The concept of securities in a dematerialized (demat) form has revolutionized the way public offers and transactions in the securities market are conducted. A dematerialized form of securities eliminates the need for physical certificates, ensuring safer, faster, and more transparent handling of securities. Under the Prospectus and Allotment of Securities section in the Companies Act, 2013, the requirement for public offers of securities to be in demat form plays a pivotal role. This article provides an in-depth understanding of the process, significance, and legal requirements surrounding public offers of securities in dematerialized form, with a focus on relevant sections and acts.
What Is Dematerialization of Securities?
Dematerialization is the process of converting physical securities (such as share certificates) into electronic form, held in a demat account, maintained by a depository. This shift from physical to digital reduces paperwork, risk of fraud, and loss, while streamlining securities transactions. In a dematerialized system, every shareholder owns securities in electronic form, which can be easily transferred, bought, or sold through digital platforms.
Key Benefits of Dematerialization
- Elimination of Physical Certificates: Reduces risks of loss, theft, or damage to certificates.
- Improved Efficiency in Transfer of Ownership: Transfers are faster and more secure in digital form.
- Enhanced Transparency and Tracking: Digital records are traceable, ensuring better transparency and security.
- Cost Savings: Reduces the expenses associated with printing and handling physical documents.
Legal Framework for Public Offer in Dematerialized Form
The Companies Act, 2013, along with regulations by the Securities and Exchange Board of India (SEBI), mandates the issue and transfer of securities in demat form for listed companies and public offers. Relevant sections and acts include:
1. Section 29 of the Companies Act, 2013
Section 29 of the Companies Act, 2013, mandates that:
- All public offers of securities must be in dematerialized form.
- Companies listed or proposing to list on recognized stock exchanges must ensure that securities issued to the public or transferred by existing shareholders are only in demat form.
This section primarily aims to increase transparency, reduce fraud, and enhance market efficiency by making securities easier to track and transfer electronically.
2. SEBI’s ICDR Regulations, 2018
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 outlines that:
- For any public issue, including an Initial Public Offering (IPO) or Further Public Offering (FPO), shares offered must be in demat form.
- Prospectus requirements for public offers must include information about the demat form, how investors can subscribe to the offer, and the need for demat accounts for participation.
3. The Depositories Act, 1996
The Depositories Act, 1996, which governs depositories in India, enables companies to issue securities in electronic form. It allows companies to transfer and register securities electronically, simplifying the process for public offers and secondary market transactions.
Process of Making a Public Offer in Dematerialized Form
1. Opening of Demat Account
To participate in a public offer, investors must open a demat account with a depository participant (DP) such as NSDL (National Securities Depository Limited) or CDSL (Central Depository Services Limited). A demat account is crucial as it holds shares in electronic form.
2. Prospectus Disclosure on Dematerialization
The company must ensure that the prospectus clearly states that shares will be issued in demat form only. It should also guide prospective investors on the necessity of a demat account for participating in the public offer.
3. Application Process through ASBA and UPI
The Application Supported by Blocked Amount (ASBA) mechanism, along with UPI integration, allows investors to apply for public offers. During application, the required amount is blocked in the investor’s bank account, and shares are credited to the investor’s demat account once allotted.
4. Allotment and Transfer of Securities in Demat Form
Upon successful subscription, securities are credited to the applicant’s demat account. This avoids the need for physical handling and ensures that shares are immediately tradeable once listed.
Advantages of Making Public Offers in Dematerialized Form
1. Enhanced Investor Protection
Dematerialization minimizes the chances of forged certificates and fraudulent activities, providing investors with a secure way to hold and trade securities.
2. Improved Accessibility and Convenience
The dematerialized form of securities makes the application and transaction process convenient for both companies and investors. With online trading platforms, investors can seamlessly buy and sell shares.
3. Simplification of Regulatory Compliance
For regulators like SEBI, demat shares simplify the tracking of ownership and transfer of securities, aiding better market surveillance and regulatory compliance.
4. Increased Market Liquidity
With securities readily available in electronic form, trading becomes faster, enhancing market liquidity and making it easier for buyers and sellers to transact.
Compliance Requirements and Disclosures in Dematerialized Public Offers
Compliance with the dematerialization requirement is essential to safeguard investors and ensure a seamless transfer of shares. Key compliance aspects include:
1. Mandatory Disclosure in Prospectus
Companies making a public offer must specify in the prospectus that shares are in demat form and accessible only to demat account holders. This disclosure helps ensure transparency for potential investors.
2. Compliance with Depository Requirements
Companies must maintain accounts with authorized depositories and ensure that all securities for the public offer are in electronic form. This aligns with the requirements outlined by NSDL and CDSL, the two main depositories in India.
3. SEBI’s ICDR Guidelines
In compliance with SEBI’s Issue of Capital and Disclosure Requirements, companies must meet specific disclosures, including information on dematerialization, market-making, and allotment in public offers. These guidelines are critical to maintaining market transparency.
4. Investor Education
Companies are encouraged to provide investor education on the dematerialization process, the benefits of demat accounts, and how to transact in dematerialized shares. This is particularly important for first-time investors.
Challenges Associated with Dematerialized Public Offers
1. Investor Knowledge and Access
For retail investors unfamiliar with the demat process, applying for public offers may seem complex, particularly for those who are not tech-savvy.
2. Cybersecurity and Data Privacy
As with any electronic process, dematerialization is susceptible to cybersecurity risks. Companies and depositories must invest in advanced security measures to protect investors’ data and shares from cyber threats.
3. Compliance Burden for Small Companies
Small or newly established companies may find compliance with dematerialization requirements burdensome, particularly if they are new to regulatory requirements.
Recent Developments and Case Studies
The mandate for dematerialized public offers has been widely adopted by Indian companies. Notable examples include:
Case Study 1: Tech Startup’s IPO in Demat Form
A recent tech startup’s IPO received strong interest from the public, with shares offered exclusively in demat form. The transparent and seamless digital process encouraged participation from a broad audience, reflecting high investor confidence in digital securities.
Case Study 2: SEBI’s Introduction of UPI-Based Application Process
In response to the rise of digital applications, SEBI mandated the use of UPI for ASBA in IPO applications. This facilitated the blocking of funds directly in investors’ accounts, further simplifying the application process and encouraging investor participation in public offers of demat shares.
Penalties for Non-Compliance
Failure to comply with the requirement of dematerialized public offers can lead to penalties, including:
- Monetary Fines: Companies issuing physical securities in public offers can incur fines, impacting financials and market reputation.
- Legal Action: Investors or regulatory bodies may initiate legal action for non-compliance, potentially affecting the company’s standing.
- Restrictions on Future Public Offers: SEBI and other regulators can restrict non-compliant companies from future public offers, limiting growth and investment opportunities.
The public offer of securities in dematerialized form under the Companies Act, 2013, represents a significant step towards modernizing securities transactions. Dematerialization benefits companies, investors, and regulators alike, promoting transparency, security, and efficiency in the public securities market. By adhering to Section 29 of the Companies Act and SEBI’s ICDR regulations, companies ensure that their public offers meet modern standards, fostering confidence and broadening investor participation.
For companies, issuing shares in demat form is both a regulatory requirement and a valuable tool for establishing investor trust and accessibility. The future of securities markets lies in digitization, and the mandate for dematerialized public offers is a crucial component of India’s evolving securities landscape.