Section 29 of Companies Act. Public offer securities, dematerialized form, public offer security to be in dematerialized form

In India, we all witness a remarkable transformation in the security market and securities issuance. We also have seen the dematerialization of securities from physical to electronic form through secure online process. Dematerialization was adopted to reduce delays in receipt of securities, the large number of waiting applications in IPO, challenges to store share certificates, and prevent fraudulent practices. We will broadly understand the securities in dematerialized form for various stakeholders and what are the provisions of Section 29 of Companies Act say.

Scope of Section 29 of Companies Act

“Section 29. Public offer of securities to be in dematerialised form.-

(1) Notwithstanding anything contained in any other provisions of this Act,—

(a) every company making public offer; and

(b) such other class or classes of public companies as may be prescribed, shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.

(2) Any company, other than a company mentioned in sub-section (1), may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder”.

Let us understand what is “dematerialisation of security” means. It’s a conversion of a physical certificate into an electronic form and it can be used through the dematerialised account (Demat Account) in digital form. Also as per Rule 9 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Rule 9 says The promoter of every public company making a public offer of any convertible securities may hold such securities only in dematerialised form:

Provided that the entire holding of convertible securities of the company by the promoter held upto the date of the initial public offer shall be convert into dematerialised form before such offer is made and thereafter such promoter shareholding shall be held in dematerialised form only.

Subsection 1 of Section 29 of Companies Act says Whether it is a listed or unlisted company it is mandatory “security offered to the public” to be issued in dematerialised form including IPO, Issue of any security, buyback of securities, bonus shares or rights offering by complying with the provision of the Depositories Act, 1996.

Subsection 2 of section 9 provides flexibility to non-public companies to choose between issuing securities in physical or dematerialised form by complying with the provision of the Depositories Act, 1996.

Process of Dematerialization under Section 29 of Companies Act

Shortlisting of depository participants ( DP )acts as an intermediary between the depository and investors. Central Depository Services (India) Limited and National Securities Depository Limited can be refer for list of DPs)

Dematerialization starts with the opening of a demat account. Select Depository participant (DP) which offers Dmat Services.
To convert physical shares into electronic or demat forms you have to fill and deposit a dematerialisation request form (DRF) which is available with the Depository participant (DP) along with a share certificate.
You shall mention “surrender for dematerialization” on each of the share certificates.
The Depository Participant (DP) processes this request along with physical share certificates to the company, registrars, and transfer agents through the depository.
The registrar confirms the dematerialisation request.
After approval of the request the share certificate in the physical form will be destroyed, registrar confirm the dematerialisation request.
Once the request gets approved, the registrar informs DP about the completion of the process.
Once this is done, the Investor can see a credit in the holding of shares electronically.
To complete the process it takes 15-30 days from the date of submission of the dematerialisation request.

What is dematerialisation of unlisted shares and how it impacts shareholders?

4.1 Unlisted shares: A company’s shares not listed or traded on any recognized stock exchange are called unlisted shares. Unlisted shares are

Shares that are not available for public trading
It is generally held by a limited number of individuals or entities
It restricts any invitation to the public to subscribe to any securities of the company by its article.

All unlisted companies shall comply with the provisions made under the Depository Act, 1996 for dematerializing their securities.

4.2 Impacts: Previously stock exchange transaction was done manually with documentation and securities used to be kept in certification form. However, with the technological advancement of electronic trading platforms securities can be kept in electronic document form which also be electronically registered and transferred. This benefited for all companies, intermediaries, and investors through easier electronic access and transparent process. All unlisted companies shall issue their securities only in dematerialised form.

Public offer of securities through dematerialisations has a lot of benefits which are

Accessible information on securities because Investors can monitor their holdings digitally.
It gives safety and security to the holders that their Digital Certificates are safer than physical ones.
Cost Effective: It minimises transaction costs for the demonetisation of securities with the help of demat accounts as compared to physical certificates. No stamp duties on the transfer of securities if is in demat form.
It allows for faster settlement like transfer of securities and for legal actions.
It also provides a nomination facility and loan facility against the holding of the Investors.

Conclusion

India is a world leader in the adoption of digitalisation and transparent financial sector governance. Section 29 of Companies Act plays a vital role here by public offer demonetisation of securities as it minimises the complexity of manual work. Since dematerialisation was adopted by introducing the mandate provisions for the dematerialisation of securities it helps for speedy, transparent, secure, and smooth processes with effective monitoring. Demonetarisation of security encourages for balanced ecosystem in today’s capital market system. Depositories Act, of 1996 was introduced to make it more effective and there are three sets of companies that may dematerialise their security. Listed Companies are governed by SEBI and MCA and unlisted private companies, or, both by MCA.

FAQ’s

1. How to convert physical holding into electronic holding i.e. how can one dematerialise securities?

To dematerialise physical securities need to fill in a DRF (Demat Request Form) which is available with the DP and submit the same along with physical certificates that are to be dematerialised. A separate DRF has to be filled for each ISIN. The complete process of dematerialisation follows as below:

· Surrender certificates for dematerialisation to your DP.
· DP intimates to the Depository regarding the request through the system.
· DP submits the certificates to the registrar of the Issuer Company.
· Registrar confirms the dematerialisation request from the depository.
After dematerialising the certificates, Registrar updates accounts and informs the depository regarding the completion of dematerialisation.
The depository updates its accounts and informs the DP.
DP updates the demat account of the investor.

2. Can electronic holdings be converted back into physical certificates?

Yes. The process is called rematerialisation. If one wishes to get back his securities in the physical form he has to fill in the RRF (Remat Request Form) and request his DP for rematerialisation of the balances in his securities account. The process of rematerialisation is follows as below:

Request rematerialisation.
The depository participant intimates depository regarding the request through the system.
The depository confirms the dematerialisation request to the registrar.
The registrar updates accounts and prints certificates.
Depository updates accounts and downloads details to depository participants.
The registrar dispatches certificates to investors.

3. Do dematerialised shares have distinctive numbers?

No. These shares are fungible, which means that all the holdings of a particular security will be identical and interchangeable.

4. Can an investor close his demat account with one DP and transfer all securities to another account with another DP?

Yes. The investor can submit an account closure request to his DP in the prescribed form. The DP will transfer all the securities lying in the account, as per the instruction, and close the demat account.

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Section 29 of Companies Act 2013

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