Dematerialization: ISIN & DEMAT Process for Private, Section-8, Holding & Subsidiary Companies

In a recent development, through a notification dated October 27, 2023, the MCA introduced Rule 9B in the PAS Rules called Companies (Prospectus and Allotment of Securities) Rules, 2014, providing for mandatory dematerialization of securities of Certain Private Companies. Prior to this amendment, it was obligatory for all unlisted public companies to exclusively hold and issue securities in dematerialized form. Private companies are required to complete the dematerialization of shares or issue new shares in dematerialized form within 18 months from the conclusion of the financial year ending on March 31, 2023. Consequently, the compliance deadline is set for September 30, 2024.

“9 A. 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 provision of the Depositories Act, 1996 and regulations made there under. These amendments shall come into force from October 02, 2018. Also, with the amendment in section 29 of the Companies Act, 2013 Date. 31.07.2019, the word "PUBLIC" has been omitted, whereby Private Limited Companies may also admit their shares in CDSL.

Process of ISIN Generation 

The process of dematerialization of shares involves several important steps, especially the 1st step to generate ISIN as outlined below:

1. Appointment of Registrar & Transfer Agent (RTA), first step is to appoint an RTA who will handle the management of the company's shares. The RTA acts as a bridge between the company, its shareholders, and the depositories (CDSL/NSDL)

2. Submission of Required Documents must be prepared and submitted to the depositories, National Securities Depository Limited (NSDL) or Central Depository Services (India) Limited (CDSL), include a request for obtaining an International Securities Identification Number (ISIN) and admitting the company’s share capital for dematerialization including required followings documents needs to be submitted before CDSL/NSDL like:  

1. Master Creation Form (MCF)

2. Soft & hard copy of security details in prescribed format (Equity).

3. Board Resolution for admission of securities with CDSL mentioning the details about authorized signatory(ies) and appointment of RTA, if any.

4. Certified copy of the Certificate of Incorporation and Certificate of Incorporation pursuant to change of name of company, if applicable.

5. Undertaking on the letterhead of the company duly stamped and signed by the authorized signatory (For Private Companies).

6. Declaration for freezing / unfreezing of securities (applicable in case of Private Limited Company).

7. Certified Copies of Memorandum and Articles of Association.

8. Certified true copy of Annual Report for the last financial year

9. Networth Certificate from a Practicing Chartered Accountant/ Practicing Company Secretary

10. Certified true copy of GST Certificate, PAN Card of company, TAN

3. Signing of a Tripartite Agreement on 600 Rs Stamp papers after submission of documents and at the time of CDSL payment link gets generated. A tripartite agreement must be signed between the company, the appointed RTA, and the chosen depository (NSDL or CDSL), an agreement that facilitates the smooth processing and dematerialization of shares by providing ISIN to the company. 

4. Providing Shareholders Access to Demat Facility: Once the above steps are completed and ISIN generated, the company can offer its shareholders the option to convert their physical shares into electronic form (Demat). Shareholders can now request their shares to be held in electronic format via the depository.

Process for Demat

The process is similar to opening a bank account. The company must select a DP (Depository participant) that will act as intermediary between Depository and Company (or Security Holder), who will help to complete the formalities. Investors need to fill in a form, submit a PAN card, proof of address and bank account details. All the DPs now provide the facility of opening an account online. Compliance Calendar LLP has partnered with the leading DP and RTA processing dematerialization.

Steps for Dematerialization of Shares:

• Surrender of Physical Share Certificates to the DP.

• DP informs Depository about the request.

• DP submit certificates to the Registrar of the issuer company.

• Registrar communicates DP to confirm request.

• Dematerialization is done by Registrar.

• Accounts are updated by Registrar and inform the same to the DP.

• Demat Account of the investor is updated.

Penalty for Non-Compliance under Rule 9A & 9(B):

As per Section 450 of the Companies Act, 2013 the company and every officer of the company who is in default will be liable to a penalty of Rs. 10,000. In case of continuing contravention, with a further penalty of Rs. 1,000 for each day after the first during which the contravention continues, subject to a maximum of Rs. 2,50,000 in case of a company and Rs. 50,000 in case of an officer who is in default or any other person.

