Understanding Dematerialization:
In a significant move towards streamlining the securities market in India, the Ministry of Corporate Affairs (MCA) issued a notification on October 27, 2023. This notification pertains to the dematerialization of shares, a process which convert the traditional paper-based securities into electronic form. This move aims to enhance transparency, efficiency, and investor convenience in the Indian capital market.
Dematerialization is the process of converting physical share certificates into electronic or digital form.
Key highlights of the MCA notification:
Mandatory Dematerialization:
- Private Company
- Public Companies
Exception of Dematerialization:
- Small Company
- Government Company
Timeline for Compliance:
The MCA has set a timeline for companies to comply with the dematerialization requirement. Companies falling within the specified categories must complete the dematerialization process within Eighteen Months of closure of financial year 31st March 2023 i.e. by 30th September, 2024
Restrictions on Companies/ Members/ New subscribers after 30th September, 2024
The company is prohibited from undertaking the following actions until the entire holding of securities owned by its promoters, directors, and key managerial personnel is converted into demat form:
- Issuance of any securities
- Buyback of securities
- Bonus issue
- Right issue
Moreover, existing holders of securities are restricted from transferring their securities before dematerialization, particularly after the 30th of September, 2024.
New Subscribers shall ensure before subscription of any securities in any mode all his securities are held in dematerialised form.
Moreover, Each company under the purview of this regulation is required to submit Half-Yearly Returns as per Rule 9A(8) in Form PAS-6 to the Registrar, along with the prescribed fee as per the Companies (Registration Offices and Fees) Rules, 2014. This submission should take place within 60 days from the conclusion of each half-year and must be properly certified by either a practicing company secretary or a practicing-chartered accountant.
Registrar and Share Transfer Agent (RTA):
The notification emphasizes the role of Registrar and Share Transfer Agents in facilitating dematerialization. These entities play a crucial role in overseeing the conversion process, ensuring accuracy, and maintaining a comprehensive record of dematerialized shares.
Expenses for Dematerialization payable by unlisted companies:
- Joining fees of Rs.15,000 plus GST at the applicable rate
- As per NSDL Circular No.: NSDL/CIR/II/26/2018 dated September 25, 2018, an Issuer shall pay an Annual Custody Fee at the rate of Rs. 11 per folio (ISIN position) in NSDL, subject to a minimum amount as mentioned below, plus taxes as applicable:
| Nominal Value of securities admitted (Rs.) | Amount (Rs.) |
| Upto Rs. 2.5 crore (applicable only for issuer of unlisted shares) | 5,000 |
| Upto 5 crore | 9,000 |
| Above 5 crore and upto 10 crore | 22,500 |
| Above 10 crore and upto 20 crore | 45,000 |
| Above 20 crore | 75,000 |
Security Deposit payable by Unlisted Public Companies:
The unlisted public companies are required to maintain security deposit of not less than two years’ of applicable Annual Custody Fee.
Conclusion:
The government’s recent announcement about converting physical shares into digital ones is a positive step for making the stock market in India better and more user-friendly. As companies adopt this change to digital formats, it will bring benefits like clearer information, simpler procedures, and more trust from investors. These improvements are likely to help the financial market grow and become stronger overall. This decision also shows that India is following the best practices globally and is committed to building a strong and adaptable financial system.
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