Dematerialisation of shares of unlisted companies

Dematerialisation:- dematerialisation is the process converting physical shares into an electronic form. Shares once converted into dematerialised form are held in demate form.

Actual stock certificates are slowly being removed and retired from circulation in exchange for electronic recording.

The Ministry of Corporate Affairs (MCA) set October 2 as deadline for issuance and transfer of shares of all unlisted public companies.

Meaning of Unlisted Company:-As per related Sections of Companies Act 2013, a public company is formed by seven persons or more, while for a private company this number is two or more. If shares of such companies are not traded on a stock exchange, they are normally called unlisted companies.

Dematerilsation is for enhancing transparency, investor protection and governance in the corporate sector. The decision also comes at a time when the Ministry is clamping down on shell companies that are suspected of being conduits for illicit fund flows.

The Act provides for the government to mandate that as in the case of listed public companies other classes of public companies should also issue securities only in dematerialised form. Accordingly, the Ministry carried out a consultation with SEBI, depositories and other stakeholders to mandate, in a phased manner, public unlisted companies to issue securities in dematerialised form with a view to bringing in greater transparency in shareholding and share transactions, better acceptance of such shares as collateral and mitigation of disputes and risks associated with securities issued in paper form. SEBI had, in its response, stated that its depository regulatory framework enables such a prescription.

Benefits of Dematerialisation:- elimination of risks associated with physical certificates such as loss, theft, mutilation and fraud, would be a key benefit from the decision on having shares in demat form. Other benefits include, improving the corporate governance system by increasing transparency and preventing malpractices such as benami shareholding, back-dated issuance of shares, exemption from payment of stamp duty on transfer and ease in transfer, pledge, etc, of securities.

Grievances:-“Unlisted public companies are expected to facilitate the dematerialisation of their securities in coordination with depositories and share transfer agents,” the release said, while adding that grievances would be handled by the Investor Education and Protection Fund (IEPF) Authority. (THE HINDU Date 11^th Oct, 2018) 

Rule: Companies (Prospectus and allotment of securities) Third Amendment Rules, 2018.

They shall come into force on the 2^nd day of October, 2018 

In the Companies (Prospectus and Allotment of Securities) Rules, 2014, after rule 9, the following rule shall be inserted, namely:-

“Rule 9A Issue of securities in dematerialised form by unlisted company:-

1. Issue of Security in Dematerialised form by Unlisted Public Company:- Every Unlisted Public Company shall issue the security only in dematerialised form and facilitate demateriation of all its existing securities in accordance with provisions of the Depositories Act, 1996 and regulations made there under.

(Analysis: i. If private Company is subsidiary of Public Company, then such private company considers as deemed public. Such Private Company shall have to comply these provisions. ii. These provison shall be applicable on existing securities and new issue also.) 

2. Dematerialisation of securities of Promoters, Directors and KMPs: Before making offer of securities or buy back or bonus or right offer, entire holding of securities of its promoters, directors and KMPs has been dematerilized in accordance with the Depository Act, 1996 and related regulations.

3. Every holder of securities of an unlisted public company i. who intends to transfer such securities on or after 2^nd October, 2018, shall get such securities dematerialised before the transfer; or ii. who subscribes to any securities of an unlisted public company (Whether by way of private placement or bonus shares or rights offer) on or after 2^nd October, 2018 shall ensure that all his existing securities are held in dematerialized form before such subscription.

(Analysis: Existing holder can not transfer any security untill it is dematerilised and If any holder wants to purchase security then he should ensure that all its existing securities are in demate form.)

4. Every unlisted public company shall facilitate dematerialisation of all its existing securities by making necessary application to a depository as defined in section 2 (1) (a) of the Depositories Act, 1996 and shall secure International Security Identification Number (ISIN) for each type of security and shall inform all its existing security holders about such facility.

5. Every unlisted public company shall ensure – i. Timely payment of fees to Depository and Registrar to an issue and share transfer agent. ii. Maintains security deposit, at times, of not less than 2 years’ fees with depostory and RTA. iii. Compalies with regulations or directions or guidelines or circulars, if any, issued SEBI.

6. DEFAULT IN PAYMENT OF FEE – No unlisted public company which has defaulted in sub-rule (5) shall make offer of any security or buyback its securities or issue any bonus or right shares till the payment to depository and RTA are made.

7. Except as provided in sub-rule (8), the provisions of depositories Act, 1996, the SEBI (DP) Regulaitions, 1996 and the SEBI (RTA) Regulations, 1993 shall apply mutatis mutandis to dematerialisation of securities of unlisted public companies.

8. Unlisted public company shall submit audit report as per regulation 55A of the SEBI (DP) Regulation, 1996 on a half-yearly basis to ROC.

9. The Grievances, if any, of security holders of unlisted public company under this rule shall be filed before the IEPF Authority.

10. IEPF Authority shall initiate any action against a depository or participant or RTA after prior consultation with the SEBI.

Note:- The Principal rules were published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i) vide notification number G.S.R. 251(E), dated the 31st March, 2014 and were subsequently amened vide number G.S.R. 424(E), dated the 30th June, 2014 and number G.S.R.430 (E), date the 7th May,2018 and number G.S.R. 752 (E), dated the 7th August, 2018.