Compulsory Dematerialisation of Securities of unlisted Public Company

Today we have covered the most crucial topic for Unslisted Public Company, i.e COMPULSORY DE-MATERIALIZATION OF SECURITIES OF THE COMPANY.

Since there was an amendment in the LODR in relation to RESTRICTION ON TRANSFER OF SECURITIES IN PHYSICAL FORM by SEBI w.e.f 05.12.2018, subject to certain exemptions, it was seems that MCA shall also mandate on Companies to issue their shares in Demat Form only which shall come into force at the earliest.

Now here the MCA vide its notification dated 10th September 2018 has notified the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018. which shall be effective on 02.10.2018

1. Applicability of new provisions related to Compulsory Demat of Securities of Company

The amendment is applicable on Unlisted Public Companies.

A new rule i.e. Rule 9A has inserted into the existing Companies (Prospectus and Allotment of Securities) Rules, 2014.

(1) Every unlisted public company shall

(a) issue the securities only in dematerialised form; and

(b) facilitate dematerialisation of all its existing securities

as per Depository Act, 1996 and its Regulations.

2. Meaning of the Word ‘securities’

A word securities marked in the above rule which is more important to discuss

As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) which provides the following:

[h] “securities” include-

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities;

3. Holding Of Promoters, Directors, KMP In Demat Form Only

(2) Every Unlisted Public Companies making any offer for issue of:

• ANY SECURITIES or
• BUY BACK OF SECURITIES or
• ISSUE OF BONUS SHARES or
• RIGHTS OFFER

shall ensure that before making such an offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with provisions of the Depositories Act 1996 and regulations made there under.

4. Responsibilities of the Unlisted Public Company

i. Facilitate Dematerialisation Of All Its Existing Securities: Every unlisted public company shall facilitate dematerialisation of all its existing securities by making necessary application to a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996. and shall secure International Security Identification Number (ISIN) for each type of security.

ii. Creation Of ISIN: Creation of ISIN thorough any Depository viz NSDL / CDSL

iii. Intimation To Security Holders:Inform all its existing security holders about such facility.

iv. Payment Of Fees: Company shall ensure that it makes timely payment of fees (admission as well as annual) to the depository and registrar to an issue and share transfer agent in accordance with the agreement executed between the parties.

v. Maintenance Of Security Deposit:Company shall ensure that it maintain 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;

vi. Compliance Required:Company shall comply with the regulations or directions or guidelines or circulars, if any, issued by the Securities and Exchange Board or Depository from time to time with respect to dematerialisation of shares of unlisted public companies and matters incidental or related thereto.

vii. Penalty For Non-Compliance:If the Company has defaulted in relation to Point no. 4, 5, 6 as ,mentioned above, then it shall not make an offer of any securities or buyback its securities or issue any bonus or right shares till the payments to depositories or registrar to an issue and share transfer agent are made.

5. Other Compliances- Audit Report

Company shall be required to submit an audit report with ROC of its jurisdiction on a half yearly basis as provided under Regulation 55A of the SEBI (Depositories and Participants) Regulations, 1996.

6. Practical Aspects Involved On The Part Of Company

CREATION OF ISIN:

In order to comply with the provision of the Rule 9A, Company is required to approach to any of the Depository through Share Transfer Agent in order to activate their ISIN which normally takes 12-15 Days time period.

What is ISIN?

The International Securities Identification Number (ISIN) is a code that uniquely identifies a specific securities issue. The organization that allocates ISINs in any particular country is the country’s respective National Numbering Agency (NNA).

Elements of the ISIN Number:

An ISIN identifier code has 12 alphanumeric characters and is structured to include:

1. the country in which the issuing company is headquartered
2. the specific security identification number
3. a final character that acts as a security check to deter fraud or misuse

The first two digits are reserved for the security’s country of origin or head office of the issuing company. The second grouping, which is nine characters long, is reserved for the security’s unique identifying number. The final digit, known as a “check digit”, assures the code’s authenticity and lowers the frequency of errors or misuse.

The middle nine digits of the ISIN system number is administered by the local Country’s numbering agency, which is called the CUSIP Service Bureau in the United States.

This office was created to improve the numbering system for securities by developing a national standard for the financial industry. The CUSIP Service Bureau was first established in 1964 and continues to enforce the numbering system through a board of trustees

You may get the shares of your Company into Demat by creation of ISIN in simple and easy way.

7. List of documents required to be submitted by the Issuers at the time of joining NSDL

1. Letter of intent cum Master Creation Form
2. Certified true copies of Audited Annual Reports for last two years.
3. Certified true copy of Memorandum of Association / Articles of Association.
4. Net Worth certificate from a Chartered Accountant.
5. Undertaking from company in the enclosed format (for private limited companies).
6. Form PAS-3 ROC for all issues if any after the last balance sheet date. Book Value Certificate after the date of last allotment
7. Form SH-7 if there is any variation in face value of shares or reduction in capital after the last balance sheet date
8. If the company is already admitted in CDSL, the ISIN activation letter from CDSL to be submitted.
9. In case of unlisted company, NSDL is charging fee of Rs.30000 + GST for activation.

Hope the information will assist you in your Professional endeavours. In case of any query/ information, please do not hesitate to write back to us.