UNIT II
SHARE CAPITAL AND SECRETARIAL DUTIES
ISSUE OF SHARES
The issue of shares is the procedure in which enterprises allocate new shares to the shareholders. Shareholders can be either corporates or individuals. The enterprise follows the rules stipulated by Companies Act 2013 while circulating the shares. The Issue of Prospectus, Receiving Applications, Allocation of Shares are 3 key fundamental steps of the process of issuing the shares.
A noticeable feature of the company’s capital is that the amount on its shares can be progressively collected in simple instalments that are spread over a time frame relying upon its enhancing financial obligation. The 1st instalment is collected with the application and is hence, called as application money, the 2nd is on allocation (termed as allocation or allotment of money), and the 3rd instalment is known as a 1st call, 2nd call and so on. The word-final is suffixed to the final instalment. This procedure, in no way, prevents an enterprise from calling the entire amount on shares during the period of application.
The significant steps in the process of issue of shares are given below :
ALLOTMENT OF SHARES
Allotment of shares is an appropriation of a certain number of shares to an applicant and distribution of shares among those who have submitted written application. It is governed by companies act, 2013 and rules & regulations incorporated therein and for Listed Companies) whose shares are listed on the NSE and BSE or any other applicable Stock exchanges in India and whose shares are freely tradable without any restrictions) and Subsidiary of Listed Companies the provisions of SEBI act, 1992 and the securities contracts (regulation) act, 1956, are also applicable
Mode of allotment of shares:
A public company may allot shares in the following ways:
A private company may allot shares in the following ways:
PUBLIC OFFER:
An application is made to stock exchange(s) for the shares to be dealt through it/ them, before any offer of allotment to public. Allotment of shares is always in e-materialized form and the offer for the allotment of shares is made through red herring/ shelf prospectus, as the case may be. In public offer, no allotment is made unless minimum amount stated in the prospectus has been subscribed and consequently return of allotment is to be filed with the registrar.
PRIVATE PLACEMENT/ PREFERTIAL ALLOTMENT:
A private placement offer letter is issued to such number of persons not exceeding 50 but limited to 200 in a financial year and the allotment of shares through private placement is to be approved by the shareholders through a special resolution only. A complete record of private placement offers is to be kept by the company and is to be filed with the registrar and to SEBI (for listed company).
RIGHTS ISSUE:
A letter of offer in the form of notice is issued to the existing equity shareholders for the purpose of rights issue which provides with the right of renunciation to the existing equity shareholders w.r.t. the offer for the allotment of shares.
Accordingly, subscribed capital of the company is increased in rights issue.
BONUS ISSUE:
Only fully paid-up bonus shares are issued to the members, out of:
Bonus issue is to be authorized by the AOA of the company making the allotment of bonus shares and it is recommended by the board and then approved by the shareholders in the general meeting of the company.
FORFEITURE OF SHARES
In business, there are situations where stakeholder loses its share because of non-payment of his share of instalment or dues. However, a company can only forfeit a share if they allow forfeiture under the Article of Association of the company.
Forfeiture of Shares Meaning
Forfeiture of shares is referred to as the situation when the allotted shares are cancelled by the issuing company due to non-payment of the subscription amount as requested by the issuing company from the shareholder.
In the event of forfeiture of shares, the shareholders loses the rights and interests of being a shareholder and ceases to be a member of the organisation.
Some shareholders might fail to pay instalments, viz., allocation of money or call money. In such a scenario :
DEMAT OF SHARES
Dematerialization (Commonly known as ‘Demat’) signifies conversion of a share certificate from its present physical form to electronic form for the same number of holding.
It offers scope for paperless trading through state-of-the-art technology, whereby share transactions and transfers are processed electronically without involving any share certificate or transfer deed after the share certificates have been converted from physical form to electronic form. It attempts to avoid the time consuming and complex process of getting shares transferred in the name of buyers as well its inherent problems of bad deliveries, delay in processing/ fraudulent interception in postal transit, etc.
Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has to demats the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares, he/she will get delivery of the shares in demat form only.
The Depositories Act 1996 has been enacted to regulate the matters related and incidental to the operation of Depositories and demat operations. Two Depositories are in operation –
Procedure for Dematting of shares:
First, you will have to open an account with a Depository Participant (DP) and get a unique Client ID number.
