Dematerialisation

In one line

Dematerialisation replaces the share certificate with an entry in a depository's records, and the Act's part in it is short: every public offer, and every prescribed class of company, must issue securities only in demat form, and wherever the Act speaks of a certificate or a register it treats the depository's record as the equivalent.

In exam wording: under section 29(1) notwithstanding anything contained in any other provision of this Act, every company making public offer, and such other class or classes of companies as may be prescribed, shall issue the securities only in dematerialised form by complying with the Depositories Act 1996 and the regulations made under it.

Why the law has this at all

Paper certificates carried four defects, and each of them is a reason for a provision of the Act.

They could be forged, lost and duplicated. The heavy fine in s.46(5) for a duplicate issued with intent to defraud is a measure of the risk. An electronic record cannot be lost by a shareholder or forged by a printer.

They made transfer slow. A physical transfer requires an executed instrument, delivery of the certificate, lodgment with the company, and registration, all under the time limits in s.56. A transfer between two accounts in a depository is a book entry.

They made settlement impossible at scale. A stock exchange settling thousands of trades a day cannot move paper. Dematerialisation is what made rolling settlement in Indian markets workable at all.

They tied identity to a number. Section 45 requires every share to carry a distinctive number so that a particular certificate can be matched to particular shares. Demat holdings are fungible: what a beneficial owner has is a quantity, not identified units, which is why the proviso to s.45 disapplies numbering.

The policy question the Act then had to answer was how far to compel it. The answer given in 2013 was to compel it for the public offer, where investors are strangers to the company. The answer given in 2019 was to extend the power to prescribed classes of unlisted companies as well, because opaque shareholding in unlisted companies is where benami holdings and layered structures hide.

Section 29: the mandate

29(1): who must issue only in demat form. Notwithstanding anything contained in any other provision of this Act, (a) every company making public offer and (b) such other class or classes of companies as may be prescribed shall issue the securities only in dematerialised form by complying with the Depositories Act 1996 and the regulations made thereunder.

The word "public" before "companies" in clause (b) was omitted by s.7 of the Companies (Amendment) Act 2019 with effect from 15 August 2019. Before that omission the Central Government could only prescribe classes of public companies; since it, the power reaches any class of company.