Demat of shares of private company

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Manoj Kumar Joshi (Querist)
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07 October 2010 Can a private company get its shares dematerialized? If yes, then how it will ensure the compliance with restrictions mentioned in its articles, since it might not be possible to control the transfers in demat form?

can part of shares of the company be dematerialized?

Ajay Mishra

Ajay Mishra (Expert)
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07 October 2010
Dear Mr. Manoj

Yes, a private company can registered with NSDL and get connectivity, for this a tripartite agreement will be executed with Company RTA and NSDL.

It is not mandatory that for connecting with NSDL all share should be in demat form at present or in future, it will depend on shareholder that he will kept their shares in demat form of physical form.

You will provide a facility to its shareholders to kept their shares in electronic form.

Regards

Manoj Kumar Joshi

Manoj Kumar Joshi (Querist)
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07 October 2010 Dear Ajay,

Thanks for your reply. I still have a doubt as to how the restrictions as required under Companies Act, 1956 in case of a private Company on transfer of shares will be ensured, once the shares are dematerialized as transfer of shares in demat form is not subject to any restrictions.

Regards
Manoj Kumar Joshi

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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21 July 2024 In the context of a private company under the Companies Act, 1956, which imposes certain restrictions on the transfer of shares, the transition to dematerialization (demat) of shares does indeed raise questions about enforcing these restrictions effectively. Here’s how the restrictions can be ensured despite dematerialization:

1. **Articles of Association (AoA):** Private companies typically include provisions in their AoA that outline the restrictions on the transfer of shares. These restrictions can include pre-emption rights, approval requirements from the board of directors or shareholders, and other conditions. Even when shares are dematerialized, the AoA remains a binding document that governs the company’s internal affairs.

2. **Demat Account Restrictions:** While shares in demat form are technically easier to transfer, the process is still governed by the Depositories Act, 1996, and the rules of the depository (NSDL or CDSL). These rules may require compliance with the company’s AoA and other regulatory requirements before effecting transfers.

3. **Transfer Deeds:** Even in dematerialized form, transfers require the submission of transfer deeds to the depository participant (DP) or registrar and transfer agent (RTA). The transfer deeds must comply with the restrictions specified in the AoA, such as obtaining board or shareholder approvals.

4. **Company’s Register of Members:** The private company maintains a register of members where transfers of shares are recorded. This register should reflect the restrictions and approvals as per the AoA, regardless of whether shares are in physical or dematerialized form.

5. **Monitoring and Compliance:** The company’s board of directors and shareholders must monitor compliance with the transfer restrictions. Regular audits and reviews of the company’s shareholding patterns and transfers can help ensure that any breaches of restrictions are identified and addressed promptly.

6. **Legal Recourse:** If there is a breach of transfer restrictions, the company can take legal action against unauthorized transfers. This includes seeking injunctions to prevent further transfers and seeking damages for any losses incurred due to unauthorized share transfers.

7. **Disclosure and Reporting:** The company should disclose its transfer restrictions clearly in its annual financial statements and other regulatory filings. This ensures transparency and notifies stakeholders of the restrictions in place.

In essence, while dematerialization facilitates easier transfer of shares, the restrictions imposed by the AoA of a private company remain enforceable. By maintaining robust internal controls, monitoring compliance, and leveraging legal recourse when necessary, private companies can ensure that transfer restrictions are upheld effectively despite shares being in dematerialized form.