Demat of Shares: ISIN for Non-Small Private Companies

Demat of Shares –If a Private Company Incorporated after 1st April 2023 and as non-small, then within how many days or month Company have to apply for ISIN for conversion of shares into Demat

Summary: The Ministry of Corporate Affairs (MCA) has issued a notification on 27th October 2023 and notified Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 which deals with dematerialization of shares for non-small private companies. While public companies have been mandated to keep their shares in demat form since 2018, the new rules, effective from 30th September 2024, require non-small private companies to dematerialize their existing securities. These companies must also ensure that any further issuance or transfer of securities occurs only in dematerialized form. The rules give non-small companies until 30th September 2024 to comply. However, there is no clear direction regarding newly incorporated non-small companies post-April 2023, leading to different interpretations. Some experts believe the provisions apply immediately upon the company’s classification as non-small, while others suggest compliance must be completed within 18 months of incorporation or the closure of the first financial year. Certain companies, such as Section 8 companies and small private limited companies, are exempt from this requirement.

The author will address a highly debated question among professionals and corporations regarding the dematerialization of shares for non-small private companies: “If a private company incorporated after April 1, 2023, is classified as non-small, within how many days or months must the company apply for an ISIN to convert its shares into dematerialized form?”

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. 02^nd 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 30^th 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.

But the Ministry is silent about the New Incorporated Companies.

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

 Situations when Newly Incorporated Company falls in Non Small Company Definition:

• Company Incorporated with Share Capital more than 4 Crore
• Company Incorporated as Subsidiary of Another Company
• Company Incorporated as Wholly owned Subsidiary of Another Company
• Company Incorporated as Holding of Another Company
• Company Incorporated as Section 8 Company

MOST IMPORTANT QUE:

1. If a Private Company Incorporated as Non-Small after 1^st 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. Law is silent about Newly Incorporated Companies. There is more than one school of thought regarding applicability of Demat of Shares of Newly Incoprorated Non-Small Private Limited Company.

First School of thought:

If a Company Incorporated Non-Small Company after 1^st 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 Incorporated non-small on 04^th October 2024 then the provisions of Demat shall be applicable on company w.e.f. 4^th October, 2024 itself.

Second School of thought:

If a Company Incorporated Non-Small Company after 1^st April 2023, then the provisions of Rule 9B shall be appliable on such Company within 18 months from the date of Incorporate of Company from Small to Non-Small. Therefore, Company will have 18 months for the applicability of provisions.

eg: If a Company Incorporated non-small on 04^th October 2024 then the provisions of Demat shall be applicable to the company w.e.f. 4^th April 2026 itself.

 Third School of thought:

If a Company Incorporated Non-Small Company after 1^st April 2023, then such Company will be required to comply with the provisions within 18 months from the closure of the first financial year of Company.

eg: If a Company Incorporated non-small on 04^th October 2024 then the provisions of Demat shall be applicable to the Company w.e.f. 30^th September 2026 itself.

Conclusion:

Until unless there is any clarity from the Ministry of Corporate Affairs all the school of thoughts seems correct.

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 csdiveshgoyal@gmail.com).