Govt mulling unlisted companies to convert shares in demat

The Securities and Exchange Board of India (Sebi) and the Ministry of corporate affairs is considering making dematerialisation (demat) of shares mandatory for all unlisted companies. While listed firms are required to maintain shares in dematerialised form, there is no such specific requirement in the case of unlisted entities — both public and private.

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Sebi rules require all listed companies to dematerialise shares. About 70,000 public limited companies are unlisted and more than 1 million private limited companies are registered with the corporate affairs ministry.

An unlisted public company is one which has more than 50 shareholders, a higher minimum capital requirement of Rs5 lakh and needs to comply with statutory requirements such as holding meeting with shareholders and capping director remuneration.

A meeting of the depositories National Securities Depository Ltd and Central Depository Services Ltd on 12 September 2017 to gauge their preparedness and the transition requirements to meet the proposal. Considering the number of companies and shares, it could be a massive exercise.

The move will bring down the number of frauds relating to dividend payouts and equity shares. In the absence of 100% demat of securities of listed or unlisted public companies, fundamentally weak companies can always issue duplicate shares to their promoters/persons, which can be pledged with different financiers to get funding.

Dematerialisation, or demat, is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and is aimed at eliminating fraud and theft while making trades trackable. India embarked on the process in 1996 and almost all shares of listed companies are held in the demat form. India has about 6,000 listed companies.

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