Dematerialization of Securities - Navigating the Process and Laisoning with RTA

WHAT IS DEMATERIALIZATION?

The process of converting the physical certificates of an investor into an electronic form is known as Dematerialization. This Process aims to eliminate the need for physical share certificates and streamline share trading and ownership. There is an account called the Demat Account where these shares and securities are maintained in electronic form.

A Depository Participant (DP) is described as an Agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act. Dematerialization is essentially the transition from physical stock certificates to digital records

WHAT IS A DEPOSITORY?

A depository is an organization that holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities.

At present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI.

WHO IS A DEPOSITORY PARTICIPANT?

A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services.

Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stockbrokers, clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as DP.

Banking services can be availed through a branch whereas depository services can be availed through a DP.

REGISTRAR AND SHARE TRANSFER AGENT (RTA)

Registrars or transfer agents (RTA) are the trusts or institutions that register and maintain detailed records of the transactions of investors for the convenience of mutual fund houses. For carrying out the business as RTA it has to get registered with Securities and Exchange Board of India (SEBI). They assist businesses that have issued shares to the public with share registry bookkeeping and share transfer operations in electronic form.

Registrar & share transfer agent plays an important role in the complete procedure of share transfer as well as documentation on behalf of the investor and mutual fund houses. They carry all the background documentation in check for actively supporting the fund house and investors data requirements from time to time.

APPLICABILITY OF MANDATORY DEMATERIALIZATION

• Every Public Company.
• Every Private Company, other than small companies and Government companies.

A Private Company (other than a company that is a small company as on 31st March 2023) is required to comply with mandatory dematerialization of securities within a period of 18 months from the end of FY 2022-2023, i.e., on or before 30th September 2024

STEPS INVOLVED IN DEMATERIALIZATION OF SHARES

1. Taking decision with which depository ISIN to be generated (i.e. NSDL and/or CDSL), which depends on where the shareholders have a Demat account.
2. For ISIN Generation carry out the documentation activity for respective depository and submit to RTA for onward submission to respective depository/ies.
3. If shareholders don't have a Demat account get in touch with a Depository Participant (DP) to open of Demat account (Demat account opening activity can be carried out simultaneously with ISIN generation (The Process is mentioned below)
4. Once ISIN is generated, share the shareholders' data and Specimen signature with RTA for updating in their system.
5. Intimate shareholders to get in touch with DP and submit a Dematerialization Request Form (DRF) with KYC and original Share Certificates.
6. DP will send the DRF with KYC and share certificate to RTA for conversion of physical shares into Demat (i.e. Electronic)

STEPS INVOLVED IN DEMATERIALIZATION OF THE PHYSICAL SHARES OF SHAREHOLDERS

1. Open a Demat Account: The first step is to open a Demat account with a registered Depository Participant (DP). Choose a DP that is affiliated with a recognized depository such as NSDL or CDSL.
2. Collect Dematerialization Request Form (DRF): Obtain a Dematerialization Request Form (DRF) from your DP. This form is used to request the conversion of physical share certificates into electronic form.
3. Fill the DRF: Fill out the DRF with accurate details including your Demat account number, company name whose shares you want to dematerialize, details of physical share certificates (certificate numbers, folio numbers, etc.), and other required information.
4. Submit Documents: Submit the filled DRF along with the physical share certificates to your DP. Ensure that all documents are properly filled in and signed.
5. Verification by DP: The DP will verify the documents and forward them to the Registrar and Transfer Agent (RTA) of the respective company.
6. Verification by RTA: The RTA will verify the documents received from the DP. This includes verifying the authenticity of the physical share certificates and ensuring that they match the details provided in the DRF.
7. Dematerialization Process: Once the documents are verified, the RTA will initiate the dematerialization process. The physical share certificates will be cancelled, and equivalent electronic shares will be credited to your Demat account.
8. Confirmation: You will receive a confirmation from your DP once the dematerialization process is completed. This confirmation will include details of the shares dematerialized and credited to your Demat account.
9. Check Demat Account: Log in to your Demat account to verify that the electronic shares have been credited successfully. Ensure that the details of the credited shares match the physical certificates submitted.
10. Update Records: Keep records of the dematerialized shares and update your investment portfolio accordingly. It's important to maintain accurate records for future reference.
11. Liaison with RTA: If you need to communicate with the RTA regarding any issues or queries related to your shares, you can contact them directly. RTA contact details are usually available on the company's website or through your DP.
12. Regular Monitoring: Regularly monitor your Demat account for any changes in shareholding, corporate actions, or communication from the RTA. Stay informed about developments related to the companies in which you hold shares.

CONCLUSION

As a result, registrars and share transfer agents guarantee the efficient operation of processes and play a crucial part in the dematerialization and digitization of society. The issuer's agent is known as an RTA (Registrar and Transfer Agent), and it serves as a go-between for the issuer and the depository to enable services including corporate actions, initial public offerings, dematerialization, and rematerialization.