Analysis of Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023

Analysis of Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023

A. Introduction

The Companies (Prospectus & Allotment of Securities) Second Amendment Rules, 2023 (the “Rules”) came into force on 28^th October 2023 (date of publication in the Official gazette). The Rules introduces two new requirements:

1. Requirement for Public Companies to file details of pending share warrants and require bearers of such warrants to surrender them.

Rule 9(2) of the Rules requires every Public Company which issued share warrants prior to the commencement of the Companies Act, 2013 (the “Act”) and not converted into shares shall:

• Inform the Registrar (ROC) about the details of such share warrants in Form PAS-7 within 3 months of the commencement of the Rules; and

• Require the bearers of the share warrants to surrender such warrants to the company and get the shares dematerialised in their account within 6 months of the commencement of the Rules.

To do this, the Company must place a notice for the bearers of share warrants in Form PAS-8 on the website of the Company, if any, and publish the same in a vernacular language newspaper and an English language newspaper in the district and state where the registered office of the Company is situated.

• If any bearer of a share warrant does not surrender the share warrant within a period of 6 months, the Company must convert the share warrant into dematerialised form and transfer it to the Investor Education and Protection Fund (IEPF) established under section 125 of the Companies Act, 2013.

2. Requirement for Private Companies to issue securities in dematerialised form and facilitate dematerialisation of all their securities

Rule 9B of the Rules requires every Private Company, other than a Small Company*, to:

• Issue securities only in dematerialised form; and

• Facilitate dematerialisation of all its securities.

This must be done within 18 months of the closure of the financial year ending on or after March 31, 2023, if the Private Company is not a small company as per audited financial statements for such financial year.

*Small Company is a company which is not a Public Company and has a paid-up share capital equal to or below Rs 4 crore and turnover equal to or below Rs 40 crore and it does not include a Holding or Subsidiary Company, Section 8 Company, Body Corporate or Company governed by Special Act.

Every Private Company to which Rule 9B applies and which makes any offer for issue of any securities, buyback of securities, issue of bonus shares, or rights offer after the date when it is required to comply with Rule 9B must ensure that the entire holding of securities of its promoters, directors, and key managerial personnel has been dematerialised before making such offer.

Every holder of securities of a Private Company to which Rule 9B applies must:

• Get such securities dematerialised before transferring them on or after the date when the Company is required to comply with Rule 9B; or

• Ensure that all his securities are held in dematerialised form before subscribing to any securities of the concerned Private Company whether by way of private placement, bonus shares, or rights offer on or after the date when the company is required to comply with Rule 9B.

The provisions of sub-rules (4) to (10) of Rule 9A (which relate to the dematerialisation of securities issued by public companies) shall apply mutatis mutandis to the dematerialisation of securities under Rule 9B.

Important Note: The Rules do not apply to Government companies.

B. Actionable (Compliances)

1. For Private Companies other than Small Company: Every Private Company other than Small Company as on 31^st March 2023

• shall facilitate dematerialisation of all existing securities and shall secure ISIN for such securities, by 30^th September 2024 (18 months from 31^st March 2023). 

Note: the word here being used is securities and not shares therefore each and every kind of “securities” shall be dematerialised.

• shall not issue securities, or buyback its securities unless the entire holding of its promoters, directors, and key managerial personnel has been dematerialised,

• Such Companies shall file Form PAS-6 to ROC within 60 days from the conclusion of every half year i.e., 6 months.

Period	Due Date
April to September	29th November
October to March	30th May

Note: Every securityholder shall not transfer his/her securities or subscribe to any security issued by a Private Company which needs to comply with the provision of Rule 9B unless his/her securities are dematerialised.

2. For every Public Companies which has issued share warrants before 1^st April, 2014 and not converted into shares:

• shall file Form PAS-7 giving the details of such share warrants anytime on or before 27^th January 2024 (within 3 months of the commencement of the Rules),

• shall issue notice on its website if any, and in a vernacular language newspaper circulated in the district and English newspaper circulated in the state in which registered office of the Company is situated, in Form PAS-8, requiring the bearers of such share warrants to surrender such warrants for conversion into dematerialised shares,

• shall convert such share warrants into dematerialised shares anytime on or before 27^th April 2024 (within a period of 6 months from commencement of the Rules),

• the Company shall convert the share warrants not surrendered to it by the bearer for conversion into dematerialisation and transfer such shares to IEPF.

C. Impact 

• By way of this amendment, the Regulator encompasses Private Companies within the ambit of an additional compliance burden of ensuring mandatory dematerialization of its securities. 

• The addition of a stringent timeline imposes a responsibility on the part of both professionals and eligible companies to ensure the requirements are met, in letter and spirit. 

• Further, the amendment stresses the security holder’s awareness, mandating it for security holders to ensure that Private Companies covered under Rule 9B have undertaken dematerialization. 

Thus, it is understood that by way of such changes, the Ministry furthers its motive of promotion of transparency amongst both Private and Public Companies.