Recent MCA Adjudication for Non-compliance in case of similar compliances introduced for Unlisted Public Companies under Rule 9(A) non compliances. Order given here for the reference to check penalty provisions applicable. 

Order for Penalty u/s 454 for Violation of Section 29(1A) of the Companies Act, 2013 r.w rule 9A(2) of the Companies(Prosecution and Allotments of Securities) Rules, 2014 in the matter of M/s. Premier Energies Limited

Compliances / Filings Post ISIN:

All unlisted Private companies shall be required to file Form PAS-6 (Reconciliation of share Capital) to the ROC within sixty days from the conclusion of each half year. Therefore, for the half-year period from April to September the due date to file Form PAS-6 will be 29th November and for the period from October to March the due date will be 30th May.

The provisions of the Present Amendment are applicable after 18 months from the closure of FY 22-23 i.e., from October 01 2024, and therefore the companies will be required to file form PAS-6 for the half year beginning from October 2024 and therefore the first PAS-6 shall be filed for half year ended March 2025.

Restriction if not dematerialized

Before initiating any offer for Issue, Buyback, Bonus Issue, or Right Issue including Share Transfer, and all other activity pertaining with Securities following the compliance date, a private company is required to confirm that all securities held by its promoters, directors, and key management personnel have been dematerialized.

Key Considerations

• Appointment of RTA (Registrar and Share Transfer Agent) is not mandatory if the company has in-house arrangements.

• Recommended: Stamp duty to be paid on Physical Share Certificate before getting Dematerialled 

• Further, in order to ensure that the holders do not transfer the securities in dematerialized form, depositories offer an optional facility to keep the ISIN under the status ‘Frozen for Debit’ to private companies.

Reason to choose CDSL

CDSL has a simplified admission process with minimal documentation and a single point of contact to assist with any queries and would be happy to help in ensuring compliance with all requirements by assisting us in admitting companies based on the requirements and invites to admit the securities of your client companies with CDSL. 

Documents & Proposal

Process to be initiated for allotment of ISIN/along with process conversation of share certificate & opening of Demat account of shareholders of the company

Company needs to call and hold a Board Meeting  to appoint as the Registrar & Transfer Agent (RTA) for the Depository upon and seek admission of the Company’s securities in the Depository system of Central Depository Services (India) Limited to dematerialize the certificates of the shareholders who may wish to do so and appoint the authorized persons to sign all such papers and documents as may be necessary to implement the above decisions.

CCL Retainership Services for 24X7 Peace of Mind

We have a dedicated team of compliance professionals working for the secretarial compliance and are here to help you with the end-to-end process, starting with sharing the relevant information, compiling of the required documents, liaisoning with CDSL, DP and RTA on behalf of the company, opening of the demat account and supporting in filing timely PAS-6 including Intimation to CDSL/RTA for any change during the year, submission of documents to CDSL, DP and RTA on behalf of the company including liaisoning on a timely basis and following up along with the management and DEMAT Reporting with RTA & Linking; wherever applicable.

Reason to choose Compliance Calendar LLP

We are committed to delivering timely, proactive, and user-friendly services to businesses that are preparing for the process of ISIN (International Securities Identification Number) Generation and the Conversion of Physical Shares to Demat (Dematerialized) format. Our professional suite of services includes expert professional consultation and advisory support, ensuring that every step of the process is handled with precision and efficiency in partnership with the CDSL, DP and RTA.

We pride ourselves on our ability to anticipate the needs of our clients and provide solutions that are both practical and innovative. Our team of experienced professionals is dedicated to guiding you through the intricacies of ISIN generation and the dematerialization of physical shares, making the transition as seamless as possible.

We eagerly anticipate the opportunity to collaborate with you on the above-mentioned proposal. If you have any questions, require further information, or have any suggestions regarding our services, please do not hesitate to contact us. Our team is always ready to assist you and provide the support you need to achieve your objectives.

Some FAQ on ISIN & DEMAT (Dematerialisation of Shares) as per Rule 9B 

Q1. Who are Certain Private Companies on which ISIN is mandatory?

Ans.Every Private Company other than small companies

Small Company Definition effective as on date: -

"Small Company" means a company, other than a public company.

1. Paid-up share capital of which does not exceed 4 Crore, or such higher amount as may be prescribed and

2. Turnover of which as per profit and loss account for the immediately preceding financial year does not exceed 40 crore rupees.

