The Ministry of Corporate Affairs (MCA) has ushered in a transformative change with its notification on October 27, 2023, introducing mandatory dematerialization of securities for all private companies, excluding small companies. This move comes through the Companies (Prospectus & Allotment of Securities) Second Amendment Rules, 2023.
Applicability of Mandatory Dematerialization:
The provisions of Rule 9B within the aforementioned rules apply to all private companies, excluding small companies. The determination of whether a company qualifies as a small company is crucial. A company will not be considered small on the last day of the financial year ending on or after March 31, 2023, as per the audited financial statement of that financial year.
A “Small Company” is defined as a company, other than a public company, with a paid-up share capital not exceeding four crore rupees and a turnover not surpassing forty crore rupees. Certain entities, such as holding companies, subsidiary companies, those registered under section 8, and those governed by any special act, do not fall under the small company category.
This implies that all private companies, irrespective of being holding or subsidiary companies, are obligated to facilitate the dematerialization of their securities for the holders, regardless of their paid-up capital and turnover.
Timeline for Dematerialization – Due Date:
Private companies, excluding small companies, must facilitate the dematerialization of all securities within eighteen months from the closure of the financial year. For instance, if a company’s financial year concludes on March 31, 2023, it must complete the dematerialization process by September 30, 2024.
Importance of Dematerializing Securities for Private Companies:
The mandate for private companies to dematerialize their securities is not just a regulatory requirement but has significant implications for various corporate actions:
i. Restrictions on Corporate Actions: Private companies cannot make offers for the issuance of securities, buyback of securities, or the issuance of bonus shares and rights issues unless the securities of promoters, directors, and Key Management Personnel (KMP) are dematerialized.
ii. Limitations on Securities Transfer and Subscription: Individuals holding securities of a private company cannot transfer these securities or subscribe to additional securities through private placement, bonus shares, and rights issues unless the securities are held in dematerialized form before such transfer or subscription.
This regulatory shift emphasizes the importance of embracing dematerialization as a standard practice for private companies. It not only aligns with broader market trends but also enhances transparency and efficiency in securities transactions. Private companies need to proactively navigate this transition to ensure compliance and seamlessly conduct various corporate actions in the evolving regulatory landscape.
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