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Dematerialization of Securities

Mandatory Dematerialization of Securities for Private Companies in India – Effective September 30, 2024

India’s regulatory landscape is evolving rapidly, and so are compliance expectations for businesses. As part of the latest reform, the Ministry of Corporate Affairs (MCA) has introduced a new mandate requiring all private limited companies (except small companies) to:

  • Issue shares only in dematerialized form from September 30, 2024
  • Convert all existing physical securities to dematerialized form by the same date
dematerialization

What do you mean by a small company?

A small company means a private limited company having a paid-up share capital of INR 40,000,000/- or less and turnover not exceeding INR 400,000,000/- in the immediately preceding financial year. However, the following do not fall in the category of a small company even if they meet the above criteria:

  • A holding or a subsidiary company
  • A company registered under section 8 of the Companies Act
  • A corporate body or company governed by any special act

What is Dematerialization of Securities?

The conversion of physical securities into an electronic form maintained by government authorized agencies, i.e. depositories, is called dematerialization of securities or shares.

Key Benefits of Dematerialization of Securities

Dematerialization of securities has several advantages – the primary advantage is it increases convenience and security for the investors. It leads to:

  • Enhanced Convenience and Security: Say goodbye to physical paperwork as dematerialization minimizes the risk of physical loss or damage of the share certificate.
  • Greater Traceability and Transparency: Real-time tracking of securities through this system provides better visibility and accountability.
  • Cost Efficiency and Fraud Reduction: Dematerialization reduces administrative costs while simultaneously decreasing the chances of forgery or fraudulent transactions.
  • Eco-Friendly & Paperless: Promotes sustainability through digital-first operations by removing the requirement for physical documentation.

Process of Dematerialization of Securities

Step 1: Obtaining ISIN and identification of Registrar and Transfer Agents (RTA) for availing services.

Step 2: Obtaining Permanent Account Number (PAN) for shareholders, if not available.

Step 3: Identification and finalization of depository participants (DP) to avail the depository related services.

Step 4: Application for converting the physical shares to dematerialized form with the DP.

Step 5: Generating account number and ID to access Demat account.

What Happens If You Don’t Comply?

Failing to dematerialize shares by the deadline can result in:

  • Restriction on issuance and transfer of shares by the shareholders of a Private Limited Company.
  • Penalty: The company and its Officers/Directors shall be liable to pay the penalty of INR 10,000 + INR 1,000 for each day till the violation continues, subject to a maximum penalty of INR 2,00,000 for the Company and INR 50,000 for the officer in default.

What services does AKM Global offer?

  • Assistance in getting a PAN for each shareholder from the Income Tax department.
  • Identify suitable RTA and facilitate the allotment of International Securities Identification Number (ISIN) for each class of securities.
  • Assistance in identifying DP for opening Demat accounts for each shareholder.
  • Overseeing the entire process of dematerialization of securities.
  • Tracking and monitoring recurring compliances associated with shares such as semi-annual reporting with the authorities, maintenance of registrar of members and transfers, and obtaining BENPOS reports, as and when required.

Got questions? Let our experts at AKM Global guide you through this transition. Reach out today to ensure you're compliant and future-ready!

FAQs

Conversion of physical securities into electronic form is known as dematerialization of securities.

September 30th, 2024.

Absolutely! Our team of qualified company secretaries has helped numerous companies with successful dematerialization.

Yes, the company and its Officers/Directors shall be liable to pay the penalty of INR 10,000 + INR 1,000 for each day till the violation continues, subject to a maximum penalty of INR 2,00,000 for the Company and INR 50,000 for the officer in default.