DEMATERALIZATION OF SHARES

[Mr. M. GOVINDARAJAN]

PROCEDURE OF OPENING DEMAT ACCOUNT

The procedure for opening an account by an investor is that the prospective account holder will have to open an account in the depository system with a Depository Participant by furnishing an application. As per Section 5 of the Depositories Act, 1996 the investor is required to enter into an agreement with the Depository Participant in the specified format under the bye-laws of the depository.   Once the Depository Participant has accepted the application, the applicant investor will be issued a Client Account number (Client ID number). The Client ID number is a unique number with respect to the Depository Participant with which the investor is holding a beneficial owner account.   The Depository Participants are also identified in the depository system by a unique Depository Participant identity number (DP Id number). The combination of client id and DP Id form the unique identification number for any person who desires to hold his securities in the depository system and the same is required to be referenced by the investor for dealings in the depository system.

DEMATERIALIZATION

Dematerialization is a process by which an investor can get his physical security certificates converted into electronic balances and hold the same in its/his account with a DP in the Depository system. Dematerialization does not result in change in ownership but results only in change in the method of holding shares.

OBLIGATION OF COMPANIES

Any shareholder who wants to dematerialize his shares in the depository system, can only do so if the company of which he is the shareholder, has made arrangements for joining the depository system by setting up/installing the necessary infrastructure, i.e., establishing electronic connectivity with the depository as per the procedure specified by depository.   If the company is not able to set up the required infrastructure or establish electronic connectivity with the depository on its own, it may enter into an arrangement with a share registrar/registrar and transfer agent that has already established such connectivity with depository and thereafter, it may inform its shareholders that it has made arrangements with the depository to enable them to dematerialize their securities and hold them with the depository in electronic form. Before making this facility available to its shareholders, a company is required to enter into an agreement as specified in the bye-laws of the depository. In the event the company prefers to establish the electronic connectivity through a share registrar/registrar and transfer agent which has already established electronic connectivity with the depository, then in such a case it is required to enter into a Tripartite Agreement with the depository along with the share registrar/registrar and transfer agent through whom it desires to establish connectivity with the depository.

 PROCEDURE FOR DEMATERIALIZATION

The procedure for dematerialization of securities is that the holder who intends to dematerialize his securities has to deface and surrender the physical security certificates registered in its/his name to the Depository Participant along with Dematerialization Request Form (‘DRF’). The Depository Participant then sends the said certificates along with the DRF to the concerned company/registrar and transfer agent. If the company/registrar and transfer agent after scrutiny of the security certificates and signature(s) finds the same in order, it cancels the physical security certificate and confirms the dematerialization in favor of the holder by authorizing the depository electronically, to credit the account of the holder, who had lodged them for dematerialization, for that many quantity of securities. On receiving such information from the company/registrar and transfer agent, the depository authorizes credit to the relevant beneficial owner account of the security holder which is held with the depository participant. No credit of any shares to the account of any client shall be made by depository unless depository has received an authorization from the company/registrar and transfer agent.

FUNGIBLE

According to Section 9 of the Depositories Act, the securities held in dematerialized with the depositories are fungible i.e., they become identical and interchangeable and cease to have any unique characteristic such as certificate number, distinctive numbers, folio numbers etc., The holdings of particular shares are identical to each other and, thus, they are interchangeable. The fungible characters of the shares have also been made permissible by an amendment to Section 83 of the Companies Act, 1956.

RIGHTS AND LIABILITIES

Under Section 10(3) of the Depositories Act, the beneficial owner (the person who holds securities in the depository system) has also the rights and liabilities and the depository system does not have any voting rights or other rights in respect of the dematerialized shares held in the depository system nor does it suffer any liabilities in respect of such securities. Under Section 41(3) of the Companies Act, the beneficial owner of the shares that are held with a depository is treated as a member of the company and is entitled to all benefits that are declared and issued by the company.