Thereafter, you will have to fill up a Dematerialization Request Form (DRF) provided by the DP and surrender the physical shares certificate, which you want to be demitted to the DP.
The DP upon receipt of the shares certificates and the DRF will send an electronic request to the company’s registrar and share transfer agent (RTA is an agent of the issuer. RTA acts as an intermediary between the issuer and depository for providing services such as dematerialization, rematerialization) through the Depository for confirmation of demat. Each request will bear a unique transaction number.
The DP will simultaneously surrender the DRF and the shares to the company’s registrar and share transfer agent with a covering letter requesting the registrar and share transfer agent of the company to confirm demat.
The company’s registrar and share transfer agent after necessary verification of the documents received from the DP will confirm demat to the Depository.
This confirmation will be passed on from the Depository to the DP, which holds your account. After receiving this confirmation from the Depository, the DP will credit the account with the shares so dematerialized.
The DP will hold the shares in the dematerialized form thereafter on your behalf. And you will become beneficial owner of these dematerialized shares.
List of documents required
1. Application for admission as Issuer of Eligible Securities
2. Net worth certificate from a Chartered Accountant as per audited annual report for the last financial year.
3. Certified true copy of Board Resolution mentioning name of signatories who are authorized by Board to execute documents and list of Authorised Signatories along with specimen signature.
4. Confirmation letter from Registrar & Transfer Agent
5. Certified true copies of Memorandum & Articles of Association along with Certificate of Incorporation.
6. Certified true copy of Audited annual report for the last financial year.
7. If company has issued equity shares after latest balance sheet in that case company has to provide us certified true copy of PAS‐3.
8. If there is any variation in face value of shares or reduction in capital after the last balance sheet date in that case company has to provide certified true copy of SH‐7.
9. In case of Private Limited Companies Additional Documents in form of Undertaking is required.
TRANSMISSION OF SHARES
Transmission of shares is a process by operation of law where under the Shares are registered in a Company in the name of deceased person or an insolvent person are registered in the name of his legal heirs by the Company on proof of death or insolvency as the case may be.
Transmission of shares takes place when registered member dies or is adjudicated insolvent or lunatic by competent court.
Article of the Company usually provide the provisions of Transmission of shares. In absence of such provisions, Company will follow Regulations 23 to 27 of Table F to govern the provision of Transmission of shares.
As per the above regulations, legal representatives are entitled to the shares held by the deceased person and company must accept the evidence of Succession.
What is Evidence of Succession?
Modes of Transmission of Shares
Definition of Member
A person whose name is entered in the register of members of a company becomes a member of that company. The register includes every single detail about the member like name, address, occupation, date of becoming a member, etc. It also includes every person who holds company’s shares and whose name is entered as the beneficial owners in depository records.
The liabilities of members are limited to the amount of shares held by them in the case of a company having share capital while in the case of a company limited by guarantee the liability of members is limited to the amount of guarantee given by them. But, in the case of an unlimited company the members have to contribute from his personal assets to pay the debts.
The members cannot take part in the management of the company, i.e. the management of the company is looked after by the Board of Directors. Although the right to appoint and remove the directors is in the hands of members.
How to become the member of a company
Definition of Shareholder
An individual who owns the share of a public or a private company is known as a ‘Shareholder.’ A subscriber of shares is not regarded as the shareholder until the shares are actually allotted to him.
The shareholders are the owners of the company, i.e. to the extent of the share capital held by them. The legal representative of the deceased member, is a shareholder, not the member, until and unless his name is recorded in the register of members of the company. Hence, it can be said that every shareholder is a member but every member, is not a shareholder.
RIGHTS OF SHAREHOLDERS
The right to vote is the most important right a shareholder has. Companies Act 2013 recognizes the following types of voting: Voting by showing hands, Voting is done by polling, voting is done electronic means, voting is done through postal ballot.
This right enables shareholders to participate in corporate decision-making. Their voting power includes the right to appoint directors, the right to make proposals, the right to vote for structural changes such as mergers and acquisitions, or liquidation.
Following a procedure mentioned in the Companies Act 2013, the shareholder also has a right to appoint a proxy on his behalf when he is unable to attend the meeting. Though the proxy is not allowed to be included in the quorum of the meeting in case of voting.
