February 07, 2024 at 10:30 AM
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.
“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.
4.1 Unlisted shares: A company’s shares not listed or traded on any recognized stock exchange are called unlisted shares. Unlisted shares are
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
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.
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:
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:
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.