Govt mulls making unlisted companies hold shares in demat form

The government is looking at the feasibility of mandating all unlisted companies to have their shares in dematerialised form, sources said as authorities step up efforts to weed out shell firms.

Preliminary discussions have been initiated on the proposal to dematerialise shares of all unlisted firms in a phased manner, which would still be a gargantuan task considering there are more than 16 lakh registered companies in the country.

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.

Source said deliberations are progressing between the Ministry of Corporate Affairs and markets regulator Sebi on the nitty-gritty of keeping shares of all unlisted companies in the dematerialised form. The idea of dematerialisation of listed companies' shares was introduced in mid 1990s and took a long time before the scrips were converted into the dematerialised form.

The ministry is implementing the Companies Act, 2013 and all registered companies come under this law. Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

While a final decision is yet to be taken, the exercise of dematerialisation of shares is expected to be put in place soon with specific near term deadlines for companies to adhere to. Dematerialised shares are held by depositories, which comes under the purview of Sebi. To chart out time-bound plans and address the practical issues involved in mandating such a requirement, the ministry is discussing various aspects with the regulator, sources said.

Depositories are organisations that holds securities, including shares, debentures and bonds, of investors in electronic form. Sources said having shares in dematerialised form would bring in more transparency as well as make it easier for authorities and regulators to track down the transactions, sources said.

Even though there are strict norms in place for companies, there have been instances of unlisted firms being misused for illegal funding activities, including by way of opaque share transfer arrangements.

With the government stepping up efforts to weed out shell companies as part of larger clamp down on the black money menace, dematerialisation of shares of unlisted firms would further help in keeping a vigil on illicit funding activities, sources said.

The ministry has struck off more than 2.09 lakh companies, which have not been carrying out business for long and also not making required statutory filings, from the records. There are more than 16 lakh companies registered and around 6,000 are listed on the stock exchanges.