Summary: In October 2023, the Ministry of Corporate Affairs (MCA) introduced Rule 9B to the Companies (Prospectus and Allotment of Securities) Rules 2014, mandating that all private companies, excluding small and government entities, must dematerialise their shares. This new regulation, effective from September 30, 2024, requires companies to issue securities in dematerialised form and facilitate the dematerialisation of all their securities in compliance with the Depositories Act, 1996. The rule stipulates that securities held by promoters, directors, and key managerial personnel must be dematerialised before issuing new securities, buying back shares, or offering bonuses or rights. Shareholders must also dematerialise their securities before transferring or subscribing to new ones. An International Securities Identification Number (ISIN) must be obtained from a Depository Participant for each type of security to facilitate electronic trading. Failure to comply will result in severe penalties, including the inability to issue or transfer securities and monetary fines of up to INR 2,00,000 for companies and INR 50,000 for officers in default. The new rule ensures a more streamlined and secure process for managing securities and prevents issues related to physical share certificates.
An outlook of MCA Notification with respect to Private Companies other than small companies
In October of 2023, the Ministry of Corporate Affairs (MCA) amended the Companies (Prospectus and Allotment of Securities) Rules 2014 (PAS Rules) via the Companies (Prospectus and Allotment of Securities) Second Amendment Rules 2023 (PAS Amendment Rules) by adding rule 9B.
This new rule mandates dematerialisation for all private companies, excluding small and government companies.
In India, there are two depositories registered with SEBI:
- NSDL (National Securities Depository Ltd.)
- CDSL (Central Depository Services (India) Ltd.)
Prior to this notification the Ministry of Corporate Affairs (MCAs) Rule 9B, dematerialisation of shares was optional for private companies. It was mandated only for publicly traded companies and some large private companies.
Rule 9B discusses the issue of securities in dematerialised form by private companies and states that:
1. Every private company, other than a small company, shall
2. Issue the securities only in dematerialised form and
3. Facilitate dematerialisation of all its securities per provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder.
4. If a private company isn’t considered small based on its financial records at the end of a financial year ending after March 31, 2023, it must follow these rules within 18 months after the end of that financial year. i.e., 30th September 2024.
5. Any private company as specified above, when making offers for issuing securities, buying back securities, issuing bonus shares, or offering rights after it needs to follow this rule, must ensure that all securities held by its promoters, directors, and key managerial personnel have been dematerialised as per the rules of the Depositories Act, 1996 (22 of 1996), and related regulations before making such offers.
6. Every holder of securities of the private company referred to in sub-rule (2),-
7. Planning to transfer these securities should dematerialise them before the transfer.
8. Similarly, anyone subscribing to securities of the private company through private placement, bonus shares, or rights offered after this rule applies to the company must make sure their securities are dematerialised before subscribing.
International Securities Identification Number (ISIN) is mandatory for private companies that wish to dematerialize their securities. The ISIN serves as a unique identifier for the securities and is required to facilitate the electronic trading and settlement of shares in the dematerialized form.
ISIN required to be obtained from Depository Participant maintained through RTA on or before 30th September 2024 for each type of securities.
Therefore, shareholders of such private limited companies and the company shall not be able to issue and transfer its securities in physical form.
Consequences and Penalties for Non-Compliance
it’s important to note that the general penalties outlined in Section 450 of the Companies Act read with section 29 of Companies Act:
The company will not be able to issue or allot any securities including bonus shares in any form and buyback of shares/securities.
- Any shareholder who has not dematerialised their holdings will be unable to sell their shares or subscribe to additional shares.
- The company faces monetary penalties of INR 10,000 plus INR 1,000 for each day the violation continues, with a maximum of INR 200,000.
- Every officer of the company in default also faces the same penalties, with a maximum of INR 50,000.
Also Read:
Dematerialisation of securities of Private Companies
Mandatory Demat of Shares of Private Limited Company
Dematerialisation of Securities by Private Limited Companies
Dematerialization of Shares for Private Limited Companies in India
Dematerialization of shares: Mandatory for Private Limited Companies
Dematerialisation of Securities in Private Companies: Rules & Benefits
Demat of Shares Mandatory for Private Companies w.e.f 30th Sept 2024
FAQs on Dematerialization of Shares
How Private Companies can dematerialise their shares
Dematerialization of Securities: Rules for Private & Unlisted Public Companies
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