In order to mitigate the risks associated with share trading in paper format, Dematerialisation concept was introduced in Indian Financial Market earlier but first with the listed companies only and now extended to unlisted public companies also.
Dematerialisation or De-mat in short is the process through which an investor’s physical share certificate gets converted to electronic format which is maintained in an account with the Depository Participant.
There are some of the benefits of introduction of Dematerialisation, as mentioned below:
• De-mat format reduces the risk of bad deliveries
• Time and money is saved as you need not go to the notary, broker for taking delivery or submitting the share certificate in paper form now.
• Liquidity is very high in case of demat format as whole process in automated.
• All the benefits of corporate action like bonus, stock split, rights etc are managed through the depository leading to elimination of transit losses.
• Investors save stamp duty while transferring shares in demat format.
Now, every unlisted public company desirous of issue any kind of securities whether by way of public issue or private placement shall issue in dematerialised form only.
MCA has come with third amendment in Companies (Prospectus and Allotment of Securities) Rules by notification in official gazette of India on 10th September, 2018 which came into force on 2nd October,2018.
Introduction of Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018
As Per Rule 9 - The promoters of every public company making a public offer of any convertible securities may hold such securities only in dematerialised 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 dematerialised form before such offer is made and thereafter such promoter shareholding shall be held in dematerialized form only.
Author’s Interpretation- Only in case of Further Issue of only Convertible Securities by a Public Company (Listed or Unlisted), promoter shareholding shall be in Dematerialised Form.
While in case of IPO, entire holding of Convertible Securities and the Equity Shares shall be in Dematerialised Form. and if once dematerialised it cannot be rematerialized.
Rule 9A – A New Insertion made by MCA
Every Unlisted Public Company
a. Issue securities in Dematerialised Form Only and
b. facilitate Dematerialisation of all its existing Securities
From when Dematerialisation is mandatory?
On and after 2nd October, 2018. Every Transaction made with the Shares of Unlisted Public Company has to be done in accordance with depository Act only and shares shall be in Dematerialised form only.
Securities includes
I. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities
II. Government securities
III. Rights or interest in securities
Whether convertible or not.
Which type of transaction involved in compulsory dematerialisation and purpose behind such mandatory requirement?
From the sub rule (1) and (2) of Rule 9A we infer that, Dematerialisation is mandatory
• When company issue new security (by right issue, Bonus issue, private placement, preferential allotment, any other public issue)
• When shareholders like to share their shares (even to existing shareholder)
As Rule provides every holder of securities of an unlisted public company who intends to transfer its securities on or after commencement of this rule shall get such securities dematerialised before the transfer or who subscribes to any securities of an unlisted company whether by way of private placement or bonus share or right offer as per section 62(1)(a) on or after commencement of this rule shall ensure that all the his existing securities are held in D-MAT form before such subscription.
• Company would be likely to announce Buy Back of its Securities.
In all the above mentioned cases the entire holding of securities of its promoters, Directors, KMP has been dematerialised.
Which Regulations should be Complied with by the Unlisted Public Company?
After Dematerialisation Company has to comply with , the provisions of
1. The Depositories Act, 1996,
2. The Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996
3. The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993
What are the compulsions made on a Company, while Dematerialising its Securities?
It has to make necessary application with the Depository and shall secure ISIN for all the existing Securities and shall inform all its existing shareholders about such facility.
What are the Mandatory Reporting?
As per the Depository and Participant Regulation 55A_ Share Capital and Audit Report has to be submitted with Registrar of Companies, in whose Jurisdiction the Registered Office of Company is Situated. It is a half yearly Report that should be submitted by 30th of the Following Month of the end of Half Year.
What are the extra Minimum maintenance fees that should be paid on Dematerialisation?
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 Dematerialisation: Unlisted Public Companies
(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 dematerialisation of shares of unlisted public companies and matters incidental or related thereto.
*If Default is made in payment in above mentioned fees, company cannot make any of the above mentioned transaction i.e. Buy back or any issue.
Where Investors can file their Grievances?
It can be filed before Investor Education and Protection Fund Authority. And is could initiate an action only after in consultation with the SEBI.
The said rule increased the scope of Company Secretaries as,
1. R. 55A (Share Capital and Audit Report) Shall be Certified by a PCS, therefore not only Listed Company rather Unlisted Public Companies having shares in Dematerialised form shall require to file half yearly Report.
2. While performing Audit_ One more thing to be added in checklist of Unlisted Public Company.
3. Certification of MGT 7_ if any Share Transfer or Allotment or issue is made, then need to check about Dematerialisation Compliance, Otherwise need to report on the same.
ABOUT THE AUTHOR
Shefali Gupta : Economics Honours Graduate from Delhi University and Qualified Company Secretary, Currently working as Legal Analyst with SVR & Co. - Company Secretaries
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