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Context: Multinational companies with subsidiaries in India face a deadline to convert shares of the subs they own that were issued as physical certificates into an electronic format, a process known as dematerialization. The deadline is Sept. 30 for companies with fiscal years ending March 31, 2023. Corporates with a Dec. 31 year-end have until June 30, 2025.
- Until last fall, the digitalization rules only applied to companies in India with publicly-traded stock. Now they also apply to privately-held companies that are not considered small—which includes most of the subsidiaries in India owned by MNCs.
- Dematerialization of shares requires opening a so-called demat account at an authorized depository institution. Opening a demat account may involve some “burdensome” steps, including know-your-customer requirements, board resolutions and notarizing documents, according to attorney Shejal Verma.
- “It may take a few months to open a demat account and even to prepare an application of opening of the demat account; and the dematerialization process itself may take some time,” she wrote in an analysis last year.
- One NeuGroup member has been told that “without a demat account with equity ownership in this format, no transactions may be permitted between the shareholder and owned company, like borrowings or capital injections. Because this is a relatively new ask (as far as how broad the scope is) it seems many companies are forced to go down this road.”
Member question: “For India demat accounts, did you have to open an operating account as well? We are currently working on dematerializing the shares of our entities in India and are being told that to support this we need to open one demat and one operating account for each of the entities’ shareholders.
- “I would very much appreciate if you had any information you could share about how you are handling this process and whether you are required to maintain operating accounts in India for each of the shareholders in addition to the demat accounts.”
- In an email, the member explained that “the demat accounts are essentially brokerage accounts to hold the shares; the operating accounts would be for any financial transactions related to changes in the shareholding structure.”
Peer answer 1: “Ahh, another sufferer of having to open demat accounts in India! We have struggled with these, and to negotiate a custody agreement that would work for us. We have also had banks insist that we open an operating account with every demat account, because they want to see the cash that may be related to any activity going on with the holdings in the demat account.
- “But we have always pushed back. If they insist, ask them to show you the regulation requiring this. Very bureaucratic requirements, it’s not easy!”
- This member told NeuGroup Insights, “I believe local banks used to offer just a demat account, but these days it seems that banks are offering a broader custody account which would include the ability to hold demat holdings. This posed problems for us because a bank’s custody agreement may demand things that might make sense for holding marketable securities but don’t make sense when it comes to an equity ownership.
- “So our legal team had quite a challenge negotiating with the bank, and we ultimately had to escalate with our global relationship managers to arrive at a solution for a negotiated agreement. We don’t tend to take off-the-shelf agreements for any bank, and this one almost got derailed because the local bank was being intransigent.”
Peer answer 2: “We are just working through this process, so your question is very timely. We are working with our legal team, opening up a custodial account. So far, we do not see a need for an operational bank account, or at least that is what we are being told. As we learn more, I will be happy to share our pain points. Right now our pain point is trying not to take the lead on something that we believe belongs to legal.”
Peer answer 3: “The demat account is accompanied by a bank account. The demat is for the security and the bank account is for the monetary transfers associated with the security. When we dividend out, each dividend requires its own bank account that must be left open for seven years; so nothing surprises me in India on maintaining operating accounts as we have a lot.”
Peer answer 4: “We are currently doing the same. [There are ] similar KYC requirements for the demat account as the cash management account. We have a demat account for each shareholder, but only an operating account for resident entities.”
Peer answer 5: “I spoke to our India legal counsel. Our Indian entity is set up as a private limited company and therefore we were able to open a demat account only, no operating account.”