2. Legal Action Against Directors
According to the rules laid down in the Companies Act 2013, shareholders can bring legal action against a director if any act was done by the director in any manner which is prejudicial against the affairs of the company, commits fraud, any act is done which is beyond the law or against the constitution, when the assets of the company are being transferred at an undervalued rate, act done in mala fide manner, when there is a diversion of funds of the company.
3. Right to Call for General Meetings
Shareholders have the right to call a general meeting. Annual General Meeting is an annual gathering of a company’s shareholders. Here, the directors of the company present the shareholders of the company’s annual report and comment on its performance over the year. Here, shareholders may elect new directors, discuss directors’ remuneration, and ask questions regarding the company moving forward. They also can approach the Company Law Board for the conduction of general body meeting if it is not done according to the statutory requirements.
4. Right to The Dividend
The Company’s shareholders have the right to a share in the profit reflected in the annual, stand-alone financial statements audited by an independent auditor and approved by a resolution of the General Meeting to be paid out to the Company’s shareholders (the right to dividend).
5. Appointment of Directors
An ordinary resolution is required to be passed by the shareholders for the appointment of directors. Shareholders also can challenge any resolution passed for the appointment of a director in the general body meeting.
6. Right to Dispose of Shares
The Company’s shareholders have the right to dispose of Shares. The disposal of Shares includes the sale (transfer of ownership) and other forms of disposal, including the establishment of a pledge, the right of use, or lease of Shares.
7. Right to Inspect Registers, Books, And Financial Records
Shareholders are the main stakeholders in a company, they have the right to inspect the accounts register and also the books of the firm and can ask questions about the same if they feel so. shareholders have the right to inspect a company’s books and records. This is so that the shareholder knows how well the company is doing. The company may do this by providing audited financial statements or financial reports to the shareholders.
8. Pre-emptive Right
The Company’s shareholders have the priority right to subscribe for new shares in the Company also in the case of an issue of securities convertible into shares in the Company or incorporating the right to subscribe for shares of the Company. A resolution adopted to increase the Company’s share capital should set the date of determining the Company’s shareholders’ pre-emptive right to new Shares (the pre-emptive right record date
9. Winding Up of The Company
Before the company is wound up the company has to inform all the shareholders about the same and also all the credit has to be given to all the shareholders.
DUTIES OF SHAREHOLDERS
The shareholders of the Company must comply with their duties, acting loyally, in good faith, and transparently, within the framework of the corporate interest as an interest that should prevail over each shareholder’s interest, and under the Company’s Corporate Governance System, accepting the substantive and formal limitations to which their rights are subject and the rules on conflicts of interest and competition, and ensuring the transparency of related-party and significant transactions and the truth of public disclosures and exercise their rights in respect of the Company and the other shareholders.
RIGHTS OF MEMBERS:
A Member of the Trade Association will be entitled to the following rights:
(1) to receive assistance and support in matters pertaining to the operations of business which lie within the Trade Association’s objectives,
(2) to proffer opinion or recommendation to the Trade Association or the Board of Directors in any matters lying within the Trade Association’s Objectives for the purpose of enhancing its efficiency and prosperity.
(3) to request examination of the Trade Association’s operations and property by submitting a letter to the Secretary-General or the Director acting for the Secretary-General.
(4) to attend general meetings, discuss matters, offer comments, make inquiries with the Board of Directors or any other person and to submit motions to the General Meetings of Members,
(5) to use the Trade Association’s logo only with the prior approval by resolution of the Board of Directors and in a dignified and appropriate manner without acquiring any proprietary right thereon in any way,
(6) Ordinary Members only may vote in General Meetings and be elected as Directors,
(7) to be appointed as proxy for other Members and to vote on behalf of such Members,
(8) to be designated by resolution of the Board of Directors as Patron or Founding Member of the Trade Association,
(9) Honorary Members and Affiliate Members shall have equal rights as Ordinary Members except for the right to vote and the right to hold an elected office.
