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The Ministry of Corporate Affairs has taken significant steps to improve the ease of doing business, with the dematerialization of securities emerging as a pivotal initiative. Dematerialization involves converting physical securities into a digital format hence promoting the digital India initiative.

Originally it just targeted listed companies, this initiative has now been extended to include unlisted public companies and private companies, marking a substantial expansion.

In this article, we are going to understand the essential aspects of Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules 2014, which outlines the applicability of dematerialization provisions to private companies.

Background:

Initially limited to listed public companies, the dematerialization provisions expanded to unlisted public companies through the introduction of Rule 9A in October 2019. Subsequently, MCA’s notification on October 27, 2023, introduced Rule 9B, extending dematerialization requirements to private companies, excluding small companies. This article delves into the key aspects of Rule 9B, we will be highlighting its similarities and differences with Rule 9A which I decided to publish after practically understanding the issue, it will surely add value to your life.

Applicability:

Rule 9B applies to private companies that are not classified as small companies as of the financial year ending on or after March 31, 2023. Once applicable, it covers all securities issued by the private company, not limited to equity shares, including preference shares and non-convertible debentures.

Now when a company is classified as a small company?

A small company is provided under Section 2(85) of the Companies Act, 2013. The Companies Act, 2013 as amended from time to time defines a small company as a company that is not a public company and has: A paid-up share capital equal to or below Rs. 4 crore or such a higher amount specified not exceeding more than Rs. 10 crores which is exempt from Dematerialization of securities as per Rule 9B of act

Applicability to Wholly Owned Subsidiaries:

Rule 9B exempts only government-owned private companies from demat requirements, contrasting with Rule 9A, which exempts wholly owned subsidiaries of public companies. As a result, wholly owned subsidiaries of private companies are currently not exempt from demat requirements.

Compliance Due Dates:

The compliance with Rule 9B is effective from October 27, 2023. The timeline for compliance is set at 18 months from the end of the financial year, with distinctions based on whether the company plans to issue fresh securities within that period.

(a) In Case of No Fresh Issue: Private companies not planning any fresh issue within 18 months must facilitate demat within the stipulated timeframe from the financial year’s end.

(b) In Case of Proposed Fresh Issue Within 18 Months: If a private company intends to issue securities within the 18-month period, demat facilitation must precede the offer, even if done before the 18-month deadline.

Demat Compliance with respect to Promoters:

For promoters, directors, and key managerial personnel, demat compliance is more stringent. Before any fresh issue or buyback, their securities must be dematerialized, irrespective of the 18-month timeline.

Demat Compliance with Respect to Non-Promoter Members:

Non-promoter shareholders are required only to facilitate demat by obtaining ISIN. Members can demat at their discretion, with no specified timeline, as long as it precedes any transfer or subscription to a fresh issue.

Procedure for Facilitating Demat/Obtaining ISIN:

The first step in compliance is obtaining ISIN. This involves selecting an RTA and depository, passing a board resolution, and entering into a tripartite agreement. The company must then apply for ISIN, inform members upon receiving it, and proceed with dematerialization.

Conclusion:

Dematerialization, although new for private companies, is a proven concept in the public domain.

Despite initial challenges, India is slowly moving to digital India, which is clearly depicted by the move towards digital securities which is aligned with the broader industry trend of eliminating physical holdings.

This transition is expected to bring efficiency, cost savings, and enhanced ease of handling securities for all parties involved.

Do comment with your views below

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Author Bio

CA Aman Rajput, Practicing Chartered Accountant Contact me at 8209604735 Email ID aman.rajput @ mail.ca.in Area of practice:- Income tax, Audit, Company/LLP Incorporation or closure, Business consultancy, cost management, Financing, Startups, MSME, Finance, Virtual CFO, GST and forensics a View Full Profile

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One Comment

  1. Muzaffar says:

    (b) In Case of Proposed Fresh Issue Within 18 Months: If a private company intends to issue securities within the 18-month period, demat facilitation must precede the offer, even if done before the 18-month deadline.

    This is not said anywhere in the rule. pl recheck.

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