Unlisted Public Companies Shall Dematerialize Shares by 2 Oct 2018

The Ministry of Corporate Affairs on 10th September 2018 had published in the Gazette of India under section 469 of the Companies Act, 2013 that every Unlisted Public Company shall dematerialize the issue of securities/shares. The rule may be called Companies Third Amendment Rules 2018 with subsection Prospectus & Allotment of Securities Rules.

Summary:

• MCA notified all Unlisted Public Companies to Dematerialize Shares
• The rule shall come into force from 2nd October 2018
• Every Shareholder of an Unlisted Public Company who intends to transfer securities on or before 2nd October 2018 shall get the securities dematerialized before the transfer
• Every Unlisted Public Company shall facilitate dematerialization by making necessary application to a depository as defined in the Depository Act, 1996
• The Unlisted Public companies shall secure International Security Identification Number(ISIN) from the depository, for each type of security and inform all its existing shareholders about the facility

MCA has notified that all Unlisted Public Companies have issue shares/securities in dematerialized form and also facilitate the dematerialization process of all its existing securities with effect from 2nd October 2018. Every shareholder who wants to transfer securities should dematerialize it before transferring and the Unlisted Public company will help to facilitate the procedure by making necessary application to a depository as defined in the Depository Act 1996. The company has to secure International Security Identification Number(ISIN) from the depository for each type of security and inform the investors about the facility. ISIN is a unique 12 digit alphanumeric identification number allotted for a security/share.

In order to reduce the risk related to share trading in paper format, dematerialization concept was introduced in Indian Financial Market. Dematerialization in short called Demat is the procedure to convert an investor’s physical share/security certificate into electronic format that is maintained and stored in an account with the Depository. In India there are two depositories namely National Securities Depository Limited(NSDL) and Central Depository Services (India) Limited(CDSL). A depository interacts with its clients or investors through its agents called Depository Participants. They are the middlemen between a Depository and a client. Depository participants are organizations like banks, brokers, custodians and financial institutions who provide financial services.

As per MCA, the major benefits of dematerialization of securities that will help Unlisted Public Companies are:

1. It will be safer than paper/certificate shares such as bad delivery, theft, fake securities etc.
2. Transaction cost will be reduced and stamp duty on transfer will be excluded
3. Shares arriving out of bonuses or mergers will be automatically credited to the account
4. Transfer of shares will be done immediately

The grievances, if any, of the shareholders of the unlisted public company, shall be filed before the Investor Education and Protection Fund Authority(IEPF). IEPF shall initiate any action against a depository or participant or registrar after prior consultation with the Securities & Exchange Board of India.

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