MEMBERS’ DUTIES:
It is the duty of the Trade Association’s Member to observe the following:
(1) to comply at all times with the Trade Association’s Bylaws and resolutions adopted by its General Meetings or the Board of Directors,
(2) to preserve the honour and vested interests of the Trade Association and not to disclose, under any circumstances, any information which may disgrace or cause the Trade Association to suffer disrepute,
(3) to promote and support the Trade Association in its activities to ensure constant progress and development,
(4) to maintain unity amongst Members and to conduct its business or any other activities with integrity nor cause damages to other Members,
(5) to pay all dues and fees to the Trade Association as scheduled,
(6) the Secretary-General shall be notified in writing of any change by any member of name, surname, nationality or re-location of residence or office, change in the business category or change of representatives where such Member is a juristic person, within seven days of such change as otherwise the Trade Association will not be under any obligation to acknowledge such change and may, for all intent and purpose, undertake any act as if such change has not taken place and will not be held liable for any loss or damage arising therefrom as long as the Trade Association has not received any notice of such changes.
In any nonprofit/charitable institution its board of directors/trustees is charged with providing ultimate oversight over the activities and affairs of the organisation. Each director/trustee must discharge his/her fiduciary duty in good faith, with due care, diligence and in a manner, he/she believes to be in the best interest of the organisation.
How often the board should meet, what it should discuss and how records of these meetings should be maintained is also important because it is indicative of what a board has accomplished over time as well as to hold directors/trustees accountable for their discussions and decisions. Minutes of the meeting should include major decisions made, follow-up steps and tasks, event information, etc.
Secretarial Standards
Companies registered under the Indian Companies Act follow ‘Secretarial Standards’ issued by the Institute of Company Secretaries of India (‘ICSI’). However, charitable trusts and societies have no such standards or guidelines to fall back on.
The Trusts Act and Societies Registration Act offers little direction in terms of number of meetings and how these should be conducted and records maintained. Often trustees find only vague guidance under their own constitution (trust deed or the by-laws or Rules).
The object of this write-up is two-fold:
a) To give readers a flavor of the latest Secretarial Standards and
b) To help directors/trustees of charitable organizations adopt or adapt some corporate best practices with regard to board meetings.
Latest Amendments to Secretarial Standards
The Institute of Company Secretaries of India (‘ICSI’) has recently (30th August, 2017) amended the Secretarial Standers which shall come into effect from 1st October 2017.
These Standards prescribes a set of principles for convening and conducting Meetings of the Board of Directors and matters related thereto.
Exemption to Section 8 Companies
These Standards are not applicable to companies registered u/s 8 of the Indian Companies Act 2013.
Highlights:
Annual General Meeting
An Annual General Meeting (AGM) is held to have an interaction between the management and the shareholders of the company.
Which Companies Are Required to Hold an AGM?
All companies except one person company (OPC) should hold an AGM after the end of each financial year. A company must hold its AGM within a period of six months from the end of the financial year. However, in the case of a first annual general meeting, the company can hold the AGM in less than nine months from the end of the first financial year. In such cases where the first AGM is already held, there is no need to hold any AGM in the year of incorporation. Do note that the time gap between two annual general meetings should not exceed 15 months.The Companies Act, 2013 makes it compulsory to hold an annual general meeting to discuss the yearly results, auditor’s appointment and so on. A company should follow the procedures under the Companies Act, 2013 to conduct the AGM.
What is the Procedure to Hold an AGM?
The company must give a clear 21 days’ notice to its members for calling the AGM. The notice should mention the place, the date and day of the meeting, the hour at which the meeting is scheduled. The notice should also mention the business to be conducted at the AGM.
A company should send the notice of the AGM to:
– All members of the company including their legal representative of a deceased member and assignee of an insolvent member.
– The statutory auditor(s) of the company.
– All director(s) of the company.
The notice may be given in writing through speed post or registered post or via electronic mode. The notice should be sent to the address of the member as per the records of the company. In the case of electronic communication, the notice should be sent to the e-mail address of the member as per the records of the company. The notice can be text typed in an email or an attachment to an email.
The notice of the AGM should be placed on the website of the company or any other website as may be mentioned by the government.
An AGM can be called at a notice period shorter than 21 days’ if at least 95% of the members entitled to vote in the meeting agree to the shorter notice. The consent may be given in writing or through electronic mode.
