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/ Dematerialization of Securities: A Comprehensive Guide for Compliance

In India, all companies limited by shares are required to issue equity, preference shares, or other securities for capitalization, which can be issued in physical or electronic format. The dematerialization of securities involves the conversion of physical securities, such as share certificates and bonds, into electronic or digital form.

The compulsory dematerialization of securities for listed companies has been enforced since 1996. In recent years, the government extended this obligation to public companies. Subsequently, on October 27, 2023, the Ministry of Corporate Affairs (MCA) mandated the dematerialization of securities for private companies by amending the Companies (Prospectus and Allotment of Securities) Rules, 2014, through a notification. The requirement for dematerialization of securities applies to both issuers (‘Company’) and investors (‘shareholders’).

According to the recent amendment in laws:

Every private company, other than a small company, shall within the period referred to in sub-rule (2):

(a) issue the securities only in dematerialised form; and

(b) facilitate the dematerialisation of all its securities,

per provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder.

Since Subsidiaries of foreign companies do not fall under the definition of small companies all subsidiary of foreign companies needs to proceed for the dematerialisation of shares.

In the dematerialization process, three key entities play crucial roles under

1. Depository: In India, NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) serve as depositories, governed by The Depository Act, 1996. These entities operate under the regulation of SEBI (Securities and Exchange Board of India), the country’s market regulator.
 
2. RTA (Registrar and Transfer Agents): RTAs stands for Registrar and Transfer Agents and it is regulated by both SEBI and the Depository. Their primary responsibility is to manage all records of securities, related to respective International Securities Identification Number (ISIN).
 
3. Depository Participant (DP): DPs are entities responsible for opening and maintaining demat accounts for shareholders. Shareholders are required to open their demat accounts, and DPs facilitate this process. DPs also play a vital role in interacting with the depositories/RTA on behalf of shareholders and companies during the dematerialization process.”

The company (Foreign subsidiary) and investor (Shareholder) need to take the below steps to comply with the dematerialization requirements:

Step – I: Creation of ISIN: The International Securities Identification Number (‘ISIN’) code is a 12-digit (alphanumeric) numbering system for the unique representation of securities such as stocks and bonds of the company. The Company needs to choose and appoint a depository, which will issue the (ISIN) for a unique representation of securities.

Step – II: Appointment of RTA: The Company need to choose and appoint a RTA and enter into a triparty agreement with the Depository and RTA so that RTA can act as Registrar and Transfer Agents and update the shares of respective ISIN.

Step – III: Open of Demat Account of shareholders: Shareholder needs to open their Demat account with a Depository Participant (‘DP’). DP hold the securities in electronic form in the demat accounts of shareholder

Step – IV: Conversion of physical shares into the electronic form: Once the demat account is opened thereafter shareholder needs to submit their physical shares to their DP for converting the same into electronic form. DP will forward this request to RTA. RTA will convert the shares into electronic form and credit into the demat account of shareholders.

What Are the Consequences / Penalties for Non-Compliance?

  1. The company will not be able to issue/allot any type of securities.
  2. The security holder will not be able to transfer or subscribe to any type of security.
  3. Monetary penalties on the company and every officer in default:
    – On the company: INR 10,000 + INR 1,000 for each day till the violation continues. The maximum limit is INR 200,000.
    – Every officer of the company who is in default – same as above. The maximum limit is INR 50,000.

Deadline for Compliance:

The deadline for compliance is 18 months from the date of closure of the financial year ending on or after 31 March 2023, which means the deadline is 30 September 2024 or later depending on the company’s financial year-end.

How Maier Vidorno Altios Can Support Foreign Companies in the Dematerialization of Securities:

Maier Vidorno Altios is well-equipped to assist foreign subsidiaries throughout the dematerialization process, from finalizing depositories, RTAs, and DPs to opening demat accounts and converting physical shares into electronic form.

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Sarvjeet Singh - Maier Vidorno Altios India
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