With the increasing digitization of financial markets, the shift from physical share certificates to electronic or dematerialized (Demat) shares has become a necessity. Dematerialisation of shares ensures efficiency, security, and transparency in securities transactions.
The Companies Act, 2013 and the Securities and Exchange Board of India (SEBI) Regulations mandate the dematerialisation of shares for certain companies, reinforcing investor protection and reducing fraudulent activities.
In this blog, we will explore the concept, legal provisions, process, and compliance requirements related to dematerialisation under Indian corporate laws.
What is Dematerialisation of Shares?
Dematerialisation is the process of converting physical share certificates into electronic form, which are then held in a Demat account with a Depository Participant (DP).
Key Benefits of Dematerialisation:
- Eliminates risks of loss, theft, or forgery of physical certificates.
- Ensures faster and paperless transactions.
- Reduces stamp duty and transaction costs.
- Enables easy transfer, pledging, and monitoring of securities.
- Enhances transparency and regulatory compliance.
Legal Framework Governing Dematerialisation
- Provisions Under the Companies Act, 2013
- Section 29: Specifies that public companies making an initial public offer (IPO) or further public offer (FPO) must issue shares in dematerialized form.
- Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014: Unlisted public companies must compulsorily facilitate dematerialisation of shares before any transfer, issuance, or buyback.
- Such companies must file Form PAS-6 (half-yearly reconciliation of share capital audit) with the Registrar of Companies (ROC).
- Section 56 & 58: Govern the transfer and transmission of shares in electronic mode.
- SEBI Regulations on Dematerialisation
SEBI (Depositories and Participants) Regulations, 2018:
- Defines rules for the operation of Depositories (NSDL & CDSL) and Depository Participants (DPs).
- Specifies the process for dematerialisation and rematerialisation.
SEBI Circular (April 2019):
- Mandates that listed companies can transfer shares only in dematerialized form (except for transmission or gift).
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR):
- Ensures listed companies comply with dematerialisation provisions to improve corporate governance.
Process of Dematerialisation of Shares
Step 1: Open a Demat Account
- The shareholder must open a Demat account with a Depository Participant (DP) (registered with NSDL or CDSL).
Step 2: Submit a Dematerialisation Request
- Fill out the Dematerialisation Request Form (DRF) and submit it to the DP along with the physical share certificates.
- The certificates are marked as “Surrendered for Dematerialisation”.
Step 3: Verification & Approval
- The DP sends the request to the respective company’s Registrar and Transfer Agent (RTA).
- The RTA verifies the request and confirms dematerialisation.
Step 4: Credit of Shares to Demat Account
- Once approved, the electronic shares are credited to the investor’s Demat account within 2-3 weeks.
Mandatory Dematerialisation for Unlisted Public Companies
- Since October 2018, unlisted public companies cannot issue or transfer shares unless they are dematerialised.
- Non-compliance Penalties:
- The company and officers in default can be fined ₹5 lakh – ₹10 lakh.
- Investors may face restrictions on share transfers.
Mandatory Dematerialisation for Private Companies as per MCA notification
- In a major step towards modernization and digitalization, the Ministry of Corporate Affairs (MCA), Government of India, has made it mandatory for private limited companies to dematerialize their shares under the Companies Act, 2013.
- This decision aligns with the existing requirements for public limited companies and seeks to standardize the process of issuing and transferring securities.
- Starting from October 27, 2023, private limited companies—excluding small companies—are obligated to convert all their existing securities into dematerialized form by September 30, 2024
Conclusion
Dematerialisation of shares is no longer an option but a mandatory compliance requirement for various companies under the Companies Act, 2013 and SEBI regulations. It ensures transparency, efficiency, and security in the stock market.
With India’s corporate sector moving toward complete digitization, companies and investors must prioritize dematerialisation to stay compliant and benefit from seamless securities transactions.
Is your company compliant with dematerialisation rules? If not, it’s time to take action!
