The Ministry of Corporate Affairs (MCA) has mandated that Non-Small Private Companies must dematerialize their shares. The provisions, effective from October 2023, state that these companies must apply for ISIN and convert their shares into Demat within 18 months from March 31, 2023, i.e., by September 30, 2024. However, if a company becomes non-small after April 1, 2023, there is uncertainty about the timeline for compliance. There are different interpretations regarding the applicability of these provisions: one view suggests immediate application upon becoming non-small; another suggests 18 months from the change in status, while a third proposes 18 months from the close of the financial year. The MCA has not clarified this, leading to differing opinions. Certain entities like Section 8 companies, Nidhi companies, and small private companies are exempt from these requirements. The provisions aim to enhance transparency and corporate governance but have caused confusion in interpretation.
Demat of Shares: If a Private Company becomes non-small after 1st April 2023, then within how many days or month Company have to apply for ISIN for conversion of shares into Demat ?
MCA Notification Dated: 27.10.2023.
(04th December 2024)
SHORT SUMMARY:
The author will cover a very controversial question amongst the professionals and corporations in relation to the Demat of Shares of Non-Small Private Company. The “If a Private Company becomes non-small after 1st April 2023, then within how many days or month Company have to apply for ISIN for conversion of shares into Demat” in this column.
The MCA has issued a Notification. Dated: October 27th, 2023 -Subject: Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023.
As per provisions of Companies Act, 2013 MCA has already made it mandatory for Public Companies to keep and transact their shares in Demat w.e.f. 02nd October 2018. That time it was not mandatory for Section 8 Private Companies to Demat their Shares.
The Ministry of Corporate Affairs in its drive to enhance transparency, investor protection and corporate governance, has notified Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 effective from 30th September 2024.
In accordance with the said rules, All Non-Small Companies need to dematerialize their existing securities and ensure that further issue of securities and transfers are only in dematerialized form.
MCA has given 18 months’ time to Non-Small Company w.e.f. 31 March 2023 to 30 September 2024 for compliance of provision of these rules.
Provisions of Companies Act, 2013:
- Section 29 of Companies Act, 2013
- Rule 9B of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023
- Form PAS 6
Discussion on the Question:
1. Que: What if the Company is a Small Company as on 31st March 2023 and continue as Small Company thereafter. Whether such a Company required to apply ISIN and convert their shares into Demat?
Small Companies are exempt from the provisions of Rule 9B. There is no time for small Company to Convert their share into Demat. However, if a Small Company sue motto convert their shares into Demat, there is no restrictions on the same.
2 What if the Company is a Non-Small Company as on 31st March 2023. Whether such a Company required to apply ISIN and convert their shares into Demat?
As per provisions of Rule 9B, a Company which is non-Small as on 31st March 2023 need to apply for ISIN within 18 months i.e. 30th September 2024. If Company fails to do so, they are liable for penalties for such non-compliance.
3. What if the Company is a Non-Small Company as on 31st March 2023 and become small Company before 30th September 2024. Whether such a Company required to apply ISIN and convert their shares into Demat?
As per provisions of Rule 9B, the due date to check status of Small and Non-Small is 31st March 2023. If a Company is Non-Small Company as on 31 March 2023 and become small thereafter, still the provisions of Demat shall be applicable on such Company. There is no exemption due to change in status of Company
MOST IMPORTANT QUE:
4. If a Private Company becomes Non-Small after 1st April 2023, then within how many days or month Company must apply for ISIN for conversion of shares into Demat?
This is a very important question, many time professionals have asked this question to me on many social media platforms from throughout the country and in physical sessions.
The main reason behind the question is that language of law is not clear in law. There is more than one school of thought regarding applicability of Demat of Shares of Non-Small Private Limited Company.
First School of thought:
If a Company becomes a Non-Small Company after 1st April 2023, then the provisions of Rule 9B shall be applicable on an immediate basis. Such a Company must apply for ISIN and demat of share on an immediate basis.
Such Company shall not be able to transfer of shares, allot shares in physical from the date of change of status of Company from Small to Non-Small.
eg: If a Company becomes non-small on 04th October 2024 then the provisions of Demat shall be applicable on company w.e.f. 4th October, 2024 itself.
Second School of thought:
If a Company becomes a Non-Small Company after 1st April 2023, then the provisions of Rule 9B shall be applicable on such Company within 18 months from the date of change of status of Company from Small to Non-Small. Therefore, Company will have 18 months for the applicability of provisions.
eg: If a Company becomes non-small on 04th October 2024 then the provisions of Demat shall be applicable to the company w.e.f. 4th April 2026 itself.
Third School of thought:
If a Company becomes a Non-Small Company after 1st April 2023, then such Company will be required to comply with the provisions within 18 months from the closure of the financial year.
eg: If a Company becomes non-small on 04th October 2024 then the provisions of Demat shall be applicable to the Company w.e.f. 30th September 2026 itself.
Conclusion:
Until unless there is any clarity from the Ministry of Corporate Affairs all the school of thoughts seems correct. However, as per my personal understanding, the third school of thought seems more convincing than the other two.
The provision of Demat of Securities shall not be applicable on the following Companies:
1. Section 8 Company, Limited by Guarantee
2. Nidhi Company
3. Government Company
4. Wholly Owned Subsidiary Company of Public Company
5. Small Private Limited Companies
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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]).
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