate the dematerialization of its current securities, the Company must make the necessary application to a depository, as specified in Section 2(1)(e) of the Depositories Act, 1996.
SIN: Every publicly traded Company that is not listed must get an International Security Identification Number (ISIN) for each kind of security and notify all current security holders of this availability.
E-Form PAS-6: In accordance with Rule 9A(8) of the Companies (Prospectus And Allotment Of Securities) Rules, 2014, each publicly traded Company that is not listed must submit E-Form PAS- (Reconciliation of Share Transfer Audit) to the Registrar no later than sixty days following the end of each half-year, duly certified by a certified public accountant or company secretary. (MCA Notice of Amendment issued May 22, 2019; effective September 30, 2019).
Regulations of SEBI and the Depositories Act of 1996: The Dematerialisation of securities of unlisted public companies would be subject to the provisions of the Depositories Act 1996, the SEBI (Depositories and Participants) Regulations, 2018, and the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993, mutatis mutandis.
What is a Corporate Demat Account?
An electronic account used by a business or corporate body to store and manage its investments and financial assets in electronic form is known as a corporate Demat account. Though intended for corporate and business use, the idea behind it is similar to that of an individual Demat account. You may use any DP to start this account. DPs that are well-known for opening demat accounts include SBICAP Securities, HDFC Securities, Kotak Securities, Zerodha, and IIFL Securities.
Unlike resident-person accounts, which may be created online, business accounts can only be opened offline. But depending on which DP is selected, the process could change.
Documents required for opening a Corporate Demat Account
For the Dematerialisation of shares, the first step is to open a corporate demat account, and for that, you will require certain documents as mentioned below:
- A board resolution approving the opening of a corporate Demat account.
- A list of signatories who have been permitted to manage the Company Demat account.
- A document detailing the ownership structure of the firm and its shareholding pattern.
- A copy of the Company’s PAN card
- Proof of address, which can be provided by utility bills, bank statements, court documents, or any other suitable documentation.
- Self-attested copies of the directors’ and signatories’ Aadhar and PAN cards.
- A copy of the incorporation certificate.
- The Company’s Memorandum of Association (MOA) and Articles of Association (AOA).
- A copy of the most recent two financial years’ balance sheets, certified by a chartered accountant.
The Procedure of Dematerialisation of Shares
Dematerialisation of shares can be done while following a whole process, and every Company to which to dematerialize shares has to follow the following procedure step by step, along with tracking all the regulatory compliances:
Step 1 – Open a Corporate Demat Account
The very first step is to open a corporate demat account by submitting an application along with the required documents for the Dematerialisation of shares that we have discussed. The primary documents required to open a Demat account are mentioned above. Other documents may also be required depending on the DP.
Step 2: Ask the DP for the Dematerialisation of shares
Once the account has been opened, the Demat Seek Form (“DRF”), which will be sent by the DP, can be submitted to seek dematerialization. It must be filed alongside the actual share certificates for the shares to be dematerialized. Every ISIN (International Securities Identification Number), or unique security, requires the filing of a distinct DRF.
Step 3: Wait for the DP to start the dematerialization process
The Company must turn in all of its physical share certificates for the dematerialization process to start after submitting the DRF form to the designated DP. Following that, the further procedures will occur:
- The request you made for shared dematerialization will be communicated to the Depository (NSDL or CDSL) by the DP.
- DP will provide the certificates to the Issuer Company’s Registrar.
- The Registrar verifies the depository’s demat request.
- Following the certificates’ dematerialization, the Registrar changes the accounts and notifies the depository that the dematerialization process is complete.
- The Depository will update its accounts and notify the DP after the dematerialization. The DP will then notify the Company and update its demat account.
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Frequently asked questions
The transition from paper certificates to computerized bookkeeping is known as dematerialization or DEMAT. After that, physical stock certificates are retired from circulation and replaced with electronic records.
The act of transferring your physical stocks and shares into digital or electronic form is known as dematerialization. The main goals are to make the process of purchasing, selling, transferring, and holding shares more accessible and more reliable while also keeping costs down.
A Private Limited Company must apply to a depository, as defined by Section 2(1)(e) of the Depositories Act, 1996, in order to allow the dematerialization of all of its existing securities.
Converting physical certificates into electronic form is known as the process of dematerialization. An investor must have an account with a DP in order to dematerialize their securities. The customer must destroy and turn over the certificates that are registered in its name to the DP.
Dematerialized shares are better as they are the safest and most secure way to conduct electronic transactions. With virtual ownership of shares, there are no longer any dangers related to theft, damage, losing share certificates, etc.
Electronic shares and securities are held in Demat or Dematerialized Accounts. Holding investments like bonds, shares, mutual funds, and government securities is made easier by it.
You may electronically store all of these shares in a safe and secure digital repository with a Demat account. Easy share storage and transfer: With this feature, you can keep any quantity of shares in storage, enabling you to trade in large amounts and keep an eye on the specifics of every share you own in a Demat account.
An investor only needs to use a computer or smartphone to control his shares. The expense of keeping share certificates goes down with dematerialization. On electronic certificates, there is no stamp duty and a minimal keeping fee.
In accordance with Section 29 of the Companies Act 2013 (the “Act”), Subsection (1A) was added to allow the Central Government to designate which class or classes of unlisted firms the securities must be kept and/or transferred in dematerialized form exclusively.
A corporate demat account is an asset that enables an organization to engage in stock market trading and investing. The business that wishes to use its money for trading and investing may be a public limited company or a private one.
Copy of the entity’s PAN card.
The incorporation certificate.
Board Resolution on the Company’s letterhead.
A list of all the directors on the Company’s letterhead.
A copy of the balance sheet of the previous two fiscal years.
Converting a company’s physical shares into an electronic format is known as the process of Dematerialization. A Depository Participant (DP) must be contacted in order for you to create a Demat account before requesting the conversion of your physical shares.
The shareholder has the option to create a Demat account with any preferred Depository Participant (DP). A Dematerialization Request Form (DRF) must be obtained from the DP and submitted by the certificate holder. Together with the hard copy of the share certificates, it must be supplied.
If you’re an investor in India, you might be curious about the possibility of purchasing shares without a demat account. The short answer is that you need a Demat account to purchase shares. In India, buying and selling shares online requires having a demat account.
Businesses can store and increase extra cash through reinvestment by using a corporate account. This bank account may also be used by businesses to buy and sell bonds, stocks, start-up firms, and other assets, as well as maintain an investment portfolio.
