In a significant development for private companies in India, the Ministry of Corporate Affairs (MCA) issued a notification on October 29, 2023, amending the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. This amendment introduces a crucial change, making it mandatory for private companies, except small companies, to issue their shares in a dematerialized manner. This move aligns with the existing requirement for public companies and aims to enhance transparency and efficiency in the securities market. In this article, we delve into the details of this new rule, including who needs to comply and the specific provisions outlined by the Companies Act.
Compliance Requirement:
Private companies (excluding small companies) must adhere to the newly amended rule, which mandates the issuance of shares in a dematerialized form. The requirement extends to all private companies that fall outside the definition of a “small company” based on specific criteria, primarily related to paid-up share capital and turnover.
Defining Small Companies:
To determine whether a private company must comply with this new rule, the Companies Act provides clear definitions. A “private company” is one that restricts the right to transfer its shares, limits its members to two hundred, and prohibits public invitations to subscribe for its securities. In contrast, a “small company” is defined by:
- A paid-up share capital not exceeding four crore rupees (or a prescribed higher amount, but not more than ten crore rupees).
- A turnover that, according to the profit and loss account of the immediately preceding financial year, does not exceed forty crore rupees (or a prescribed higher amount, not exceeding one hundred crore rupees).
The exceptions to this definition encompass holding companies, subsidiary companies, those registered under section 8, or companies governed by special acts.
Compliance Threshold:
In simple terms, every private company with a paid-up share capital of four crore rupees or more and a turnover of forty crore rupees or more must comply with the new rule. Small companies, as defined by the Companies Act, are exempt from this requirement.
Compliance Timeline:
Private companies subject to the new rule are given a timeline to facilitate dematerialization of securities. The rule stipulates that within eighteen months of the closure of the financial year ending on March 31, 2023, private companies must ensure that all their securities are dematerialized in accordance with the provisions of the Depositories Act, 1996. This means that by September 30, 2024, these companies must complete the transition to dematerialized securities.
Compliance for Specific Transactions:
In addition to the general compliance timeline, private companies planning specific transactions must also ensure dematerialization of securities. These transactions include the buyback of securities, issuance of bonus shares, and rights offers. If such transactions occur after the compliance due date, the company must confirm that the holdings of securities by promoters, directors, and key managerial personnel have been dematerialized according to the Depositories Act, 1996.
Transfer of Shares:
Further emphasizing the transition to dematerialized securities, the rule requires that every holder of securities in these private companies, intending to transfer shares on or after the compliance due date, must first dematerialize those securities. Moreover, individuals subscribing to securities from the private company, whether through private placement, bonus shares, or rights offers after the compliance due date, must ensure that all their securities are held in dematerialized form.
Due Date for Compliance:
The due date for private companies to facilitate the dematerialization of securities or issue new securities in dematerialized form is eighteen months from the closure of the financial year ending on March 31, 2023. Therefore, the compliance deadline falls on September 30, 2024.
Conclusion
The recent amendment to the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, marks a significant step toward enhancing the efficiency and transparency of securities issuance and management for private companies in India. This new rule mandates that private companies, excluding small companies, transition to dematerialized securities within a specified timeframe. Compliance with the rule aligns with the existing requirement for public companies and underscores the commitment to robust corporate governance and investor protection. As private companies embark on the path to compliance, ensuring the dematerialization of securities and adherence to the Companies Act’s definitions and provisions will be of paramount importance. With the compliance deadline set for September 30, 2024, private companies must proactively initiate the necessary measures to meet this regulatory milestone, ultimately contributing to a more streamlined and transparent securities market landscape in India.
Author Bio
Hi,
Thanks for the detailed update on the new requirements for Pvt Ltd Cos. I require some clarification and would appreciate your views on the same.
1) The Share capital referred to above includes both Equity & Preference shares or only Equity Capital.
2) For attracting the above provisions, have both the conditions; i.e. requirement of 4 crs SC + 40 crs turnover have to be met.
3) Suppose if any Pvt Ltd Cos falls under the definition of Small Cos (as per above) and it intends to transfer its shares or issue bonus / rights shares, do also have to go for dematerialization of it’s Share capital or it is exempted due to its Small Co status.
Your views on the above will be of great help to further understand the changes for Pvt Ltd Cos. Thanks in advance.
Regards,
CA Amit Shah
Hello Amit,
Here are my responses to your queries. Do not hesitate to contact me in case of any further queries.
1.The referred Share capital, while considering the status of a Private company to be Small company or not, includes both Equity & Preference shares as there is no such clarification or exemption specifically provided for under the rule or separately by MCA. Further, the definition of Small Companies says “Paid up capital”, which is defined as below under Companies Act.
“Paid-up share capital” or “Share capital paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called”
Thus, the Share capital referred to in the article includes both Equity & Preference shares or only Equity Capital.
2.Yes, for attracting the provisions both the requirement of paid up share capital and turnover shall be met. As the company can be considered as a small company only when it meets both requirements of Paid-up capital and Turnover. Small Companies is defined as below under Companies Act.
“Small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed four crore rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed forty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
3.If any private company does fall under the definition of Small Company the applicable provisions shall not be applicable on such private companies. Thus, in case any Private company falls under the definition of Small Company and it intends to transfer its shares or issue bonus / rights shares, it does not have to go for dematerialization of its shares.