Matters Discussed in an AGM or Agenda for an AGM
The matters discussed or business transacted in an AGM consists of:
– Consideration and adoption of the audited financial statements
– Consideration of the Director’s report and auditor’s report
– Dividend declaration to shareholders
– Appointment of directors to replace the retiring directors
– Appointment of auditors and deciding the auditor’s remuneration
– Apart from the above ordinary business, any other business may be conducted as a special business of the company.
The ordinary business of the company will be passed by an ordinary resolution where the votes cast in favour are more than the votes cast against the resolution. However, in case of special business transactions, the resolution may be passed as an ordinary resolution or a special resolution, depending on the applicable legal provisions. A special resolution requires at least 75% votes in favour of the resolution.
An AGM should be conducted during the business hours between 9 a.m. and 6 p.m. only. The meeting can be conducted on any day, which is not a national holiday, including holidays declared by the Central Government. The meeting can be held at any place which is within the limits of the city or town or village in which the registered office is situated. A government company can also hold its AGM at any other place as the Central Government may approve. An unlisted company can hold an AGM at any place in India after obtaining consent from its members in writing or in electronic mode.
In the case of a Section 8 company, the Board decides the date, time and place of the AGM as per the directions given in a general meeting of the company.
What is the Quorum for an AGM?
In the case of a private company, two members present at the meeting shall be the quorum for the AGM.
In the case of a public company, the quorum is:
– Five members present at the meeting if the number of members is within one thousand.
– Fifteen members present at the meeting if the number of members is more than one thousand but within five thousand.
– Thirty members present at the meeting if the number of members is more than five thousand.
In case the quorum for the meeting is not present within half an hour from the scheduled time, the meeting will be adjourned to the same day in the following week for the same time and at the same place.
Members’ Rights in an AGM
The members (including shareholders) of the company are entitled to attend and vote at the AGM. Members can cast their votes by a physical ballot or postal ballot or through e-voting. Members can appoint proxies to attend an AGM and vote on their behalf. The proxy should be appointed in writing, and the proxy form should be signed by the member. In case the proxy is appointed by a corporate shareholder, the proxy form should be signed and sealed by an authorised signatory of the corporate.
The members can elect one among themselves as the chairman of the meeting. However, if the articles of association of the company provide for a chairman, such person shall chair the AGM of the company.
Reporting of the AGM in Form MGT-15
After the conduct of AGM, every listed company has to file a report on the AGM in form MGT-15 within a period of 30 days from the conclusion of the AGM.
Consequences and Penalty for Default in Holding an AGM
In case a company fails to hold an AGM within the stipulated time or extension obtained by it, the Tribunal may itself or on an application made by any director or member order an AGM to be conducted as per its directions.
If the company further defaults in holding a meeting in accordance with the directions of the Tribunal, the company and every officer of the company who commit the default shall be punishable with a fine of up to Rs 1 lakh. In case of continuing default, a fine of Rs 5,000 per day is levied for each day during which the default continues.
Extra ordinary General meeting
Matters requiring immediate consideration by members, which cannot be deferred till next Annual General Meeting, to meet such emergencies, the companies can provide for holding of emergency meetings of the members which are known as Extra Ordinary General Meeting.
Regulation 42 of Table F provides that all general meetings, other than Annual General Meeting, shall be called as Extra Ordinary General Meetings.
All business which are transacted at Extra Ordinary General Meeting shall be deemed special.
Extra Ordinary General Meeting shall be held at a place within India except of the wholly owned subsidiary of a company incorporated outside India.
Calling of Extra Ordinary General Meeting
1. Section 100(1) of Companies Act 2013 and Regulation 43(i) of Table F
The Board of Directors may whenever it thinks fit call an Extra Ordinary general meeting. For this Board resolution is required. Thus General meeting need to be called only on the authority of board resolution.
If a managing director, manager, secretary or other officer calls a general meeting without prior approval of the Board of Directors, it will have no effect unless the Board ratifies the convening of general meeting before it is held.
2. Regulation 43(ii) of Table F, Calling of Extra Ordinary General Meeting by any director or any two members
If at any time directors capable of acting sufficient in number to form a quorum, any one director or any two members of the company may call an Extra Ordinary General meeting in the same manner, as nearly as possible as that in which such a meeting may be called by the board.
3. Section 100 of Companies Act, 2013 Calling of Extra Ordinary General Meeting on requisition
The demand of members to convene a meeting is called requisition. It shall set out the matters for consideration of which the meeting is to be called.
