Dematerialisation of Securities by Unlisted Public Companies

In a major step to keep track of transactions of Corporates and making the things easier and transparent for the Shareholders, the Ministry of Corporate Affairs (MCA) has notified the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 by inserting Rule 9 (A) on 10^th September, 2018 making the Dematerialisation of Securities of an Unlisted Public company madatory. The said Amendment Rules shall come in Force on 02^nd October, 2018.

Understanding the Term “Dematerialisation”:

Dematerialisation is the process of converting Physical Securities into electronic format. It should be related to Listing of securities. A Shareholder intending to dematerialise its securities needs to open a Demat account with Depository Participant. Investor Deface and surrenders his Physical Securities and in turn gets Electronic Shares in his Demat Account.

Major Highlights of Amendments:

As per Rule 9 (A) (1), an Unlisted Public Company is required to issue the securities only in dematerialised form and facilitate Dematerialisation of all its existing Securities as per provisions of the Depositories Act, 1996 and regulations made there-under.

Further, every Unlisted Company has to ensure that entire holding of securities of its Promoters, Directors, Key Managerial personnel is in dematerialised Form, at the time of making an offer for issue or buyback of securities or issue of bonus shares or Rights. Rule 9 (A) (2)

Rule 3 of the amendment specifies that every holder of Securities who intends to transfer securities or who intends to subscribe to any securities of an unlisted public company has to make sure that all their existing Securities are held in dematerialised form before such transfer or subscription to the Securities;

Rules 4 of the amendment Rules mandates every Unlisted Public Company to facilitate dematerialisation of all its existing securities by making necessary application to a depository and to secure International Security Identification Number (ISIN) for each type of security and to inform all its existing security holders about such facility.

Half-Yearly Audit Report: The Unlisted Public companies are required to submit a half-yearly Audit Report to the ROC as provided under regulation 55A of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 on a Half-yearly basis. (Rules-8)

Rule 5 & 6 requires for the timely fee payment by the Public Company to the Depository and registrar to an issue and Share Transfer Agent and to maintain security deposit of minimum 2 years’ fee and in case default is made in payment of fees then not to issue Shares until the fees is paid.

Note: Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Author is not responsible for any errors or omissions in the article therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.

Major benefits of dematerialisation of securities  to unlisted Public companies-

i.  Elimination of risks associated with physical certificates such as loss, theft, mutilation, fraud etc.

ii.  Improving the corporate governance system by increasing transparency and preventing mal-practices such as benami shareholding, back dated issuance of shares, etc.

iii.  Exemption from payment of stamp duty on transfer.

iv.   Ease in transfer, pledge etc. of securities.

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