Companies operating as a public company are free to trade shares once they are done with the company registration procedure. Dealing with physical shares of a company is a cumbersome procedure. Physical shares bring with them a whole array of problems. For eg. the problem of bad deliveries, processing delays, fraud in transits among many other issues. Thus, in an attempt to bring some order SEBI announced restriction on transfer of physical shares
In a notification released on the on the 8th of June, 2018 the Securities and Exchange Board of India (SEBI), declared that that except in case of transmission or transposition of securities, requests for effecting the transfer of securities shall not be processed unless the securities are held in the dematerialized form with a depository. Basically, the amendments aim to bring about a curb on instances of fraudulent transfer of shares. The amendment also aims to introduce transparency in the system. The restrictions on the transfer of physical shares will not only help catch fraudulent people/transactions but will also help speed up the process of transferring of shares. The restriction basically is that after the 5th of December, 2018 shares cannot be transferred as physical shares. However, there is no restriction on holding physical shares.
Today while purchasing or selling shares brokers prefer to deal only with dematerialized shares of a company. For holding dematerialized shares or converting physical shares into dematerialized shares, a person has to open a demat account. As said above in the explanation of the notification, that dematerialization of existing shares is optional. However, to sell shares the shares on the stock exchange these shares will have to be in the demat format otherwise most brokers might not accept them.
Apart from this, new shares purchased by individuals will come in a demat format. Thus, it becomes pretty evident that it isn’t a wise choice to keep physical shares. Hence, SEBI has introduced a deadline of 5th December for the physical transfer of shares.
To dematerialize shares, the first step is to open up a demat account with a Depository Participant(DP) ie. Banks or Brokers who issue a unique client ID number. Dematerialization of shares is basically converting them from the current physical form to electronic format. This dematerialization of shares basically accomplishes the task of paperless trading and eliminates the need for share certificates and transfer deeds etc. After opening up an account, you have to surrender the physical shares and the notify company involved about the details of the agreement with the depository participant.
The company then cancels your shareholding certificate, issues the shareholdings in the name of the depository participant declaring them as a registered owner. The depository participant then makes you a beneficial owner. This ensures you have all the rights to the benefits from the shares.
Here is the process for dematerializing physical shares:
- Create a demat account with a Depository Participant(DP)(Banks & Brokers) and get the unique client ID.
- Fill up Dematerialization Request Form (DRF) and the surrender the corresponding physical shares.
- DP sends an electronic request to company’s registrar and shares transfer agent confirming the demat
- Cover letter, DRF and surrendered physical shares are sent to the registrar.
- The company verifies the documents sends confirmation of demat and makes DP the registered owner
- DP credits the dematerialized shares into the account.
- DP makes you a beneficial owner of the said shares.
Thus, it is not mandatory to demat the shares, however, since the sale/purchase, as well as the transfer of shares, has to be done in demat format, it is only logical that you wouldn’t hold these shares in the physical format.
Only Public companies offer shares and registering a public company is not an easy task by any means. At LegalRaasta, we specialize in company registration procedures as well as taxation related issues such as GST registration and Income tax-return filing. Talk to us about your requirements at +91-8750008585 or drop us an e-mail at firstname.lastname@example.org.