Understanding the Procedure for Conversion of Physical Shares into Demat Shares

understanding conversion of physical shares to demat shares

On October 27th 2023, the Ministry of Corporate Affairs (“MCA”) issued the Companies (Prospectus & Allotment of Securities) Second Amendment Rules 2023 (“Amendment Rules”) mandating the dematerialization of all existing securities and issuance of securities in dematerialize form by private companies, other than small companies and government companies, by and from September 30, 2024 (i.e. 18 (eighteen) months from financial year ended on March 31, 2023 as stated in the Amendment Rules) (“Compliance Date”).

Key Requirement and Compliances

The Amendment Rules incorporated Rule 9B to the Companies (Prospectus & Allotment of Securities) Rules 2014, thereby mandating the following requirements by the applicable private companies and its shareholders:

  • Deadline for Dematerialization: Every private company, other than companies categorized as small companies as on 31st March 2023, must complete the dematerialization of all its securities by the Compliance Date, with provisions of the Depositories Act, 1996 (“Depositories Act”) and regulations made thereunder.
  • Restriction on Transfer of Physical Shares: Post the Compliance Date, holders of securities in physical form must dematerialize their holdings before executing any transfer. Additionally, if an existing shareholder of a company intends to subscribe to further securities through private placement, bonus shares, or rights offer after the Compliance Date, they must dematerialize their existing holdings before such subscription.
  • Promoter/Director/KMP Share Dematerialization: Prior to initiating any offer for the issue of securities, buyback of securities, or issuance of bonus shares after the Compliance Date, the company is mandated to dematerialize the holdings of its promoters, directors, and Key Managerial Personnel (KMP).

Procedure for Dematerialization of Securities

  • To facilitate the dematerialization process of securities and offer dematerialized securities in the future, companies must engage with any depository (i.e either the National Securities Depository Limited or Central Depository Services (India) Limited) registered with the Securities Exchange Board of India (SEBI) to obtain an ISIN (International Security Identification Number) for each type of security issued by it.
  • Apart from obtaining an ISIN number for each type of securities, companies are required to appoint a share transfer agent and carry out compliances incorporated in Rule 9A of the Rules, including:
  • Ensure timely payment of fees (admission as well as annual) to the depository and share transfer agent in accordance with the agreement executed between the parties;
  • Maintain the security deposit at all times, of not less than two years fees with the depository and share transfer agent in such form as may be agreed between the parties; and;
  • Compliance with the regulations or directions or guidelines or circulars, if any, issued from time to time with respect to dematerialization of shares.
  • Opening of Demat Account by Shareholders: Once the abovementioned compliances are carried out by the company, in order for the shareholders to convert their physically held securities into dematerialized form, the concerned security holder must initially engage a depository participant (“DP”) (i.e. stockbroker in India), to establish an demat account (“Demat Account”) in the name of the security holder, so as to act as an intermediary between the depository and the security holder. The DP facilitates this process.
  • Once the Demat Account is created in the name of the shareholder, the shareholder must fill and submit the demat request form (“DRF”) provided by the DP, along with additional documents including the physical share certificates (clearly labelled that they have been furnished for dematerialization), for the purposes of processing the DRF request, whereafter the securities get reflected in the shareholders Demat Account.

Author – Abhisshek Singla

Co Author – Prajjwal Sharma


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