Dematerialization of Physical Shares for a Private Company- A Complete Guide

Dematerialization of Physical Shares for a Private Company- A Complete Guide. History of Dematerialization of Physical Shares in India
If you read section 29 of the Companies Act, 2013; it talks about the Public Offer of securities to be in dematerialized form. The Companies (Prospectus and Allotment of Securities) Rules, 2014, established procedures for dematerialization under Section 29 of the Companies Act, 2013, and required public companies, including unlisted ones, to comply. 
However, as digitization has been taking place rapidly, it is understood that now the government wants to do all paperwork online. In this quest, Amendments on October 2, 2018, extended these requirements to all unlisted public companies where MCA came up with Rule 9A which talked about the dematerialization of shares for unlisted public companies. 
Fast forward to today, a recent notification from the Ministry of Corporate Affairs (MCA) dated October 27, 2023, added Rule 9B to these rules, extending the dematerialization mandate to private companies (excluding small and government companies). What it means is that private companies must apply for ISIN & get dematerialized their securities within 18 months from the end of the financial year starting on or after March 31, 2023, whose first due date happens to be Sep 30, 2024. As per Rule 9B, it has been made mandatory to convert physical shares of other than small companies (private companies) to have their shares dematerialized. 
Concern of Companies Regarding e-Stamping of Old Physical Share Certificates and Alteration of AOA
We all know that Private limited companies are increasingly transitioning to dematerialized shares, the most burning question these days: Is it mandatory to alter the Articles of Association (AOA) and pay stamp duty on old physical share certificates before converting physical shares to Demat form? Sharing from our experiences working with different companies and liaisoning with Depository, RTA, and DP; they are not demanding the e-Stamping for old share certificates. Coming to Alteration of AOA; no changes are required in AOA as the Depositories Act, 1996 being an Act of Parliament, overrides everything. However, for all new shares to be issued after Sep 30, 2023, in demat; e-Stamping is a must.
Purpose and Benefits of Dematerialization of Physical Shares
As India advances in digitization, most of the paperwork is being upgraded to electronic versions. For example, earlier all signatures used to be on paper but as MCA came up online in 2006, they introduced the concept of digital signature with electronic MCA Forms. The shift from physical to dematerialized share certificates resolves common issues like lost certificates and complicated recovery processes. Not just this, earlier it was difficult to find out the shareholding patterns of any company that caused huge issues in numbering the folios and streamlining the updates of the register of members under section 88 of the Companies Act, 2013.
One major issue always remained to contact the beneficial owners. Since these data will be with the Depositories and RTA, the corporate governance of any company will be greatly enhanced. If we look closely; previously; shareholders had to recover lost shares through the IEPF and with shares being issued electronically, it simplifies in the KYC update and following up with the RTA rather than approaching the company for every task. Furthermore, filing PAS-6 half-yearly will improve the shareholding pattern of every other than a small company.
Why so much hue and cry in getting ISIN and Demat of Shares?
If we make an attempt to understand what exactly needs to be done while obtaining an ISIN (International Securities Identification Number) and converting physical shares to demat, we will find that for ensuring a smooth and compliant process if you have the consultation from a professional firm like Compliance Calendar LLP where we have helped hundreds of companies in the process and we help them with end-to-end process.
Now the technical part of the Securities and Process
Clause (81) of Section 2 of the Companies Act, 2013 defines ‘securities’ by referring to the definition provided in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956. According to this definition, 'securities' encompass a broad range of financial instruments, including shares, bonds, debentures, and other similar instruments.
This new amendment of Rule 9B is applicable for other than small companies that include all private companies having paid-up share capital of 4 crores or more, turnover of 40 crores or more; holding or subsidiary company including section 8 companies if they are limited by shares.
Demat Status of Companies for FY ending March 31, 2024?
If your company is a private other than a small company as of March 31, 2023; the due date is September 30, 2024. For companies having a status other than the small company as of Mar 31, 2024; the due date will fall on September 2025.
Will Corporate Action be allowed without a Demat of Shares?
Private company shareholders must dematerialize their securities before transferring or subscribing to new ones. As of October 31, 2023, India has 25,86,341 registered companies, with 16,28,791 active. Private limited companies make up 96% of this total, highlighting the significant impact of these new requirements. As per the MCA Update, no corporate action shall be allowed without first converting the physical shares to demat, and to do that the company has to obtain ISIN for each class of securities. 
Do companies require more than 1 ISIN in the case of a class of securities?
Yes, if your company has preference shares or any other class of securities, you need to obtain a separate ISIN for preference shares as well as other securities in addition to equity shares.
Process of Dematerialization for Private Limited Company 
Many companies are still struggling to understand the process of dematerialization of physical shares in the case of private companies. Below are the simple steps you can take to:

Select Depository: Securities registered with NSDL must be dematerialized using a demat account with NSDL, while securities with CDSL require a demat account with CDSL. For your information, you can choose either of the Depositories and it is not mandatory to reach out to both.

Timeline: The dematerialization process starts with the ISIN Creation which normally takes 15-30 days whereas other than the Depository (NSDL/ CDSL), one more party other than the issuer company is the Registrar and Transfer Agent (RTA).

Inform Shareholders: Once ISIN is created, notify existing security holders about the dematerialization facility where they have to open a demat account with any DP of their choice and surrender their physical shares along with the Demat Request Form (DRF). After submitting the same, DP allows the Demat Request Number (DRN) that works as a tracking ID and proof of submission of physical shares.

Payment and Deposit: The issuer company has to pay the Depository, one-time processing fees, Annual Maintenance Cost (AMC), and Security Deposit which is generally two times the AMC Cost. RTA also takes AMC charges at the time of ISIN Creation. Ensure timely payment of fees to depositories and RTA to maintain compliance.

Form PAS-6: Submit Form PAS-6 to the Registrar within sixty days from the end of each half-year, certified by a company secretary or chartered accountant to ensure compliance as per the Companies Act, 2013.

Process for Conversion of Physical share into demat by shareholders 
The steps involved in dematerializing or conversion of physical securities into demat by a shareholder of a private company: -

Open Demat Account: The investor (shareholder) needs to open a Demat account with a Depository Participant (DP), who serves as an intermediary between the investor and the depository. The investor has to provide the necessary documents to complete the account opening process.

Submit Dematerialization Request to the DP: Submit a request to the DP in the Dematerialization Request Form (DRF) for dematerialization, along with the certificates of securities to be dematerialized. Before submission, the client has to deface the certificates by writing "SURRENDERED FOR DEMATERIALISATION".

Verification of the Dematerialization Request and Documents by the DP: The DP will verify that the form is duly filled in and the number of certificates, number of securities, and the security type (equity, debenture, etc.) are as given in the DRF. If the form and security count are in order, the DP will issue an acknowledgment slip, duly signed and stamped, to the client.

Verification and Checking of Accompanying Documents by the DP: The DP verifies and checks the accompanying documents for accuracy and completeness.

Acceptance of the Demat Request and Generation of DRN: If the securities are in order, the details of the request as mentioned in the form are entered into the DP’s software, generating a Dematerialisation Request Number (DRN).

Electronic Submission of the Dematerialisation Request: After further verification, the dematerialization request is sent to the depository and the Issuer/ RTA electronically through the DP's software.

Transfer of Physical Securities to Depository: The DP then dispatches the certificates along with the request form and a covering letter to the Issuer/ RTA.

Confirmation of Dematerialisation by the Issuer/RTAt: The issuer/RTA confirms acceptance of the request for dematerialization to the DP and the depository if the request is found in order.

Update Demat Account Balance: On confirmation by the issuer/RTA, the client's account is automatically credited with the appropriate number of securities electronically.

The process of ISIN and Dematerialization of Physical Shares seems difficult. What to do?
Do not worry about it. If you are struggling with the process and compliance, you can reach out to our compliance team, and we shall make all our efforts to make it smooth for you. Compliance Calendar has partnered with the Depository, Depository Participant, and RTA where our professionals will be assisting you with the end-to-end process. Have any questions? We have got you covered. Book a free consultation at info@ccoffice.in or reach out at 9988424211 and someone from our team will get in touch with you.

