Background
Dematerialisation refers to the process of converting securities held in physical form (paper certificates) into electronic form maintained in dematerialised accounts with depositories. This transformation from tangible to intangible representation of ownership has revolutionized securities holding and transfer mechanisms, enhancing efficiency, security, and transparency in capital markets.
The regulatory framework mandates dematerialisation for specific categories of securities and entities, particularly focusing on promoter holdings in public companies and legacy share warrants, thereby modernizing India’s securities infrastructure and aligning it with global best practices.
Compliance Requirements for Dematerialisation for Promoters [Rule (1)]
Primary Obligation
The promoters of every public company making a public offer of any convertible securities may hold such securities only in dematerialised form. While the language uses “may,” the context and proviso make it clear that this is effectively a mandatory requirement for promoters participating in public offerings.
Definition of Convertible Securities
Convertible securities include:
Pre-IPO Conversion Requirement
The proviso establishes a critical timeline and compliance mechanism:
“The entire holding of convertible securities of the company by the promoters held in physical form up to the date of the initial public offer shall be converted into dematerialised form before such offer is made.”
This means:
(a) Timing: Conversion must be completed before the IPO is made
(b) Scope: Entire holding – no partial conversion is permitted; 100% of promoter holdings in physical form must be dematerialised
(c) Perpetual Requirement: “Thereafter such promoter shareholding shall be held in dematerialized form only” – this creates an ongoing obligation, not merely a one-time conversion requirement
Treatment of Legacy Share Warrants [Rule (2)]
Share warrants are bearer instruments that were permitted under earlier company law regimes. Unlike registered shares where ownership is recorded in the company’s register of members, share warrants transfer ownership by mere delivery, similar to currency notes. This feature made them:
The Companies Act, 2013 prohibited the issuance of new share warrants but had to address those already in circulation.
Information Filing Requirement [Rule 2(a)]
Public companies that issued share warrants prior to the commencement of the Companies Act, 2013, and have not converted them into shares, must:
Timeline: Within three months of the commencement of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023
Action: Inform the Registrar about the details of such share warrants in Form PAS-7
Purpose: This creates a registry of outstanding share warrants, enabling regulatory oversight and tracking.
Mandatory Surrender and Dematerialisation Process [Rule 2(b)]
Timeline: Within six months of the commencement of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023
Company’s Obligation: Require bearers of share warrants to surrender such warrants and get the shares dematerialised in their account
Notice Requirements: The company must issue a notice in Form PAS-8 through:
(i) Website Publication: On the company’s website (if available)
(ii) Vernacular Newspaper: In a newspaper in the vernacular language circulated in the district where the registered office is situated
(iii) English Newspaper: In an English language newspaper widely circulated in the State where the registered office is situated
Multi-Channel Publication Strategy
The requirement for publication across multiple channels ensures:
Geographic Reach: Both district-level (vernacular) and state-level (English) coverage
Linguistic Accessibility: Vernacular publication ensures language is not a barrier for warrant holders
Digital Access: Website publication provides permanent, accessible reference
Legal Notice: Newspaper publication serves as constructive notice to all warrant bearers
Practical Process for Warrant Bearers
Upon receiving notice, warrant bearers must:
Treatment of Non-Compliant Share Warrants [Rule (3)]
The IEPF Transfer Mechanism
Where any bearer of share warrants does not surrender the warrants within the six-month period specified in Rule 2, the company is mandated to:
(a) Convert such share warrants into dematerialised form
(b) Transfer the dematerialised shares to the Investor Education and Protection Fund (IEPF) established under Section 125 of the Companies Act, 2013,
facilitating efficient capital formation while protecting investor interests and maintaining market integrity.
Penalty & Punishment
Section 450 – company and every officer of the company in default or such other person shall be liable to a penalty of Rs. 10,000, and in case of continuing default, with a further penalty of Rs. 1000 for per day of default, subject to a max Rs. 2 lakh in case of a company and Rs. 50000 in case of an officer who is in default or any other person
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