Taxmann's Analysis | Dematerialization Now Mandatory for Private Companies

Unveiling MCA’s Game-Changer: Dematerialization now mandatory for private companies (except small companies)

Unveiling MCA’s Game-Changer: Dematerialization now mandatory for private companies (except small companies)

Contents 1.

Mandatory issue of securities in dematerialised form by private companies – Rule 9B 1.1.

2.

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Dematerialization of promoters/directors/KMP holdings before making offer for buyback of securities

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1.2. Mandatory dematerialization for security holders intending to transfer securities after 18 Months of closure of FY

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1.3. Mandatory dematerialisation for security holders subscribing to securities via private placement/bonus shares/right offer

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1.4. Private Co’s Responsibilities w.r.t depositories and registrars to an issue and share transfer agent

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1.5. Compliance with filing of Form PAS-6 and reporting of capital discrepancies to depositories

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Compliances w.r.t share warrants issued by a public company prior to commencement of Companies Act, 2013

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2.1. Case where bearer of share warrant fails to surrender warrants within 6 months

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Unveiling MCA’s Game-Changer: Dematerialization now mandatory for private companies (except small companies)

Background Earlier, on September 10, 2018, the Ministry of Corporate Affairs (MCA) notified the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 20181. As per the amended norms, a new rule 9A has been added to the existing rules. The new rule stipulates that every unlisted public company must issue securities only in dematerialised form and facilitate the dematerialisation of all its existing securities in accordance with the provisions of the Depositories Act, 1996 and the regulations made thereunder.

Now, the MCA vide notification no. GSR 802(E) dated October 27, 2023 notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. As per the amended norms, every private company except a small company must issue the securities only in dematerialised form within 18 months from the closure of the FY i.e. March 31, 2023. Further, the company must facilitate the dematerialisation of all its securities in accordance with the provisions of the Depositories Act. The amended rules are effective from 27.10.2023.

1.

Notification no. GSR 853(E); Dated: 10-09-2018

Unveiling MCA’s Game-Changer: Dematerialization now mandatory for private companies (except small companies)

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1. Mandatory issue of securities in dematerialised form by private companies – Rule 9B A new Rule 9B has been inserted to the Companies (Prospectus and Allotment of Securities) Rules, 2014, which mandates that private companies that are not small companies as on the last day of financial year ending on or after March 31, 2023 are required to issue securities in dematerialised form only, within 18 months from the closure of the said FY i.e. by 30.09.2024.

These provisions shall not apply to a Government company.

1.1. Dematerialization of promoters/directors/KMP holdings before making offer for buyback of securities Every private company making an offer for the issuance of any securities, buyback of securities or issuance of bonus shares or rights offer after the specified date, must ensure that the entire holding of securities of its promoters, directors, and KMP has been dematerialized before making such an offer.

1.2. Mandatory dematerialization for security holders intending to transfer securities after 18 Months of closure of FY Every holder of securities of the private company that intends to transfer securities on or after 18 months of the closure of FY must get such securities dematerialized before such transfer.

1.3. Mandatory dematerialisation for security holders subscribing to securities via private placement/bonus shares/right offer Every holder of securities of the private company that subscribes to any securities of the concerned private company whether by way of private placement or bonus shares or rights offer on or after 18 months from closure of FY, must ensure that all his securities are held in dematerialized form before making such subscription.

1.4. Private Co’s Responsibilities w.r.t depositories and registrars to an issue and share transfer agent Every private company must ensure that it makes timely payment of fees to the depository and registrar to an issue and share transfer agent in accordance with the agreement executed between the parties. Further, it maintains a security deposit, at all times, of not less than two years’ fees with the depository and registrar to an issue and share transfer agent, in such form as may be agreed between the parties.

1.5. Compliance with filing of Form PAS-6 and reporting of capital discrepancies to depositories A private company is required to submit Form PAS-6 to the Registrar with such fee as provided in Companies (Registration Offices and Fees) Rules, 2014 within 60 days from the conclusion of each half-year duly certified by a CS in practice or CA in practice. Further, the company must immediately bring to the notice of the depositories any differences observed in its issued capital and the capital held in dematerialized form.

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Unveiling MCA’s Game-Changer: Dematerialization now mandatory for private companies (except small companies)

Impact of this amendment – The MCA has taken this step as a measure for further enhancing transparency, investor protection and governance in the corporate sector. The major benefits of dematerialization of securities will now be available to private companies including the elimination of risks associated with physical certificates such as loss, theft etc, ease in transfer of securities, exemption from payment of stamp duty on transfer and improvement in the corporate governance system by increasing transparency and preventing malpractices.

Further, any grievances arising out of the dematerialization of securities will be handled by the IEPF Authority. This measure is expected to streamline and simplify the resolution of grievances related to dematerialized securities, thereby improving investor confidence in the overall process.

2. Compliances w.r.t share warrants issued by a public company prior to commencement of Companies Act, 2013 A new sub-rule has been inserted to the existing rule 9 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. As per the newly inserted sub-rule, every public company that had issued share warrants prior to the commencement of the Companies Act, 2013 and the same has not yet been converted into shares, is required to complete the following compliances – (a) Inform the ROC about the details of outstanding warrants within a period of 3 months of this notification in Form PAS-7. (b) Require the bearers of share warrants to surrender warrants to the company within a period of 6 months of the notification and get the shares dematerialized in their account.

The company must place a notice for the bearers of share warrants in Form PAS-8 on the website of the company.

2.1. Case where bearer of share warrant fails to surrender warrants within 6 months In case, any bearer of the share warrant fails to surrender the share warrants within the specified period of 6 months, then the company must convert such share warrants into dematerialized form and transfer the same to the Investor Education and Protection Fund (IEPF) established u/s 125 of the Companies Act.

Impact of this amendment – The newly inserted sub-rule enhances regulatory transparency by ensuring the reporting of outstanding warrants, streamlines the conversion of warrants into dematerialized shares and promotes corporate governance. It also creates a clear timeline for companies and bearers of share warrants to adhere to, reducing the risks associated with unconverted physical certificates.

Overall, this seeks to promote the modernization of corporate practices and the enhancement of governance within the corporate sector.

Unveiling MCA’s Game-Changer: Dematerialization now mandatory for private companies (except small companies)

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Conclusion Previously, unlisted public companies were obligated to issue securities in a dematerialised mode. Now, these dematerialization provisions have been extended to include private companies as well (except small companies). This extension of the requirement for private companies to issue securities in dematerialized mode, aligning with unlisted public companies, represents a positive step towards enhancing transparency and efficiency in the securities market, benefitting both companies and investors.

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Unveiling MCA’s Game-Changer: Dematerialization now mandatory for private companies (except small companies)

Our Associations

Income-tax Department

Indian Institute of Banking & Finance

Income-tax Appellate Tribunal

National Institute of Securities Markets An Education Initiative of SEBI

Unveiling MCA’s Game-Changer: Dematerialization now mandatory for private companies (except small companies)

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