History of Dematerialization of Physical Shares in India

If you read section 29 of the Companies Act, 2013; it talks about the Public Offer of securities to be in dematerialized form. The Companies (Prospectus and Allotment of Securities) Rules, 2014, established procedures for dematerialization under Section 29 of the Companies Act, 2013, and required public companies, including unlisted ones, to comply.

However, as digitization has been taking place rapidly, it is understood that now the government wants to do all paperwork online. In this quest, Amendments on October 2, 2018, extended these requirements to all unlisted public companies where MCA came up with Rule 9A which talked about the dematerialization of shares for unlisted public companies.

Fast forward to today, a recent notification from the Ministry of Corporate Affairs (MCA) dated October 27, 2023, added Rule 9B to these rules, extending the dematerialization mandate to private companies (excluding small and government companies). What it means is that private companies must apply for ISIN & get dematerialized their securities within 18 months from the end of the financial year starting on or after March 31, 2023, whose first due date happens to be Sep 30, 2024. As per Rule 9B, it has been made mandatory to convert physical shares of other than small companies (private companies) to have their shares dematerialized.

Concern of Companies Regarding e-Stamping of Old Physical Share Certificates and Alteration of AOA

We all know that Private limited companies are increasingly transitioning to dematerialized shares, the most burning question these days: Is it mandatory to alter the Articles of Association (AOA) and pay stamp duty on old physical share certificates before converting physical shares to Demat form? Sharing from our experiences working with different companies and liaisoning with Depository, RTA, and DP; they are not demanding the e-Stamping for old share certificates. Coming to Alteration of AOA; no changes are required in AOA as the Depositories Act, 1996 being an Act of Parliament, overrides everything. However, for all new shares to be issued after Sep 30, 2023, in demat; e-Stamping is a must.

Purpose and Benefits of Dematerialization of Physical Shares

As India advances in digitization, most of the paperwork is being upgraded to electronic versions. For example, earlier all signatures used to be on paper but as MCA came up online in 2006, they introduced the concept of digital signature with electronic MCA Forms. The shift from physical to dematerialized share certificates resolves common issues like lost certificates and complicated recovery processes. Not just this, earlier it was difficult to find out the shareholding patterns of any company that caused huge issues in numbering the folios and streamlining the updates of the register of members under section 88 of the Companies Act, 2013.

One major issue always remained to contact the beneficial owners. Since these data will be with the Depositories and RTA, the corporate governance of any company will be greatly enhanced. If we look closely; previously; shareholders had to recover lost shares through the IEPF and with shares being issued electronically, it simplifies in the KYC update and following up with the RTA rather than approaching the company for every task. Furthermore, filing PAS-6 half-yearly will improve the shareholding pattern of every other than a small company.

Why so much hue and cry in getting ISIN and Demat of Shares?

If we make an attempt to understand what exactly needs to be done while obtaining an ISIN (International Securities Identification Number) and converting physical shares to demat, we will find that for ensuring a smooth and compliant process if you have the consultation from a professional firm like Compliance Calendar LLP where we have helped hundreds of companies in the process and we help them with end-to-end process.

Now the technical part of the Securities and Process

Clause (81) of Section 2 of the Companies Act, 2013 defines ‘securities’ by referring to the definition provided in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956. According to this definition, 'securities' encompass a broad range of financial instruments, including shares, bonds, debentures, and other similar instruments.

This new amendment of Rule 9B is applicable for other than small companies that include all private companies having paid-up share capital of 4 crores or more, turnover of 40 crores or more; holding or subsidiary company including section 8 companies if they are limited by shares.

Demat Status of Companies for FY ending March 31, 2024?

If your company is a private other than a small company as of March 31, 2023; the due date is September 30, 2024. For companies having a status other than the small company as of Mar 31, 2024; the due date will fall on September 2025.

Will Corporate Action be allowed without a Demat of Shares?

