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Introduction: In a significant move towards modernizing financial practices, the Ministry of Corporate Affairs (MCA) has expanded the scope of dematerialisation norms to include private companies. This development comes through the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. While small companies are exempted from these regulations, other private companies are now mandated to issue securities exclusively in dematerialised form and facilitate the dematerialisation of existing securities. In this article, we will delve into the details of these new regulations, their applicability, compliance timelines, and their implications for private companies.

Background: On September 10, 2018, the Ministry of Corporate Affairs (MCA) promulgated the Companies (Prospectus and Allotment of Securities) (Third Amendment) Rules, 2018 through its notification, thereby introducing Rule 9A. This rule, effective from October 2, 2018, mandated the issuance of securities in dematerialised form by Unlisted Public Companies, albeit with certain exemptions. Rule 9A stipulated that every unlisted public company shall issue securities exclusively in demat form and ensure the dematerialisation of all its existing securities.

Now, the MCA has expanded this mandate to encompass private companies as well, via the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, dated 27th October 2023, albeit exempting small companies from this requirement. This recent amendment serves to broaden the initial mandate, establishing a robust framework for private companies to transition towards a dematerialised securities regime, thereby aligning with contemporary financial practices.

Applicability:

Private companies, excluding small companies, are mandated to:

– Issue securities solely in dematerialised form.

– Facilitate the dematerialisation of all its securities.

This is to be done in alignment with the provisions of the Depositories Act, 1996, and the regulations therein.

Definition of Small Company:

Small company means a company, other than a public company

(i) Whose paid up capital does not exceed Rupees 4 ( four) Crores and turnover does not exceed Rupees 40 (forty) Crores, and

(ii) Which is not a

  • holding company
  • Subsidiary company
  • Section 8 company, or
  • company governed by any special Act.

Note:

1. An Indian company possessing one or more overseas subsidiaries is classified as a holding company, in adherence to the definition outlined in Section 2(46).

2. An Indian company that operates as a subsidiary of a foreign entity is recognized as a subsidiary company, pursuant to the delineation provided in Section 2(87).

Compliance Timeline (due date):

Private companies, which are not categorized as small companies as of the last day of a financial year ending on or after 31st March, 2023 as per audited financial statements, are to comply with the dematerialisation requirements within 18 (eighteen) months following the closure of that financial year.

For example, if a private company not qualify as a small company based on its audited financial statements as of 31/03/23, it is required to adhere to the dematerialisation stipulations by 30/09/2024. Similarly, if the company falls outside the small company classification as of 31/03/24, it must comply with the dematerialisation requisites by 30/09/2025.

Obligation of the promoters, directors, and KMPs:

Any private company to which the Rule 9B applies, post the due date of compliance, intending to make an offer for issue, buyback of securities, issue of bonus shares, or rights offer, must ensure the entire holding of securities of its promoters, directors, and key managerial personnel is dematerialised before making such offer.

Compliance by Holder of Securities:

Holders of securities of the concerned private company should:

– Dematerialise such securities before transferring them post the company’s compliance due date.

– Ensure all securities are held in dematerialised form before subscribing to any securities of the company post the due datecompliance, whether via private placement, bonus shares, or rights offer. 

Obligations of private company which is falling under the demat criteria:

  • Dematerialisation Facilitation: Such Private companies should facilitate dematerialisation by applying to a depository and securing an International Security Identification Number (ISIN) for each type of security.
  •  Information to all existing security holders: Such private Company shall inform all its existing security holders about such facility  (and guide them the further course of action at their end and consequences of inaction).
  • Timely Fee Payment: Companies must ensure timely payment of admission and annual fees to depositories and share transfer agents.
  • Security Deposit Maintenance: A security deposit of at least two years’ fees must be maintained with depositories and share transfer agents.
  • Regulatory Compliance: Compliance with all regulations, directions, guidelines, or circulars issued by the Securities and Exchange Board or Depository concerning dematerialisation is mandatory.
  • Restrictions on Defaulters: Companies defaulting on fee payments are barred from offering or buying back securities, or issuing bonus or right shares until outstanding payments are settled.
  • Regulatory Application: Provisions of the Depositories Act, 1996, SEBI (Depositories and Participants) Regulations, 2018, and SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 apply to the dematerialisation of securities by suchprivate companies.
  • Reporting Requirements: Submission of Form PAS-6 to the Registrar within 60 (sixty) days from the conclusion of each half year is required i.e., Half Year ending 31st March and 30th September, certified by a practicing company secretary /  chartered accountant.
  • Discrepancy Reporting: Companies should promptly report any discrepancies observed between issued capital and capital held in dematerialised form to the depositories.

Grievance Redressal:

Security holders can file grievances with the Investor Education and Protection Fund Authority (IEPFA).The IEPFA may initiate actions against a depository or participant or registrar to an issue and share transfer agent upon prior consultation with SEBI.

Exemptions:

Pursuant to Rule 9A(11)(c ), a wholly owned subsidiary which is an unlisted public company is exempted from the applicability of demat requirement. However, no such exemption is provided under Rule 9B for a wholly owned subsidiary which is a private company. The newly incorporated Rule 9B does not seem to provide specific exemption for One Person Companies (OPCs). However, exemption has been delineated for Government Companies.

Link: Companies (Prospectus & Allotment of Securities) Second Amendment Rules, 2023

Conclusion

The expansion of dematerialisation norms to private companies is a significant step towards aligning with contemporary financial practices. Private companies must be diligent in their compliance with these regulations, ensuring a smooth transition to a dematerialised securities regime. Additionally, it is crucial for all stakeholders, including promoters, directors, key personnel, and security holders, to be aware of their respective obligations to avoid any compliance-related issues. These changes mark a milestone in the evolution of corporate compliance in India, and private companies must embrace them to stay in line with regulatory requirements. Readers are advised to conduct their own due diligence before taking any action based on the content provided. Stay informed and compliant in this evolving financial landscape.

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Disclaimer: The perspectives presented above are solely those of the author. Readers are encouraged to conduct their own due diligence prior to taking any action based on the content provided.

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