Demat of Shares Mandatory for Private Companies w.e.f 30th Sept 2024

Introduction:

The Ministry of Corporate Affairs (MCA) has taken another significant step towards transparency with the issuance of a notification dated 27th October 2023. This notification introduces new rules under the Companies (Prospectus & Allotment of Securities) Second Amendment Rules, 2023 making the dematerialization of shares mandatory for private companies.

The dematerialization of shares was already made mandatory for public companies starting on 2nd October 2018, and now it has been extended to private limited companies except Small Companies.

Provisions of the Companies Act, 2013:

The legal foundation for this regulation is found in Section 29 of Companies Act, 2013 and Rule 9 of Companies (Prospectus and Allotment of Securities) Rules, 2024

Applicable Criteria: These rules are applicable to private companies except Small Companies, with compliance required within 18 months of the fiscal year ending on 31st March 2023 i.e. by 30th September 2024.

Exemptions: Small companies and government companies are exempt from these regulations. Small companies are defined as those with a turnover not exceeding Rs. 40 Crores and paid-up capital not exceeding Rs. 4 Crores.

Legal Provision: The new Rule 9B, effective from 27th October 2023, mandates that every private company (excluding small companies) must issue securities only in dematerialized form and facilitate the dematerialization of all its securities.

Basis for Compliance: Private limited companies not meeting the criteria for small companies as of the last day of a financial year ending on or after 31st March 2023 must comply with the rule within 18 months from the close of that financial year, i.e., by 30th September 2024.

Due Date for Compliance: On or before 30th September 2024

Prohibition/Restriction on Further Issues in Physical Mode:

 Any offer for the issue of securities

 Buyback of securities

 Issuance of bonus shares

 Rights offer

 After the date when compliance with this rule is required, the company must ensure that all securities held by its promoters, directors, key managerial personnel have been dematerialized in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder before making such offers.

 Every holder of securities of the private company referred to in sub-rule (2) –

(a) who intends to transfer such securities on or after the date when the company is required to comply with this rule, must dematerialize such securities before the transfer; or

(b) who subscribes 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 this rule, must ensure that all their securities are held in dematerialized form before such subscription.

Compliance & Penal Provision:

1. Obtain ISIN As per Rule 9B, the company must provide an opportunity for its shareholders to convert their shares into demat, for which an application to obtain an ISIN with NSDL is required.

Even as per Rule 9B(5) and Rule 9A(4), every non-small private limited company must facilitate the dematerialization of all its existing securities by making the necessary application to a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996, and must secure an International Security Identification Number (ISIN) for each type of security and must inform all its existing security holders about such facility.

Penal Consequences: Since no specific penalty/fine is prescribed under rule 9B, penal provisions as per Section 450 of the Companies Act shall apply, which state, “The company and every officer of the company who is in default, or such other person, shall be punishable with a fine that may extend to ten thousand rupees, and where the contravention is continuing, with a further fine that may extend to one thousand rupees for every day after the first during which the contravention continues.

2. Filing of Half-Yearly Returns As per Rule 9A(8), every non-small private limited company governed by this rule must submit Form PAS-6 to the Registrar with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014, within 60 days from the conclusion of each half-year, duly certified by a company secretary in practice or chartered accountant in practice.

Penal Consequences: Since no specific penalty/fine is prescribed under rule 9B, penal provisions as per Section 450 of the Companies Act shall apply, which state, “The company and every officer of the company who is in default, or such other person, shall be punishable with a fine that may extend to ten thousand rupees, and where the contravention is continuing, with a further fine that may extend to one thousand rupees for every day after the first during which the contravention continues.

Conclusion:

The new MCA notification, effective from 30th September 2024, mandates the dematerialization of shares for private companies, ensuring transparency and compliance with the changing financial landscape. While this shift may pose challenges for large private companies, understanding and adhering to the rules is crucial to avoid penalties and ensure a smooth transition to dematerialized securities. For further information or assistance, do not hesitate to contact us.

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