Private company shareholders must dematerialize their securities before transferring or subscribing to new ones. As of October 31, 2023, India has 25,86,341 registered companies, with 16,28,791 active. Private limited companies make up 96% of this total, highlighting the significant impact of these new requirements. As per the MCA Update, no corporate action shall be allowed without first converting the physical shares to demat, and to do that the company has to obtain ISIN for each class of securities.

Do companies require more than 1 ISIN in the case of a class of securities?

Yes, if your company has preference shares or any other class of securities, you need to obtain a separate ISIN for preference shares as well as other securities in addition to equity shares.

Process of Dematerialization for Private Limited Company

Many companies are still struggling to understand the process of dematerialization of physical shares in the case of private companies. Below are the simple steps you can take to:

Select Depository: Securities registered with NSDL must be dematerialized using a demat account with NSDL, while securities with CDSL require a demat account with CDSL. For your information, you can choose either of the Depositories and it is not mandatory to reach out to both.
Timeline: The dematerialization process starts with the ISIN Creation which normally takes 15-30 days whereas other than the Depository (NSDL/ CDSL), one more party other than the issuer company is the Registrar and Transfer Agent (RTA).

Inform Shareholders: Once ISIN is created, notify existing security holders about the dematerialization facility where they have to open a demat account with any DP of their choice and surrender their physical shares along with the Demat Request Form (DRF). After submitting the same, DP allows the Demat Request Number (DRN) that works as a tracking ID and proof of submission of physical shares.
Payment and Deposit: The issuer company has to pay the Depository, one-time processing fees, Annual Maintenance Cost (AMC), and Security Deposit which is generally two times the AMC Cost. RTA also takes AMC charges at the time of ISIN Creation. Ensure timely payment of fees to depositories and RTA to maintain compliance.
Form PAS-6: Submit Form PAS-6 to the Registrar within sixty days from the end of each half-year, certified by a company secretary or chartered accountant to ensure compliance as per the Companies Act, 2013.

Process for Conversion of Physical share into demat by shareholders

The steps involved in dematerializing or conversion of physical securities into demat by a shareholder of a private company: -

Open Demat Account: The investor (shareholder) needs to open a Demat account with a Depository Participant (DP), who serves as an intermediary between the investor and the depository. The investor has to provide the necessary documents to complete the account opening process.
Submit Dematerialization Request to the DP: Submit a request to the DP in the Dematerialization Request Form (DRF) for dematerialization, along with the certificates of securities to be dematerialized. Before submission, the client has to deface the certificates by writing "SURRENDERED FOR DEMATERIALISATION".

Verification of the Dematerialization Request and Documents by the DP: The DP will verify that the form is duly filled in and the number of certificates, number of securities, and the security type (equity, debenture, etc.) are as given in the DRF. If the form and security count are in order, the DP will issue an acknowledgment slip, duly signed and stamped, to the client.

Verification and Checking of Accompanying Documents by the DP: The DP verifies and checks the accompanying documents for accuracy and completeness.

Acceptance of the Demat Request and Generation of DRN: If the securities are in order, the details of the request as mentioned in the form are entered into the DP’s software, generating a Dematerialisation Request Number (DRN).

Electronic Submission of the Dematerialisation Request: After further verification, the dematerialization request is sent to the depository and the Issuer/ RTA electronically through the DP's software.

Transfer of Physical Securities to Depository: The DP then dispatches the certificates along with the request form and a covering letter to the Issuer/ RTA.

Confirmation of Dematerialisation by the Issuer/RTAt: The issuer/RTA confirms acceptance of the request for dematerialization to the DP and the depository if the request is found in order.

Update Demat Account Balance: On confirmation by the issuer/RTA, the client's account is automatically credited with the appropriate number of securities electronically.

The process of ISIN and Dematerialization of Physical Shares seems difficult. What to do?

Do not worry about it. If you are struggling with the process and compliance, you can reach out to our compliance team, and we shall make all our efforts to make it smooth for you. Compliance Calendar has partnered with the Depository, Depository Participant, and RTA where our professionals will be assisting you with the end-to-end process. Have any questions? We have got you covered. Book a free consultation at info@ccoffice.in or reach out at 9988424211 and someone from our team will get in touch with you.