The number of members entitled to requisition a meeting in regard to any matter shall be
1. In case Company having a share capital, members holding at least one tenth of such paid up capital of the capital which carries a right voting in regard to that matter.
2. In case Company not having share capital, members holding at least one tenth of total voting power of all the members who have a right to vote to that matter.
On receipt of requisition the Board of Directors shall proceed to call Extra Ordinary General Meeting within 21 days from the date of the deposit of requisition, on a date, which shall not be later than 45 days of the date of deposit of requisition.
The Board of Directors shall be said to have failed in calling the meeting if:
1) It does not call the meeting within 21 days of the deposit of requisition.
2) It calls the meeting on a day which is later than 45 days from the date of deposit of requisition or
3) It convenes a meeting to transact only a part of the business specified in the requisition.
Where the Board fails to call a meeting, the meeting may be called by the requsitionists themselves within a period of 3 months from the date of the deposit of requisition.
Any reasonable expenses incurred by the requsitionists in calling a meeting shall be reimbursed to the requsitionists by the Company and the same so paid shall be deducted from any fee or other remuneration payable to such of the directors who were in default in calling the meeting.
Notice of the meeting
Notice shall be given in writing or through electronic mode at least before 21 clear days to the proposed date of extra ordinary general meeting.
The notice calling meeting shall specify the place, date, day and hour of the meeting and shall contain the business to be transacted at the meeting.- Requistionists should convene meeting at Registered office or in the same city or town where Registered office is situated. Further such meeting should be convened on any day except national holiday.
No explanatory statement as required under section 102 need be annexed to the notice of an extraordinary general meeting convened by the requistionists and the requistionists may disclose the reasons for the resolutions which they propose to move at the meeting.
The notice of the meeting shall be given to those members whose names appear in the Register of members of the company withinthree days on which the requistionists deposit with the Company a valid requisition for calling an extraordinary general meeting.
The notice of the meeting shall be given by speed post or registered post or through electronic mode . Any accidental omission to give notice to, or the non-receipt of such notice by, any member shall not invalidate the proceedings of the meeting.
4. Section 98 of Companies Act, 2013 Calling of Extra Ordinary General Meeting by Tribunal
If for any reason company could not call, hold or conduct meeting. The National Company Law Tribunal may order a meeting of the company to be called, held or conducted in such manner as it thinks fit.
The directions given under this section include that one member of the company present in person or by proxy shall be deemed to constitute a meeting.
The tribunal may do so either on its own motion or on the application of any director of the company or on the application of any member of the company who would be entitled to vote at the meeting.
Key Takeaways:
1) An Annual General Meeting (AGM) is held to have an interaction between the management and the shareholders of the company.
2) The company must give a clear 21 days’ notice to its members for calling the AGM.
3) All general meetings, other than Annual General Meeting, shall be called as Extra Ordinary General Meetings.
Dematerialization is the process of converting your physical shares and securities into digital or electronic form. The basic agenda is to smoothen the process of buying, selling, transferring and holding shares and also about making it cost-effective and foolproof. All your securities are stored in an electronic form instead of physical certificates. Let us delve deeper into the topic of dematerialization.
Two depositories called Central Depository Services India Limited (CDSL), and National Securities Depository Limited (NSDL) is registered with the Securities and Exchange Board Of India also known as SEBI.
Why is Dematerialization Needed?
It’s sometimes hard to keep track of all the paper-based documents. Moreover, the increasing amount of papers day by day may lead to missing an important document. It can become the cause of the break down of the Indian Share Market and any businesses associated with it. Not only that, if a share is being transferred 0.5% is saved for stamp duty. If the original certificates are somehow misplaced it saves time and money in obtaining duplicate certificates. Shares that are dematerialized receive credits and bonuses right into their account hence no chances of loss in transit followed by fewer interest charges for loans associated with Demat accounts.
Process of Dematerialization
The Dematerialization starts with opening a Demat account. So, let’s first see how to create an account.
1) Select a depository participant (DP): Most financial institutions and brokerage service firms are referred to as Depository Participants.
2) Fill an account opening form: You need to fill an account opening form to open a Demat account. This includes basic contact information.
