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What is DEMAT shareholding in unlisted companies?

August 17, 2020

Shareholding in the listed company is to be held in demat form. Few years back MCA has issued a notification for all unlisted public companies to transfer their physical shareholding into dematerialized form. For this, company is required to approach to RTA for taking demat connectivity with depositories (NSDL/ CDSL). Once company’s securities are dematerialised with NSDL/CDSL, shareholders of the Company through their respective depository accounts, convert their physical securities certificates into demat form.  The said conversion for individual shareholder is usually with minor cost and for company yearly demat connectivity fees needs to be paid to RTA & depository.

Dematerialization of securities provides in-build protection to investor from fake issue of share certificates. It provides easy transferability without approaching to Company/ RTA and making request for transfer and waiting for endorsement on share certificates. Recently Indian Stamp Act has started charging prescribed % of stamp duty on off market transfer of securities in demat form. Earlier demat transfer was totally exempted from payment of stamp duty.

Dematerialization of securities by unlisted & private company requires amendment in their Articles of Association plus completion of several documentation & compliances. It also needs to execute demat agreement with depository. Fundamental feature of Private Company is restriction on transferability of shares & demat transfer does not require any Board approval & is automatic. Hence while moving to demat format of shareholding, Private Company needs to take necessary precautions & needs to give standing instructions to not to register transfers without the approval of the Company’s Board.

Company is required to procure six-monthly certificate regarding demat shareholding form professionals for onward submission to MCA.

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