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Mandatory Dematerialization of Securities of Prescribed Companies

Under the Indian law regime, every company incorporated under the Companies Act, 2013 and erstwhile Act of 1956, which is limited by shares, is mandatory required to issue certain types of securities to its stakeholders. These securities are issued by the companies either in the physical form or the dematerialized form. 

Till now, only public limited companies were required to issue these securities in dematerialized form but with the effect from 27th October 2023, the MCA has mandated for the Private limited companies also to issue the securities mandatorily in the dematerialized form starting from 30th September 2024 and to facilitate the conversion of all their existing securities in dematerialized form by 30th September 2024. 

What is the Dematerialization of The Securities?

The conversion of physical securities into electronic form which is to be maintained by the dedicated depositories authorised by the government of India is called dematerialization of the securities. The securities include any kind of shares, stocks, bonds, debentures etc.

Who Has Requirement To Apply?

• All types of Private limited companies excluding Small Companies and government companies.

• Section 8 companies limited by shares.

• Private company which is a wholly owned subsidiary of the Public Company.

Note: The small company under section 2(85) of the Companies Act 2013 means a private limited company having a paid-up share capital of INR 4,00,00,000 or less and Turnover not exceeding INR 40,00,00,000 in the immediately preceding financial year. 

However, if your company is a holding company or a subsidiary company of a body corporate, then it will not be considered as a small company.

Documents Required for Obtaining ISIN and Dematerialization of Shares?

• PAN and Aadhar card of the security holder.

• Bank statement as a proof of address.

• Company documents like MOA, AOA, COI and PAN

• Company Financials and Auditor report.

• Any other documents as may be prescribed.

• Board Resolution and Net worth Certificate

• Tripartite Agreement

• GST certificate

• Issuer and the Securities details

Process/Actions to Be Taken After This Amendment?

The following companies covered under this amendment will be required to:

• Obtain ISIN for all existing securities issued by the company by paying the prescribed fees to NSDL or CDSL.

• Request to DP for the dematerialization of the securities.

• DP verify the client’s details and signature and processed the DRF form.

• Facilitate dematerialization of all existing securities as and when the request is received from the holders.

• Ensure that all the Promoters, KMPs and directors holdings shall be held in dematerialized form.

• Issue all securities in dematerialized form only on or after 30th September 2024 as per MCA notification.

Consequences and Penalties for Non-compliance?

If a company or the securities holders do not comply with the requirements to dematerialize their securities before 30th September 2024, the following consequences as follows:

• The company shall not be able to issue or allot any type of securities.

• The securities holders will not be able to transfer or subscribe for any type of security.

• As per section 450 of the Companies Act 2013, the monetary penalties on the company is INR 10000/- plus INR 1000/- per day if the violation continues up to the maximum limit of INR 2,00,000/-

• As per section 450 of the Companies Act 2013, monetary penalties on every officer of the company who is in default is INR 10000/- plus INR 1000/- per day if the violation continues up to the maximum limit of INR 50,000/-