3) Submit documents for verification: You need to submit a copy of your income proof, identity proof, address proof, active bank account proof and one passport-sized photograph for verification. All copies of documents need to be duly attested.
4) Sign a standardized agreement with the DP: A standardized agreement will contain the rules and regulations, charges you will incur and the terms and conditions of the agreement between you and the depository participant.
5) Verification of documents: A staff member from the DP will verify all the documents that you have submitted in your application.
6) Demat account number and ID are generated: Once all your documents have been verified, your Demat account number and ID will be generated. You can use this information to access your online Demat account.
Benefits of Dematerialisation
A Demat account provides you the facility to carry out the transactions electronically. There is no need for you to be physically present at the broker’s place to settle a transaction. Moreover, the investor can have access to the Demat account using a computer or smartphone. In addition, you can convert your physical holdings into electronic format to become the legal owner of your shares.
2. Fund Transfer
By linking your Demat account with the bank account you can easily transfer funds electronically. This saves you from the hassles of drawing a cheque or transferring the funds manually.
3. Safe and Secure
Demat account is the most secure and safest way to carry out transactions by electronic means. All the risks like theft, damage, loss of share certificates, etc. that were associated with holding shares in physical form are completely eliminated.
4. Nomination Facility
Demat account provides you the facility to grant the right to operate your Demat account to the nominee in your absence. With this facility, you can carry out transactions in your Demat account with the help of a nominee when you are not in a situation to do it yourself.
5. Paperless
One of the main benefits of using a Demat account is that it excludes the need for paper. Since the Demat account is about holding shares or securities in electronic form, the need for the paper is almost zero. In addition, the Demat account has also proved to be very useful for the companies in reducing their administrative costs and hassles. Furthermore, cutting down paper usage is also good for the environment.
6. Avail Loan Facility
The Demat account helps you in availing loans against the holdings in dematerialized form. The securities and shares held in Demat account can be kept as collateral and loan can be taken against them.
7. Easily Traceable
With the help of a Demat account, you can monitor your portfolio from your home, office or anywhere across the globe. The flexibility to be able to monitor the portfolio performance enhances the chances of you making more profits because of the increase in participation and interest.
8. Ease In Receiving Corporate Benefits
Demat account eases the process of receiving various corporate benefits like dividends, interest, refunds, etc. All the benefit amount gets directly credited into the Demat account. Moreover, other benefits like stock splits, bonus shares, rights shares, etc. get directly updated into the Demat account.
9. Multiple Purposes
In the Demat account, you can not only hold shares or equities but also debt instruments. You can even purchase, hold and sell mutual fund units through the Demat account. In fact, you can even purchase government bonds, exchange-traded funds, etc. in the Demat account.
The Depositories Act, 1996 provides for regulation of depositories in securities and for matters connected thereto. The Act which initially came into force as an ordinance, viz. The Depositories Ordinance, 1995, was designed to provide a legal framework for establishment of depositories to record ownership details in book entry form.
The Act also made consequential amendments in the Companies Act, 1956; the Securities and Exchange Board of India Act, 1992; the Indian Stamp Act, 1899; the Income tax Act, 1961; and the Benami Transactions (Prohibition) Act, 1988.
The Depositories Act, 1996 provides a legal framework for establishment of depositories to facilitate holding of securities including shares in the demat form (electronic form) and to effect transfer of securities through book entry.
The Act establishes the depository system in India by providing for setting up of one or more depositories to enable the investors to hold securities in non-physical form (known as dematerialized form) and to affect transfer of securities by way of book entries in accounts maintained by the depository.
Every depository is required to be registered with the Securities and Exchange Board of India (SEBI) and will have to obtain a Certificate for commencement of business on fulfillment of the prescribed conditions.
Investors opting to join the system are required to be registered with one or more participants who are the agents for the depository. Investors have the choice of continuing with the existing securities certificates or opt for the depository mode.
The depository system envisages a deposit of securities by various investors with the depository. Once the securities are lodged with the depository, their transfer would be through book entry transfers in accounts maintained by the depository. Thus the main function of a depository is to dematerialize the securities and enable their transaction in book entry form.
References:
1) ‘Company Law’ by Brenda Hannigan.
2) ‘Elements of Company’ Law by N. D. Kapoor.
