Overview on Dematerialization of Physical Share Certificates

Overview on Dematerialization of Physical Share Certificates

BRIEF INTRODUCTION

• Dematerialization (Commonly called ‘Demat’) signifies conversion of a share certificate from its present physical form to electronic form for the identical number of holding.
• It provides scope for having a paperless trading system using state-of-the-art technology, whereby share transactions and transfers are processed electronically without involving any share certificate or transfer deed after the share certificates are converted from physical form to electronic form.
• It attempts to avoid the time consuming and complicated process of getting shares transferred within the name of buyers further its inherent problems of bad deliveries, delay in processing/ fraudulent interception in postal transit, etc.
• Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she should dematerialize the shares if he/she wishes to sell the identical through the Stock Exchanges. Similarly, where an investor purchases shares, the requisite number of shares will directly get credited into their demat account.
• The Depositories Act 1996 has been enacted to manage the matters related and attendant the operation of Depositories and demat operations. Two Depositories are operative  are below mentioned–
  • National Securities Depository Limited (NSDL) and
  • Central Depository Services Limited (CDSL).
• SEBI has long been insisting that each one physical share should be converted to the digital format.
• Why has the capital markets regulator been bent on this? Such an exercise will make the settlement process quicker and easier. it’ll also help eliminate fraud committed by share transfer agents. Shell companies too will have a troublesome time managing the electronic mode.
• Now, SEBI has cracked the whip. The capital markets regulator has set a deadline of 1 April 2019 for completion of the migration process. SEBI provided that such a system of having an electronic bookkeeping, will bring transparency in the trading system of the capital markets.
• The tax authorities will find it easier to trace shareholders and identify the 000 beneficiaries. detain mind that the dearth of transparency has been bothering the govt for quite a while.
• If you continue to retain physical share certificates, it’s time to convert physical shares to demat now. this will be done easily during a matter of two to 3 weeks.
• Till now, Dematerialization of Shares was a compulsory requirement for a listed entity to own its 100% promoter shareholding and 50% non-promoter shareholding in demat form. But now, as part of its drive to lift the company veil, target benami transactions and produce more transparency, the govt plans to form it compulsory for unlisted Companies to urge their shares dematerialized, in keeping with organization.

DEMAT SHARES OF COMPANY

• Demat or Dematerialization is that the process by which a shareholder can get physical share certificates of a corporation converted into electronic balances.
• Converting physical shares into demat shares is usually mandated by investors while investing within the shares of an organization and is advisable for companies looking to boost equity funds. In this article we will discuss about glance at the method to demat shares of a personal company.

BENEFITS OF DEMATERIALISATION OF SHARES

1. Transfer of shares may be very conveniently done it’ll take less time and no taxation shall be levied.
2. Easy account of all the transactions is maintained.
3. Sometime the share certificates wander off, destroyed because of fire, decay, etc. which isn’t the case just in case of dematerialization of shares.

OPERATION IN DEPOSITORY SYSTEM

• The operations within the Depository System involve the participation of a Depository, Depository Participants, Company/Registrars and Investors. the corporate is additionally called the Issuer.
• A Depository (NSDL and CDSL) is a corporation where the securities on an investor are held in electronic form, through Depository participants.
• A Depository Participant is that the agent of the Depository and is that the medium through which the shares are held within the electronic form. they’re also the representatives of the investor, providing the link between the investor and therefore the company through the Depository.
• In both systems, the transfer of funds or securities happens without the particular handling of funds or securities. Both the banks and also the Depository are answerable for safe keeping of funds and securities respectively.

PROCESS OF DEMATERILISATION OF SHARES

1. To start with, you’ve got to settle on between the assorted depository participants available within the market to open the demat account. you’ll need to open an account with a Depository Participant (DP) and obtain a novel Client ID number.
2. Thereafter, you’ll must refill a Dematerialization Request Form (DRF) provided by the DP and surrender the physical shares certificate, which you would like to be demitted to the DP.
3. The DP upon receipt of the share certificates and also the DRF will send an electronic request to the company’s registrar and share agency (RTA is an agent of the issuer. RTA acts as an intermediary between the issuer and depository for providing services like dematerialization, rematerialization) through the Depository for confirmation of demat. Each request will bear a singular transaction number
4. The following documents shall be required to open the demat account, depending upon the entity type and also the requirements of each depository participant:

• • Board Resolution just in case of Company.
  • PAN of the Company/Individual.
  • Certified copy of INC-22 together with paid challan of Company/Proof of residence of individual.
  • Photographs of Individual/Authorized Signatory just in case of Company.
  • Latest revenue enhancement Returns of the applicants.
  • Proof of identity and residence of the directors/promoters of the corporate.

