This article is written by Calista Chettiar, a Second-Year BA. LL.B. (Hons.) student from NMIMS, School of Law, Bangalore.
INTRODUCTION:
As per Indian law, shares of unlisted companies might well be held in dematerialized form (i.e., with the depository participant by establishing a ‘De-mat account’) or in physical reality (i.e., evidenced by letters of assignment or share certificates granted against such shares). The Companies Act of 2013’s Sections 29 (1) and 29 (IA) deal with the de-matting of all pre-existing Key Managerial Personnel or KMP securities, promoters by unlisted public companies, and measures taken by holders of unlisted company shares obtained through a public business. The Ministry of Corporate Affairs, also known as the MCA, has altered its goal to enhance corporate governance all through the nation and can now be referred to as a component of ‘The Swachh Corporate Abhiyan.’
DEMATERIALIZATION:
Dematerialization is the process of transforming an investor’s physical assets into an equivalent amount of electronic securities that are housed in a Demat account with a depository participant, who serves as a sort of intermediary between the depository and the corporation.
As dematerialization has been mandated by SEBI, 99.9% of transactions at the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) currently take place in this fashion. Hence, in order to make trades at the exchanges, a Beneficial Owner (B.O.) account is essential in light of the ease of dealing in a dematerialized method. However, the stock exchanges offer a separate trading window that allows small investors to sell physical shares that are on the required demat list once, up to a limit of 500 shares, to ease trading by small investors in the physical mode. Before selling the shares further, the buyers of these shares must demat them.
DEMATERIALIZATION OF SECURITIES:
Solid certifications of securities are turned into electronic forms in an appropriate amount of the investor’s securities under the dematerialization of securities procedure. Promoters of each publicly traded firm that offers changeable securities may only retain them as securities: Up until the day of the initial offering to the public, the promoters’ initial ownership of the changeable securities of the company is held. After that, the initial offering to the public is transformed into dematerialized form, and the promoter’s ownership is then only held in dematerialized form.
THE PROCESS OF DEMATERIALIZATION OF SECURITIES:
The process of dematerializing shares is really straightforward and simple to comprehend. And it only takes a few days to finish. Here is a quick description of how shares are dematerialized.
- To begin with, you must use a depository participant to open a Demat account with the depository (DP). The stockbroker with whom you hold a trading account typically serves as both a DP and a broker.
- After opening a Demat account, you must send your DP a properly completed Dematerialization Request Form (DRF) and any physical share certificates you may have.
- If you have shares in more than one company, you must submit a properly completed DRF for each company together with the appropriate share certificates.
- Your DP will carefully review the form and the securities after obtaining the DRF to make sure everything is in order.
- You will be given a Dematerialization Request Number (DRN) as an acknowledgment after the DP is pleased with your request.
- The Registrar and Share Transfer Agent (RTA) of the company receive your request from the DP and passes it to them.
- The physical share certificates are transformed to the electronic mode and then destroyed when the company’s RTA approves your request for dematerialization.
- And lastly, the shares that have been dematerialized are credited to your Demat account, where you can then sell them or transfer them to other accounts.
OBJECTIVES OF DEMATERIALIZING THE SHARES IN AN UNLISTED COMPANY:
- To uncover the hidden ownership of companies or benami ownership in shell corporations, India’s regulatory agencies, including the SEBI and the MCA, have regularly proclaimed the transition of tangible share certificates into dematerialized form.
- This action will lessen the frequency of special dividend and equity share scams. Theoretically unstable corporations can always contrive to issue duplicated shares to people or promoters, which can be insured with various financiers to acquire funding if there isn’t 100% demat of assets of unlisted or listed public/private companies.
- The ministry of corporate affairs (MCA) recently announced its intention to dematerialize securities and shares since it seeks to guarantee that the exercise reveals true ownership while also making it simple to detect shareholders.
- The state officials will find it simple to trace the trail of benami transactions that are taking place because the company’s demat accounts will be coupled with the shareholder’s Aadhar and PAN.
- It will be easier for the income tax administration to catch tax evasion committed by unlisted companies because they’ll be capable of recognizing the chain of benami transactions.
APPLICABILITY OF DEMATERIALIZATION OF SECURITIES:
As of the Second of October 2018, it applies to the issuance of securities in dematerialized form and the dematerialization of existing shares for all unlisted public companies.
If we’re talking about the definition of security under the Securities Contract (Regulations) Act of 1956, we need to take a close look at the applicability of debentures and preference shares.
MAJOR BENEFITS OF DEMATERIALIZATION OF SECURITIES:
Some of the Dematerialization of Securities of Unlisted Public Corporations has several advantages:
- Minimize the possibility of fraud, duplication, theft, loss, or delays with regard to securities held in actual share certificates: The best and most secure way to conduct transactions via electronic means is through a demat account. Holding shares in tangible form no longer entails any of the dangers that came with it, such as theft, damage, loss of share certificates, etc. Transparency should also be improved.
- The transfer of securities will now be made easier: A Demat account provides you the facility to carry out transactions electronically. There is no need for anyone to be actually onsite at the broker’s workplace to finalize a transaction. Furthermore, the investor can also have access to the Demat account via a computer or smartphone. In order to acquire legal ownership of your shares, you can also transform your physical holdings into an electronic format.
- The transfer of securities will involve less paper effort: Utilizing a Demat account has several advantages, one of which is that it eliminates the necessity of paper. There is nearly no need for the paper since the Demat account is for holding shares or securities electronically. Demat accounts have also proven to be very helpful for businesses in lowering their administrative expenses and hassles. Also, reducing paper use is helpful for the environment.
- Nomination Facility: Demat accounts give you the ability to authorize the nominee to manage your Demat account while you are away. With the help of a nominee using this option, you can complete transactions in your Demat account when you are unable to do so yourself.
- Easily Traceable: By opening a Demat account, one may oversee one’s portfolio from their house, workplace, or even anywhere throughout the globe. The versatility to be able to evaluate the portfolio performance elevates the likelihood of you producing more money owing to the rise in engagement and interest.
In conclusion, companies are required by Section 29 of the Companies Act, 2013, to only make public offers of securities in dematerialized form. This section aims to promote openness and effectiveness in the securities market by eliminating the need for physical certificates and enabling faster, more secure, and cost-effective transactions. Dematerialization of securities also helps in reducing the risks of loss, theft, and fraud associated with physical securities. Compliance with Section 29 is essential for companies to ensure that their securities issuance is in line with the regulatory framework and builds investor confidence in the market. Overall, the introduction of Section 29 has been a significant step towards creating a more modern and digitized securities market in India, promoting transparency and investor protection.
REFERENCES:
https://blog.ipleaders.in/dematerialization-public-offer-securities-companies-act-2013/
https://www.lexology.com/library/detail.aspx?g=f5e3b15c-a288-4257-b40e-49213b2cb98e