Dematerialization of Shares

Shares went digital a couple of decades back.  While holding shares in demat is mandatory for public listed companies, even private limited companies can opt for it. This just makes it a tad easier, especially during the secondary sale of shares. Private limited companies who raise institutional investment or in cases of large number of angel investors on their capital table may find this especially useful. [caption id=attachment_2379 align=aligncenter width=635]shares Image credit:[/caption] According to the Depositories Act, 1996, a shareholder has the option to hold shares either in physical or electronic form. The converted electronic data is stored with the depository from where they can be traded. It is similar to a bank where a shareholder opens an account with any of the depository participants. The parties involved in process of Dematerialisation are Issuer Company, Depository, Depository Participant, Registrar and Transfer Agent and Shareholder. Depository is an institution registered under the Securities and Exchange Board of India (SEBI). Similar to the way banks hold funds of its account holders, depositories maintain accounts for shareholders’ securities (share, debentures, mutual fund etc.) held by them in a dematerialised or an electronic form. Presently, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are registered with SEBI to act as Depositories in India. They interface with the shareholders through their agents called Depository Participants (DPs). Any bank (private, public and foreign), financial institutions and SEBI registered trading members could be a DP. A DP is one with whom you need to open an account to deal in electronic form. Apart from ease, demat provides for other benefits

  • Dematerialized shares cannot be defaced or mutilated or stolen, hence it is a safe way to hold shares by the shareholders;
  • Easily transferred electronically;
  • No Stamp duty is required to be paid upon allotment or transfer of shares;
  • Reduction in transaction cost and legal cost;
  • Minimal paperwork.

Process that private limited companies can follow to demat their shares:

  1. The Articles of Association should provide for issuances of shares in dematerialised form.
  2. Arrange demat connectivity from depositories like NSDL or CDSL along with a Registrar and Transfer Agent (RTA) by entering into a tripartite agreement between the company, the Depositories and the RTA.
  3. Before converting physical shares into dematerialized form, a company is required to register with a depository as an issuer. These depositories have their terms of registration, so it is necessary for a company to meet those terms. If registration is successful depositories will be providing the company with an International Securities Identification Number (ISIN) for each of the shares. “ISIN” is a unique 12-digit alphanumeric code given to a security, share, debenture, bond etc. when the security is admitted in the depository system. First two digits of the ISIN code indicate country of registration for the security. For all securities registered on depository in India, first two digits of the ISIN code are ‘IN’.
  4. ISIN shall be quoted on all correspondence with the DP and Depositories with respect to allotment of securities or transfer of securities as the case may be.
  5. Issuer should obtain electronic connectivity with the existing RTA or by obtaining In-House connectivity.
  6. Shareholders of a registered company are required to open an account with any of the DPs in India by signing an agreement which defines the rights and duties of the DP and the shareholder wishing to open the account. The client ID along with the DP ID gives a unique identification in the depository system.
  7. After opening an account with the DP, a shareholder should surrender the physical certificates held in his name to the DP. These certificates will be sent to the respective companies where they will be cancelled after dematerialization and the respective shareholder’s account maintained with the DP will be credited.
  8. Dematerialised shares are in the fungible form, that is, they do not bear any notable feature like distinctive number, folio number or certificate numbers and stamping, is not required.

If required, securities in dematerialized form can again be converted into physical form through a process called Rematerialization. Some indicator of the costs as per the information on the DP’s website. At NSDL, the joining fees for companies to register as issuer is Rs. 30,000/- plus service tax (one-time fee). In addition to the joining fee, any issuer of the listed securities is required to pay annual custody fees at the rate of Rs. 8/- per shareholder in NSDL, which is subject to a minimum amount which ranges between Rs. 6000 (where nominal value of shares admitted is upto Rs. 5 crores) to about Rs. 50,000 (for nominal value of shares above Rs. 20 crores). CDSL is the other big DP in India, whose fees and charges are a tad lesser than NSDL.   Authors: Ashwin Bhat D, Senior Associate and Ifla A, Associate Disclaimer: The information contained in this post is for dissemination purposes only and shall not be relied upon as an opinion. For any help or assistance please email us on  

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