Hence if any one criteria threshold crossed by private company, its mandatory to get ISIN 

Example:

• Case 1: Private company having 1 lac paid up shares but more than 40 crores of sale in the F.y. 2023: Yes Applicable 

• Case-2: Private company having 1 lac paid up shares but more than 20 crores of sale in the F.y. 2023: Not Applicable 

• Case 3: Private company having 5 crores paid up shares but less than 40 crores of sale in the F.y. 2023: Yes, Applicable 

• Case 4: Private company having 5 crores paid up shares but more than 40 crores of sale in the F.y. 2023: Yes, Applicable 

Q2. To which companies Dematerialization is Applicable? 

Ans. All the Unlisted Public companies as per Rule 9(A)

• All the Unlisted private companies having Paid up share more than 4 cr and turnover 40 cr (anyone) except Small and Government Company under Rule 9B

• Section 8 company Limited by Shares under Rule 9B

• Nidhi Company under Rule 9B

• Private company which is a WOS or Subsidiary of another Private company under Rule 9B.

• Private company which is a Holding Company of another Private company under Rule 9B.

Example: -

• Case 1: Section 8 company having 1 lac paid up share capital but NIL sale/grants/donation in the F.y. 2023: Yes, Applicable 

• Case 2: Section 8 company Limited by guarantee and less than 4 crores of sale/grants/donation in the F.y. 2023: Yes, Applicable 

• Case 3: Section 8 company Limited by Shares having 1 lac of paid-up share capital and less than 4 crores of sale/grants/donation in the F.y. 2023: Yes, Applicable 

• Case 4: Private Company having less than 20% shares in other private Company company in the F.y. 2023: Not, Applicable 

• Case 5: Private Company having 51 % shares in other private Company company in the F.y. 2023: Yes, Applicable 

Q3. What are the Fees Applicable for CSDL for the ISIN generation?

Fee structure of CDSL-

4. What are the Fees Applicable for RTA for ISIN?

Ans.The fees for appointing a Registrar & Transfer Agent (RTA) typically range between Rs.3,000 to Rs.8,000, depending on the service provider, their billing cycle, and onboarding costs. It is essential for companies to choose the right RTA, not just based on fees but also on their ability to manage the entire dematerialization process and handle post-ISIN compliances. A reliable RTA will assist with all corporate actions, including timely filing of half-yearly compliance reports like PAS-6. Companies should prioritize the quality and responsiveness of the RTA’s services rather than focusing solely on cost.

Q5. What are the key steps involved in the dematerialization process for foreign and Indian shareholders, and how do different entities like RTA, Depository Participants, and CDSL/NSDL play a role in this process?

• Appointment of Registrar & Transfer Agent (RTA):The company appoints an RTA to assist in obtaining the ISIN from CDSL/NSDL for dematerializing shares.

• Obtaining ISIN:The RTA handles the submission of required documents to CDSL/NSDL for acquiring the International Securities Identification Number (ISIN).

• PAN Card Issuance for Foreign Entities/Shareholders:Foreign entities and shareholders must obtain a PAN card from the Income Tax Department for compliance purposes.

• Demat Account Opening for Foreign Body Corporate:Foreign companies open a Demat account with a Depository Participant to hold shares electronically.

• Annual Maintenance Charges (AMC) for Foreign Body Corporate Demat Account:The foreign corporate body incurs yearly AMC for maintaining its Demat account.

• Demat Account Opening for Foreign Individual Shareholders:Foreign individual shareholders open a Demat account with a Depository Participant for electronic shareholding.

• Annual Maintenance Charges (AMC) for Foreign Individual Shareholders:Foreign individual shareholders are subject to yearly AMC for their Demat accounts.

• Physical to Demat Conversion for Foreign Entities/Shareholders:Foreign entities and shareholders holding physical shares need to convert them into electronic form through their Depository Participant.

• Demat Account Opening for Indian Body Corporate (Subsidiary):The Indian subsidiary opens a Demat account to manage its shares electronically.

• Demat Account Opening for Indian Resident Shareholders:Indian shareholders need to open a Demat account to hold their shares electronically.

• Physical to Demat Conversion for Indian Shareholders:Indian shareholders with physical shares must convert them into Demat form with assistance from their Depository Participant.