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India: Unlisted Companies may issue DEMAT shares

September 12, 2018

Source: www.sebi.gov.in

With the increasing growth and development in the economic sector of India, a number of companies have come up. The ownership of the companies vests in the hands of its members known as shareholders and is managed by the board of directors thereby giving life to this artificial legal distinguished entity. Not only the shareholders have voting rights with respect to the company, they also possess the right to transfer their shares dependent upon the nature of the company.

The shareholders have the right to freely transfer their shares in case of a listed public company, on the other hand in case of private company such transactions are restricted.

Listed companies

The shares of public companies which are listed on any stock exchange for the purpose of trading are known as listed companies. This allows the companies to raise funds from the public thus allowing them to expand the horizon of their business arena.

There are 18 stock exchanges in India which include National Stock Exchange, Bombay Stock Exchange, Ahmedabad Stock Exchange, Delhi Stock Exchange.

Unlisted companies

The companies whose shares are not listed on any stock exchange are known as unlisted companies. The reasons for non-listing may include non-qualification to the norms of the respective stock exchange, non- requirement of public funds, etc.

Issuance of shares for unlisted companies

In the pursuit of creating a more transparent system of transactions, the Government may soon mandate the following with respect to the unlisted companies :[1]

  • Issue of new shares in dematerialized or electronic form;
  • Transfer of shares in dematerialized or electronic form;
  • Issuance of bonus shares and stock split in dematerialized or electronic form;

The above transactions may be carried out on voluntary basis for the time being.

The Government is in the process to keeping the cost of conversion of shares from physical to dematerialized shares at minimum. The authorities would be shortly issuing rules under the Companies Act, 2013 for unlisted companies for having their shares dematerialized.

Advantages of dematerialization of shares of unlisted companies

The dematerialization of the shares of unlisted companies shall be beneficial in the following ways:

  • Clarity regarding the ownership of corporates;
  • Weeding out of shell companies which may be used to carry out illegal acts;
  • Curbing in the benami transactions;
  • Strengthening of ‘Know of Your Client’ framework;
  • Prevention of pledging of duplicate shares.

The dematerialization of the shares of unlisted companies would help create an organized and strong framework for prevention of any illicit activities.

[1] https://timesofindia.indiatimes.com/business/india-business/govt-to-make-it-compulsory-for-unlisted-cos-to-issue-shares-in-demat-form/
articleshow/65549798.cms

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