Introduction: In a significant move towards modernization and digitization, the Ministry of Corporate Affairs, Government of India, has mandated the dematerialization of shares for private limited companies under the Indian Companies Act, 2013. This move aligns with the existing practice for public limited companies and aims to bring uniformity in the issuance and transfer of securities. Effective from October 27, 2023, private limited companies, excluding small companies, are required to issue and convert all existing securities into dematerialized form by September 30, 2024.
Applicability: The demat of shares requirement applies to all private limited companies in India, excluding small companies. A small company, as defined by the Companies Act, 2013, is one with a paid-up share capital of up to ₹4 Crores or a turnover of up to ₹40 crores as of March 31, 2023. If a private company exceeds these thresholds, it falls under the category of a non-small company and is subject to the dematerialization requirement.
Exceptions to Small Company Criteria:
Certain entities, irrespective of their paid-up capital or turnover, are categorized as non-small companies and must comply with the demat of shares directive. These include:
(A) A holding company or a subsidiary company.
(B) A company registered under section 8.
(C) A company or body corporate governed by any special Act.
Consequently, the dematerialization of shares is applicable to these entities, emphasizing the government’s commitment to standardizing procedures across various types of companies.
Importance of Dematerialization: Dematerialization is the process of converting physical securities, such as share certificates, into electronic form. With this mandate, private limited companies are required to issue, transfer, and hold securities exclusively in dematerialized form. This move aims to streamline the trading and ownership of securities, making the process more efficient and secure.
Deadline for Compliance: Private limited companies falling under the non-small category have until September 30, 2024, to ensure the dematerialization of their shares. This deadline provides companies with ample time to transition and adapt to the new digital format for their securities.
Conclusion: The introduction of mandatory dematerialization for private limited companies represents a significant step towards fostering transparency, efficiency, and standardization in the Indian corporate sector. Companies falling under the non-small category must prioritize the conversion of their existing securities into dematerialized form before the September 30, 2024 deadline. Any queries or concerns regarding the demat of shares and the issuance of ISIN (International Securities Identification Number) should be promptly addressed to ensure a smooth and compliant transition. This move not only aligns with global best practices but also reflects the Indian government’s commitment to embracing technological advancements in the corporate landscape.
Relevant link for MCA notification: https://taxguru.in/company-law/companies-prospectus-allotment-securities-second-amendment-rules-2023.html
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