Dematerialisation of Shares: Meaning, Process, Benefits & Requirements

With the increasing digitisation of corporate governance and capital markets in India, holding shares in physical form is no longer considered efficient or secure. To improve transparency, reduce risks associated with paper certificates, and simplify share transactions, the concept of Dematerialisation of Shares was introduced. Today, dematerialisation is not only a best practice but also a mandatory legal compliance for many companies under Indian law.

At Compliance & Registration Services Private Limited (CRSPL), we assist companies and shareholders in navigating the legal, procedural, and regulatory aspects of share dematerialisation efficiently and in full compliance with applicable laws.

What is Dematerialisation of Shares?

Dematerialisation of shares refers to the process of converting the physical share certificates into electronic form, which is then credited to the shareholder’s demat account maintained with a depository through a registered Depository Participant (DP).

Once shares are dematerialised, they exist only in digital format and can be transferred or transacted electronically. This system eliminates risks such as loss, theft, forgery, duplication, and delays that are common with physical share certificates.

In India, dematerialisation is primarily governed by the Companies Act, 2013, SEBI regulations, and the Depositories Act, 1996, and is facilitated through depositories such as NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).

Legal & Regulatory Framework Governing Dematerialisation

Dematerialisation of shares in India is regulated through multiple statutory provisions and regulatory authorities.

Key Legal Provisions

• Section 29 of the Companies Act, 2013 – Mandates that securities of certain classes of companies must be held and transferred in dematerialised form.
• Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014 – Applicable to unlisted public companies.
• Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 – Applicable to private companies.
• SEBI (Depositories and Participants) Regulations, 2018.

Mandatory Dematerialisation for Private Companies (Rule 9B)

As per Rule 9B, most private limited companies are now required to: -

• Dematerialise all existing securities
• Issue new securities only in demat form
• Facilitate demat connectivity with NSDL or CDSL

Share the Dematerialisation Process in India

The share dematerialisation process involves coordination between the shareholder, company, depository participant, registrar and transfer agent (RTA) and the depository.

Step 1: Open a Demat Account

The shareholder must open a demat account with a SEBI-registered Depository Participant (DP).

Step 2: Submit Dematerialisation Request

The shareholder submits a Dematerialisation Request Form (DRF) to the DP along with the original physical share certificates.

Step 3: DP Verification

The DP verifies the application and forwards the request electronically to the depository (NSDL/CDSL).

Step 4: Company / RTA Confirmation

The depository corresponds with the company or its Registrar and Transfer Agent (RTA) to verify the share details.

Step 5: Credit of Shares

Upon the successful verification: -

• Physical share certificates are cancelled
• Equivalent shares are credited to the shareholder’s demat account

The process usually takes around 15–30 working days, subject to the document accuracy and company confirmation.

Requirements for Dematerialization of Physical Shares

To complete the dematerialisation of physical shares, the following requirements must be fulfilled: -

For Shareholders

• Original physical share certificates
• Active demat account in the shareholder’s name
• PAN and KYC compliance
• Properly filled Dematerialisation Request Form (DRF)

For Companies

• ISIN activation for each class of securities
• Appointment of a SEBI-registered Registrar & Transfer Agent (RTA)
• Connectivity with NSDL or CDSL
• Amendment of the Articles of Association (if required)
• Maintenance of the statutory registers and records in electronic form

Benefits of Dematerialisation of Shares

Dematerialisation offers significant advantages to both companies and shareholders as follows: -

1. Enhanced Security

Electronic holding eliminates the risks of loss, theft, forgery, or damage associated with the physical certificates.

2. Faster Share Transfers

Transfers are processed electronically, reducing time, paperwork, and manual intervention.

3. Improved Transparency

Accurate and proper ownership records enhance investor confidence and corporate governance.

4. Regulatory Compliance

Mandatory dematerialisation ensures compliance with the SEBI and MCA regulations, avoiding penalties and restrictions.

5. Reduced Administrative Burden

Companies save costs on printing, storage, stamping and handling of physical certificates.

6. Seamless Corporate Actions

The Bonus issues, rights issues, splits, mergers, and acquisitions are processed efficiently in demat form.

Role of Companies in Share Dematerialisation

Companies play a critical role in enabling and maintaining dematerialisation compliance by: -

• Obtaining an ISIN for securities
• Appointing an SEBI-registered RTA
• Establishing and maintaining depository connectivity
• Educating shareholders on demat compliance
• Ensuring timely confirmation of dematerialisation requests
• Filing required disclosures and compliance reports

At CRSPL, we provide end-to-end support, from advisory and documentation to depository coordination and ongoing compliance.

Conclusion

Dematerialisation of shares is a critical compliance requirement and a key step toward transparent, secure, safe, efficient, and effective corporate governance in India. Under the mandatory demat norms in Rules 9A and 9B, companies and shareholders must act proactively to avoid various regulatory consequences. Professional assistance from CRSPL ensures accurate and proper execution, timely compliance, and the smooth coordination with depositories and regulators.

Frequently Asked Questions (FAQs)

1. What do you mean by dematerialisation of shares?

Dematerialisation of shares means converting physical share certificates into electronic form and holding them in a demat account through a depository.

2. Is dematerialisation of shares compulsory?

Yes. Dematerialisation is compulsory for listed companies, unlisted public companies, and most private companies as per Rule 9A and Rule 9B of the Companies Rules.

3. Who is a dematerialised shareholder?

A dematerialised shareholder is a person who holds shares in electronic form in a demat account instead of physical share certificates.

4. What happens if a company does not comply with dematerialisation rules?

Non-compliance may lead to penalties on the company and its officers, restrictions on share transfers, and the inability to issue or allot securities.