Demat Shares of Private Limited Company

Demat or Dematerialisation is the process by which a shareholder can get physical share certificates of a company converted into electronic balances. Converting physical shares into demat shares is often mandated by investors while investing in the shares of a company and is advisable for companies looking to raise equity funds. In this article, we look at the process to demat shares of a

private limited company

Benefits of Demat Shares

The following are the benefits of a demat share account:

Safe way to hold shares of a company - cannot be defaced or mutilated or stolen.
Convenient - can be easily transferred electronically from one entity to another.
Instant transfer of shares on authorisation.
No stamp duty on transfer of shares.
No risk of bad delivery of shares - fake share certificates, delays, bad delivery, missing certificate, etc.,
Minimal paperwork.
Reduction in transaction cost and legal cost.
Even one share can be transferred.
Easy maintenance of ownership information and changes to address of shareholder.
Automatic credit to account on stock split or bonus.
Single demat account of investor can hold multiple securities.

Converting to Demat Shares

In India, a

depository is an organisation which holds securities of investors in electronic form at the request of the investors. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are currently the two registered depositories with SEBI. However, investors cannot directly trade through depositories and must interact through a depository participant. A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services. Many public financial institutions, commercial banks, stock-brokers, clearing corporations /clearing houses and NBFCs complying to the requirements of SEBI are registered as Depository Participants. Both the NSDL and CDSL has hundreds of depository participants through whom investors can deal. To convert shares of a private limited company into demat form, the company and the investors of the company must enter into an agreement with depository participants.

Private Limited Company Becoming an Issuer

A private limited company can offer demat facility to its shareholders by admitting the securities to the NSDL. To do so, the company must first enter into a contract with an existing Registrar & Transfer Agent (R&T Agent) who is responsible communicating with the NSDL for all share credits and transfers.

Documents Required for Creating Company Demat Account

Letter of intent cum Master Creation Form (MCF)
Certified true copies of the audited Balance Sheet for last two years
Certified true copy of Memorandum of Association & Articles of Association
Confirmation letter from Registrar and Transfer Agent for common registry
Net worth certificate from a Chartered Accountant
Undertaking from company.
List of Authorised signatory with Board Resolution with specimen signature
If the company is already admitted in CDSL, the ISIN activation letter from CDSL to be submitted.

Fee for Becoming an Issue

At NSDL, the joining fees for an unlisted companies is Rs.30,000 plus service tax. In addition to the joining fee, any issuer of listed securities is required to pay an annual custody fee at the rate of Rs. 8 per folio (ISIN position) in NSDL, subject to the following minimum amount:

Nominal Value of Securities admitted (Rs.)	Amount (Rs.)
Upto 5 crore	6,000
Above 5 crore and upto 10 crore	15,000
Above 10 crore and upto 20 crore	30,000
Above 20 crore	50,000

Investor Account for Shareholders

In addition to the company becoming an issue, the shareholders of the company must also become an investor under a depository participant to hold their shares of the company in demat form. Shareholders of the company can open a Beneficial Owner (BO) account with a Depository Participant (DP) of any depository.

Procedure for Opening Shareholder Demat Account

To open a demat account, the shareholder must complete a Beneficial Owner application form with the depository participant along with copies of identity and address proof. PAN card copy has been mandated at the time of opening Beneficial Owner account for all investors. Once the application is approved, the investor must sign an agreement with Depository Participant giving details of rights and duties of investor and Depository Participant. On opening the account the depository participant will provide the investor schedule of charges, account details and a unique account number, which is also called BO ID (Beneficial Owner Identification number) - which is used for all future transactions. Charges paid by the investor for converting his/her shares into demat form include:

One time charges for conversion of shares into demat form
Annual account maintenance charges
Transaction fee on sell transactions.

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Frequently Asked Questions

Common questions about Demat Shares for Private Limited Company in India.

Dematerialization, or demat, is the process of converting physical share certificates of a company into electronic balances. It involves getting the shares admitted with a depository like NSDL or CDSL through a Registrar & Transfer Agent, and the shareholders opening a demat account with a Depository Participant to hold the shares electronically.

A private limited company should dematerialize its shares as it provides many benefits such as safe holding of shares, convenient electronic transfer, no stamp duty on transfer, minimal paperwork, easy maintenance of ownership records, and is often mandated by investors while raising equity funds.

The benefits of having a demat account for shareholders include safe holding of shares without risk of theft or mutilation, instant electronic transfer of shares, no stamp duty on transfer, minimal paperwork, easy maintenance of ownership information, automatic credit of shares on stock split or bonus issue, and the ability to hold multiple securities in a single account.

The documents required for a private limited company to become an issuer on NSDL include a letter of intent cum Master Creation Form, audited balance sheets for the last two years, copies of Memorandum of Association and Articles of Association, confirmation from the Registrar and Transfer Agent, a net worth certificate from a Chartered Accountant, and an undertaking from the company.

For a company, there is a one-time joining fee of Rs. 30,000 plus service tax and an annual custody fee based on the nominal value of admitted securities. For shareholders, there are one-time charges for conversion of shares into demat form, annual account maintenance charges, and transaction fees on sell transactions.

A shareholder can open a demat account, also known as a Beneficial Owner (BO) account, with a Depository Participant (DP) of any depository like NSDL or CDSL. The process involves completing an application form, providing identity and address proof, signing an agreement with the DP, and paying the required charges.

A Depository Participant (DP) is an agent of the depository through which it interfaces with the investors and provides depository services. DPs are entities like financial institutions, banks, stock-brokers, and clearing corporations registered with SEBI. Shareholders open their demat accounts with a DP, and the DP facilitates the conversion and holding of shares in electronic form.

Yes, a single demat account of an investor can hold securities of multiple companies. This is one of the benefits of having a demat account, as it eliminates the need for separate physical share certificates for each company.

While it is not mandatory by law for private limited companies to dematerialize their shares, it is often mandated by investors while investing in the shares of a company. Dematerialization is advisable for companies looking to raise equity funds as it provides various benefits and conveniences for both the company and its shareholders.

A Registrar & Transfer Agent (R&T Agent) is responsible for communicating with the depository (NSDL or CDSL) for all share credits and transfers on behalf of the company. A private limited company must enter into a contract with an existing R&T Agent to offer demat facility to its shareholders and admit its securities with the depository.