– By Usha Ganapathy Subramanian and Dr Ranjith Krishnan
The days of woes are long gone when a legal heir or nominee had to visit all the companies in which a deceased investor held securities or the share transfer agents to effect transmission in their name. Gone are the days when an investor had to do the same to intimate a simple address change. Now all one needs to do is to approach the depository participant with whom the demat account is opened. The weeks of anticipatory waiting to get shares transferred in one’s name after a share purchase are gone too. Now an investor gets his shares the next working day of his purchase. Safe custody of securities is no longer a worry today. All because dematerialization is here to stay.
The journey towards dematerialization started long back with the promulgation of Depositories Ordinance in 1995. The proliferation of demat accounts and the reduction in the length of the rolling settlement cycle went hand in hand, starting with the introduction of T+5 rolling settlement in 2001 to T+1 now. The Companies Act, 2013 also brought with it the requirement for compulsory dematerialization for every company making a public offer. The Listing Regulations issued in 2015 mandated the holding of promoters in listed entities to be in dematerialized form. In June 2018, the Listing Regulations were amended to prohibit processing of transfer requests on securities unless they were in demat form. Then in September 2018, an amendment to the rules under the Companies Act, 2013 further quickened the tempo of dematerialization by mandating it for unlisted public companies and placing a similar prohibition on transfers in physical form. In August 2019, an amendment to the Act created room to enable the Government to include private companies under the fold of dematerialization when the time is felt right.
Now on October 27, the Government has exercised this power to mandate that private companies, other than small companies, shall issue securities only in dematerialized mode. ‘Small companies’ refers to those private companies that are not a subsidiary or holding company of any other body corporate and who have paid-up capital up to Rs 4 crores and turnover up to Rs 40 crores; these cannot be companies with charitable objects or be governed by a special Act. The private companies that do not satisfy the criteria of a small company as on 31st March of a financial year ending on or after 31st March, 2023, shall comply with the dematerialization requirements within 18 months from the closure of the financial year.
The requirements put in place for unlisted public companies are now extended to private companies falling within the ambit. So, now private companies are required to obtain ISIN, enter into agreements with depositories, pay admission and annual fees, maintain security deposit with them, file a half-yearly reconciliation of share capital audited by specified professionals, among other requirements. Further, any new issuance or buyback of securities can be done only if the existing holdings of promoters, directors, and key managerial personnel are converted into dematerialized form.
One must remember that demat share transfers too are subject to stamp duty payment from July 1, 2020 at the same rate as physical transfers, which is 0.015% of the market value. Also, a precaution to be taken, although not specified in the present notification, is that the restriction on transfer of shares, a mandatory condition in the articles of private companies, must be enforced as provided in the articles through appropriate control mechanisms.
On the part of security-holders there are annual maintenance charges for demat accounts, which sometimes is waived off. Investors need to maintain only one account in respect of all their holdings and this will enable a bird’s eye view of all the holdings. The benefits for a security-holder in having a demat account will surely outweigh the costs involved.
Most private companies are at present still in the physical regime and there may be initial hesitation from the promoters to this change, considering the fees to be paid to depositories and the procedures involved. One may ponder upon whether it is justified that private companies are subject to this requirement. However, the benefits of dematerialization can be felt when a company wants to exhibit transparency and good governance, especially in the context of startups where managing investor relationships is crucial. Transparency goes a long way in building trust, and may help avoid disputes at least to the extent that the shareholding on records is clearly established and that there is a third party, that is, a depository’s involvement in effecting allotments, transfers and transmission.
One more step towards a truly Digital India!
(Usha Ganapathy Subramanian is the Practicing Company Secretary, Chennai; and Dr Ranjith Krishnan is the Sustainability Consultant, Thane.)
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