top of page
Search
  • Writer's pictureTaxmarket Services

Mandatory DEMAT for Private Companies: A New Era in Shareholding

In a significant move towards modernizing the corporate landscape, the Ministry of Corporate Affairs has introduced a new rule making dematerialisation (DEMAT) of shares mandatory for private limited companies. This step, under Rule 9B of The Companies (Prospectus and Allotment of Securities) Rules, 2014, marks a pivotal change, ensuring greater transparency, security, and efficiency in share transactions. Let's delve into the details of this mandate and understand its implications.

Private Limited Companies - Mandatory DEMAT (Dematerialisation) of Shares

What is Dematerialisation?

Dematerialisation, often referred to as DEMAT, is the process of converting physical share certificates into electronic form. This process is facilitated by a depository, such as the National Securities Depository Limited (NSDL) or the Central Depository Services (India) Limited (CDSL). The electronic shares are then held in a demat account with a depository participant (DP), typically a bank or brokerage firm.


Key Points of the New Rule


  1. Applicability: The rule applies to all private limited companies, with the exception of small companies.

  2. Deadline: Private limited companies must dematerialise their shares within 18 months from the financial year ending 31.03.2023, i.e., by 30.09.2024.

  3. Non-Compliance Consequences: Companies that fail to comply will not be able to allot new shares, and shareholders will be unable to transfer their existing holdings.


Exemption for Small Companies


Notably, small companies are exempt from this mandate. A small company is defined as one having a turnover of less than Rs. 40 Crores and a paid-up capital of less than Rs. 4 Crores as on 31.03.2023. This exemption aims to alleviate the regulatory burden on smaller enterprises, allowing them to focus on growth and development without the immediate need to switch to electronic shareholding.


Benefits of DEMAT


The transition to dematerialised shares offers numerous advantages:

  • Safety: Electronic shares eliminate the risk of theft, loss, or forgery associated with physical certificates.

  • Convenience: Shareholders can manage their holdings easily, and transactions become smoother and faster.

  • Efficiency: The settlement of trades is quicker, reducing the time and effort involved in share transfers.

  • Cost-Effective: DEMAT reduces the costs linked to printing, storing, and handling physical certificates.

  • Transparency: Enhanced transparency in transactions and record-keeping, leading to better compliance and governance.


Steps to Dematerialise Shares


  1. Open a Demat Account: Shareholders need to open a demat account with a DP.

  2. Submit Physical Certificates: Submit the physical share certificates along with a dematerialisation request form (DRF) to the DP.

  3. Verification: The DP sends the certificates to the respective company for verification.

  4. Conversion: Once verified, the company instructs the depository to convert the physical shares into electronic form.

  5. Credit to Demat Account: The electronic shares are credited to the shareholder's demat account.


Conclusion


The mandatory dematerialisation of shares for private limited companies is a forward-looking move that aligns with global best practices. By embracing DEMAT, companies can ensure more secure, efficient, and transparent handling of their shares, fostering a more robust corporate governance framework. As the deadline approaches, it is crucial for all private limited companies (except small companies) to take the necessary steps to comply with this mandate and transition smoothly into this new era of electronic shareholding.


For further information or to schedule a consultation, Please contact us.


Let us help you transition smoothly into this new era of digital shareholding.

58 views

Comments


Recent Posts

Request Your Free Consultation

bottom of page