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Dematerialisation in Unlisted Companies

Dematerialisation in Unlisted Companies

Dematerialisation in Unlisted Companies

Dematerialisation is mandatory for unlisted companies whose shareholders are holding physical shares. Dematerialisation refers to the conversion of physical shares into electronic shares. Companies (Prospectus and Allotment of Securities) Third Amendment Rules 2018 should be followed by a company which is dematerialising its shares. The rules came into force on 2nd October 2018.  The Government of India (GoI) has introduced the rules to ensure compulsory dematerialisation of all shares issued by unlisted companies. The requirement to dematerialise applies to all forms of capital and debt issued.

Dematerialisation provides the buyer of the shares with the option to sell the shares in the online mode. Dematerialisation also allows the company to list the shares in a stock exchange. Listing of shares enhances the credit-worthiness of the company. The listing also enables the company to opt for additional issue of capital easily.

Rules Relating to Share Capital

  • The company should issue shares, debentures and other securities only in dematerialised form.
  • The company may have previously issued securities in physical form. In such cases, the company should convert the securities into dematerialised form.
  • The dematerialisation procedure followed by the company should comply with the Depository Act.
  • In the following circumstances, the company should not enter into any transaction until all the securities are entirely dematerialised:
    • When the company is making an Initial Public Offer (IPO)
    • In case the company is issuing bonus shares
    • When the company has made an announcement to the public for buyback of its shares or debentures
    • In case the company is making a preferential issue of shares to promoters or directors
  • The specified transactions can be made after fees have been paid to the depository and the share transfer agent.

Rules Relating to Transfer of Shareholding

  • A person who is holding shares in the physical form may wish to transfer the shareholding. In such cases, the company should ensure that the shares are dematerialised before the date of transfer.
  • Before allotting shares to an applicant, the company should check whether the applicant is already holding shares in the company. The applicant may be holding the company’s shares in the physical form. In such cases, the company should send a letter of intimation to the shareholder. The letter should indicate that the shareholder should make arrangements for converting the shares into an electronic mode. After the conversion is complete, additional shares can be allotted to the applicant.
  • The company should apply to a depository for converting its shares from physical to electronic mode. The procedure for dematerialising the shares of an unlisted public company is the same as that followed by a private company.
  • The company should inform all shareholders and debenture-holders that the company’s securities are dematerialised. The letter communicating the fact should also mention the International Security Identification Number (ISIN). The ISIN is a unique identification number assigned to a company’s securities. The ISIN allows the securities to be individually recognised.

Rules Relating to Depository

  • At the time of applying for dematerialisation, the company should pay fees to the depository and the share transfer agent. The fees should be calculated as per the Depository Act.
  • The company should create a security deposit at the time of applying for dematerialisation. The amount of deposit should be twice the fees paid to the depository and share transfer agent. The duration for which the deposit is maintained should be as per the agreement with the depository.
  • The shareholders may have grievances relating to the transactions made by the company with the depository. The grievances may be communicated to the Investor Education and Protection Fund Authority.

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