DOCUMENTS REQUIRED DEMATERIALIZATION OF PHYSICAL SHARES

• Application in respect of admission as Issuer of Specified Eligible Securities.
• Net worth certificate from a comptroller as per audited annual report for the last yr.
• Certified and true copy of Board Resolution providing approval for dematerialization of the specified securities and shall also mention the name of signatories authorized by Board to execute documents and list of Authorized Signatories together with specimen signature.
• Confirmation letter from Registrar & agency
• Certified true copies of Memorandum & Articles of Association together with Certificate of Incorporation.
• Certified true copy of Audited annual report for the last fiscal year.
• If company has issued equity shares after latest record therein case company has got to provide us certified true copy of PAS‐
• If there’s any variation in face value of shares or reduction in capital after the last record date in this case company should provide certified true copy of SH‐
• just in case of personal Limited Companies Additional Documents in variety of Undertaking is required.

It is to be noted that it generally takes around 15 – 30 days for opening a demat account.

• Once demat account is opened, the request for conversion of physical shares should be made in “Dematerialization Request Form” (DRF) and also the same must be deposited along with the share certificates to the requisite Depository Participant (“DP”).
• DP shall process the request to the corporate together with DRF and share certificates.
• Once the request is accepted by the corporate, the corporate shall destroy the physical share certificates and ensure the dematerialization of shares to the concerned DP.
• The DP upon receipt of the share certificates and therefore the DRF will send an electronic request to the company’s registrar and share agency (RTA is an agent of the issuer. RTA acts as an intermediary between the issuer and depository for providing services like dematerialization, rematerialization) through the Depository for confirmation of demat. Each request will bear a singular transaction number.
• DP will simultaneously surrender the DRF and therefore the shares to the corporate’s registrar and share agency with a letter requesting the registrar and share agency of the company to verify demat.
• Company’s registrar and share agency after necessary verification of the documents received from the DP will confirm demat to the Depository.
• This confirmation is going to be passed on from the Depository to the DP, which holds your account. Once the confirmation is received from the Depository, the DP shall credit the account with the number of shares so dematerialized.
• The DP will hold the shares within the dematerialized form thereafter on your behalf. And you’ll become beneficial owner of those dematerialized shares.

REMATERIALIZATION

If you’re holding shares in electronic style of those company where mandatory requirement of dematerialization isn’t applicable, you continue to have the choice to convert your holding in physical form by submitting a Rematerialization Request Form (RRF) through your DP within the same manner as Dematerialization. Upon receipt of such request from your DP, the corporate will issue share certificates for the amount of shares so rematerialized.

COMPULSORY TRADING IN DEMAT FORM

1. The shares of the corporate are to be compulsorily traded in demat form; however, an investor can hold shares in physical form. Where an investor wishes to sell the shares through the Stock Exchanges, the same is required to be in dematerialized form only. Similarly, if an investor purchases shares, he/she will get delivery of the shares in demat form only.
2. Receipt of Annual Reports and other correspondence from the corporate after demat. The Depository Participants gives the list of demat account holders and also the number of shares held by them in electronic form on the Record date to the corporate (Beneficiary Persons, called Benpos).
3. The rights of the shareholders, as to their holding shares in demat form, shall be par with their holders in physical form. Hence each shareholder is eligible to urge the Annual Report and can have the correct to attend the AGM further.

CHANCES OF FRAUD/DISPUTES IN EMPLOYING A DEMAT ACCOUNT

Some of the common risk factors that applies to trading in physical shares are – mismatch in signatures, loss in postal transit, etc., while the same are absent in trading of dematerialized shares, since they are scrip less. In case of an unlikely event of the other dispute, the concerned exchange and/or Depository Custodian viz. NSDL/CSDL or SEBI would need to be approached for resolving such issues.

Pledging of shares in demat form for the aim of availing any Funding/loan arrangement with banker. You will should contact your DP for this.

FEE FOR BECOMING A MEMBER

At NSDL, the joining fees for an unlisted company is Rs.30,000 plus GST. additionally, to the joining fee, any issuer of listed securities is required to pay an annual custody fee at the speed of Rs. 8 per folio (ISIN position) in NSDL, subject to the subsequent minimum amount:

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 CRORES	50,000

INVESTOR ACCOUNT FOR SHAREHOLDERS

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

CONCLUSION

• Physical shares are going to be losing their validity very soon. in keeping with SEBI’s ruling, migrating to the electronic or dematerialized format will get effect from April 2019. The market watchdog believes that electronic bookkeeping is way easier and it reduces the chance of forgery.
• Moreover, it’ll boost investor confidence and produce much-needed transparency into the stock exchange. So, this can be the correct time to open your demat account.
• Many people tend to believe that to convert physical shares to demat may be a cumbersome process. But that’s not true. the method is fairly simple and might be completed within two to 3 weeks. Once the shares are dematerialized, it might lead to more convenience for the investors.
• The buying and selling of shares could then be worn out a matter of seconds. Thus, shares in demat form, thereby safeguard an investor against the risk associated with the physical shares.

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