Dematerialisation of Securities: Meaning, Applicability, Compliance & Process

Summary: The Ministry of Corporate Affairs (MCA) has issued the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, mandating the dematerialization of securities for private companies and requiring public companies to issue dematerialized shares against share warrants. Previously, the dematerialization requirement was only applicable to public companies per the notification dated September 10, 2018. The amendment now extends to private companies, excluding small and government companies, to enhance transparency and corporate governance. Dematerialization involves converting physical shares and securities into digital form, facilitating smoother transactions. Securities to be dematerialized include shares, stocks, bonds, debentures, and similar marketable securities. Private companies must comply within 18 months from the end of the financial year ending on or after March 31, 2023. Security holders must ensure all transfers are in dematerialized form by September 30, 2024. Private companies must ensure that promoters, directors, and key managerial personnel hold their securities in dematerialized form before any new issuance, buyback, bonus, or rights offer. Additional compliance includes filing half-yearly returns in form PAS-6 with the Registrar of Companies. Companies must appoint a SEBI-registered Registrar and Transfer Agent (RTA), obtain an International Securities Identification Number (ISIN) for each type of share, open a demat account, and facilitate the conversion of existing shares. Non-compliance will result in penalties and restrictions on issuing or transferring securities.

DEMATERIALISATION OF SECURITIES: –

In Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, Ministry of corporate affairs has mandated the dematerialization of securities for private companies and issue of dematerialized shares against share warrants by all public companies.

In the previous notification dated 10^th September 2018, Ministry has mandated the dematerialization of securities for public companies now it has extended to private companies for better transparency and improved corporate governance.

Therefore, as of now both private (except small companies and government companies) and public companies shall issue and facilitate dematerialization of securities

Meaning of dematerialization: –

DEMATERIALISATION refers to the process of converting your physical shares and securities into digital or electronic form to smoothen and transparent the process of buying, selling, transferring etc of shares.

Now what exactly are securities which needs to be dematerialised: –

SECURTIES includes shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

i.e. equity shares, preference shares, debentures, warrants, etc. issued by companies needs to be dematerialised.

APPLICABILITY OF THE ABOVE AMENDMENT RULES: –

*Small companies – As per the section 2(85) of companies act 2013, small company means a company other than a public company whose paid up share capital does not exceed 4 crore and turnover of which does not exceed 40 crores (Both conditions should be fulfilled to come under the preview of small company.)

Following companies will not be considered as small companies: –

• a holding company or a subsidiary company
• Section 8 companies
• a company or body corporate governed by any special Act

**Government companies – As per the section 2(45) of Companies Act 2013, any company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company;

Compliance for private companies: –

– A private company (which is not a small company as on last day of the financial year, ending on or after 31 March 2023), shall within 18 months from closure of such financial year i.e. 30^th September 2024, need to:

• • issue the securities only in dematerialised form
  • facilitate dematerialisation of all its securities

POINTS TO BE CONSIDERED: –

– For security holder: – On or After 18 months i.e. 30^th September 2024.the holders of securities of private companies shall ensure that every transfer needs to be in dematerialised form and for new subscription, all securities of private company to be in dematerialised form.

– For applicable private companies: – ensure that entire holding of securities of its promoters, directors, key managerial personnel have to be in dematerialised form before making the following offers: –

• • Fresh issue / offer of any securities
  • Buyback of securities
  • Bonus issue
  • Right issue

ADDITIONAL COMPLIANCES FOR APPLICABLE PRIVATE COMPANIES:-

• File half yearly return in form PAS-6 with Registrar of Companies within 60 days of each half year;

PRCOESS FOR DEMATERIALISATION

• Appointment of Registrar and transfer agent (RTA) – Company to appoint SEBI registered RTA to manage the dematerialisation process

**RTA acts as an intermediary between the company and the depository participant (NSDL/ CDSL) for facilitating dematerialisation and corporate actions (for debit and credit of securities) undertaken by the issuer thereafter. **

2- Obtaining International Securities Identification Number (“ISIN”): Apply for an ISIN for each type of share issued by the company.

3- Opening of Demat Account: The company needs to open a demat account with a depository participant (DP)

4- Dematerialisation of Existing Shares: Facilitate conversion of existing shares into demat form (shareholders needs to submit their original share certificate.

CONSEQUENCES OF NON COMPLAINCES OF ABOVE RULES

– The company can’t issue or allot any securities including bonus shares in any form and buyback of shares/securities

– Shareholders will not be able to transfer their securities or subscribe additional securities. – 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.