Digital Economy,Digital Securities! The long-known concept of the Dematerialization of Securities has now become one of the important concepts in today’s digitalized world. Dematerialization is essentially conversion of the physical securities into electronic securities wherein the physically held Share Certificates entitling the ownership of the securities are converted into electronic securities by way of opening of Demat Account. All the purchase, sale and transfer of the securities are then routed via this Demat Account. This article contains various aspects of the Dematerialization of Securities.
LEGAL ASPECT
Rule 9 and 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014 deals with the Dematerialization of the Securities. The content of the said Rules is reproduced below:
“9 Dematerialization of securities
The promoters of every public company making a public offer of any convertible securities may hold such securities only in dematerialized form:
Provided that the entire holding of convertible securities of the company by the promoters held in physical form up to the date of the initial public offer shall be converted into dematerialized form before such offer is made and thereafter such promoter shareholding shall be held in dematerialized form only.”
“9A. Issue of securities in dematerialized form by unlisted public companies.-
(1) Every unlisted public company shall –
(a) Issue the securities only in dematerialized form; and
(b) Facilitate dematerialization of all its existing securities
in accordance with provisions of the Depositories Act, 1996 and regulations made there under
(2) Every unlisted public company making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer shall ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialized in accordance with provisions of the Depositories Act 1996 and regulations made there under.
(3) Every holder of securities of an unlisted public company,
(a) who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialized before the transfer; or
(b) who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure that all his existing securities are herd in dematerialized form before such subscription.
(4) Every unlisted public company shall facilitate dematerialization of all its existing securities by making necessary application to a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996 and shall secure International security Identification Number (ISIN) for each type of security and shall in-form all its existing security holders about such facility.
(5) Every unlisted public company shall ensure that –
(a) it makes timely payment of fees (admission as well as annual) to the depository and registrar to an issue and share transfer agent in accordance with the agreement executed between the parties;
(b) it maintains security deposit at all times, of not less than two years, fees with the depository and registrar to an issue and share transfer agent in such form as may be agreed between the parties; and
(c) it complies with the regulations or directions or guidelines or circulars, if any, issued by the securities and Exchange Board or Depository from time to time with respect to dematerialization of shares of unlisted public companies and matters incidental or related thereto.
(6) No unlisted public company which has defaulted in sub-rule (5) shall make offer of any securities or buyback its securities or issue any bonus or right shares till the payments to depositories or registrar to an issue and share transfer agent are made.
(7) Except as provided in sub-rule (s), the provisions of the Depositories Act 1996 the securities and Exchange Board of India (Depositories and participants) Regulations, 2018 and the securities and Exchange Board of India (Registrars to an Issue and share Transfer Agents) Regulations, 1993 shall apply mutatis mutandis to dematerialization of securities of unlisted public companies.
(8) Every unlisted public company governed by this rule shall submit Form PAS-6 to the Registrar with such fee as provided in Companies (Registration Offices and Fees) Rules, 2014 within sixty days from the conclusion of each half year duly certified by a company secretary in practice or chartered accountant in practice.
(8A) The company shall immediately bring to the notice of the depositories any difference obsen’ed in its issued capital and the capital held in dematerialized form.
(9) The grievances, if any, of security holders of unlisted public companies under this rule shall be filed before the Investor Education and protection Fund Authority.
(10) The Investor Education and protection Fund Authority shall initiate any action against a depository or participant or registrar to an issue and share transfer agent after prior consultation with the securities and Exchange Board of India
(11) This rule shall not apply to an unlisted public company which is:-
(a) a Nidhi;
(b) a Government company or
(c) a wholly owned subsidiary.”
To interpret, all the listed companies shall compulsorily be required to issue al their securities in dematerialized form only. Effectively from 2nd October 2018, if it is proposed by any security holder of an unlisted public company intends to transfer such securities, it shall be transferred only in the case such securities are dematerialized. Additionally, where a security holder tends to subscribe to securities of unlisted public companies, it shall be mandatory for the security holder to get his present physical holding converted into demat before applying for such subscription.
However, this compulsory dematerialization of securities shall not apply to the following Companies:
(a) a Nidhi;
(b) a Government company or
(c) a wholly owned subsidiary.
PROCEDURE
When the Company intends to apply for the Dematerialization of its securities, it has to approach any one of the two depositories i.e. NSDL or CDSL. In India, currently, only two depositories operate, National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CDSL). These depositories have their own terms of registration, so it is necessary for a company to meet those criteria. However, the general procedure for the dematerialization of the securities is as laid below:
- Beneficiary Owner (BO) has to open a demat account with a Depository participant (DP) and obtain an account number.
- BO need to fill in a Demat Request Form (DRF) and submit the same with the physical certificate/s to the depository participants for dematerialization. For each ISIN, a separate DRF has to be used. If the BO has free as well as lock-in shares of the same ISIN, separate demat request has to be set up for free shares and lock-in shares.
- DP would verify that the DRF has been filled correctly.
- DP would setup a demat request on the CDSL or NSDL system and send the same to the Company and the Registrar and Transfer Agent.
- Issuer/ Registrar and Transfer Agent (RTA) would verifies the genuineness of the certificates and confirms the request.
- Once the request has been successfully made, DP would deface and mutilate the physical certificates, generate a Demat Request Number (DRN) and send an electronic communication to the depository and courier the DRF and the share certificate to the company by courier.
- On receiving confirmation, depository will credit an equivalent number of securities in the demat account of the BO maintained with CDSL or NSDL.
- The depository will electronically download the details of the demat request and communicate the same to the electronic registry maintained by the Registrar of Companies.
WHAT IS DEMAT ACCOUNT?
Having understood the procedure of Dematerialization of Securities, let us know understand what does Demat Account mean. A Demat account is an account to hold financial securities in electronic form. The purpose of opening a Demat account is to hold shares that have been bought or dematerialized (converted from physical to electronic shares), thus making share trading easy for the users during online trading. A Demat Account holds all the investments an individual makes in shares, government securities, exchange-traded funds, bonds and mutual funds in one place.
UNDERSTAND DEPOSITORY
Depository is a place where financial securities are held in dematerialized form. It is responsible for maintenance of ownership records and facilitation of trading in dematerialized securities.
Depository is a place where financial securities are held in dematerialized form. It is responsible for maintenance of ownership records and facilitation of trading in dematerialized securities. However, a Depository Participant (DP) is described as an Agent (law) of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the sub section 1A of Section 12 of the SEBI Act. As per the provisions of this Act, a DP can offer depository-related services only after obtaining a certificate of registration from SEBI. There are two depositories which are functional in India – National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CDSL). Various Depository Participants linked to each one of them in India. All the details in form of electronic records of equity and debt are kept there.
DEPOSITORY PARTICIPANTS
A Depository Participant (DP) is described as an Agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the sub section 1A of Section 12 of the SEBI Act. As per the provisions of this Act, a Depository Participant can offer depository-related services only after obtaining a certificate of registration from SEBI.
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