Demat Shares of Private Limited Company
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.