Dematerialisation of Shares of Private Limited Companies (ISIN)

Companies (Prospectus and Allotment of Securities) Rules, 2014 this rule was introduced by Ministry of Corporate Affairs (MCA) on October 2023, this rule clarifies about applicability of dematerialization on private limited companies other than Small companies and Government companies. Requires applicable companies to convert their physical shares into demat by September 2024.

The International Securities Identification Number (ISIN) is a universally recognized number that is used for identification of securities. Need of introduction of ISIN to a standardized identification system for securities. It also approaches a consistent method to distinguish the various types of financial instruments in the market.

Each security worldwide should have a unique identifier. Each ISIN code is unique to a specific security. Uniqueness of ISIN helps to avoid confusion between securities and ensures accurate tracking and reporting.

The amendment in the Companies Rule Companies (Prospectus and Allotment of Securities) Rules, 2014, pertaining to the dematerialization of securities has significant implications for private limited companies. Initially, the dematerialization provisions applied only to listed companies. However, with the notification issued by the Ministry of Corporate Affairs in October 2023, private limited companies are now mandated to dematerised their shares.

Applicability of Demat Provisions:

In 12^th October of 2023, 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) after rule 9A of the said rules, rule 9B shall be inserted.

Rule 9B of said Rule- Issue of securities in dematerialized form by private companies:  

(1) Every private company, other than a small company, shall, within eighteen months of the closure of such financial year, comply with the provisions of this rule –

(a) issue the securities specifically in demat form; and

(b) facilitate dematerialization for all securities of the company in accordance with provisions of the Depositories Act, 1996 (22 of 1996), rules, and regulations made thereunder.

Simplification of Notification issued by MCA

The provisions of this rule do not apply to certain categories of companies, which are:

• Nidhi companies,
• government companies,
• wholly-owned subsidiaries of unlisted public companies
• small private limited companies.

Provision of this rule is applicable to the following companies:

• Public limited companies
• Non-small private limited companies
• Section 8 companies
• Subsidiaries of foreign or Indian companies
• Producer companies (non-small)
• Wholly-owned subsidiaries of private limited companies
• NBFCs
• Companies registered with regulatory authorities.

Grant Extension:

MCA grant extension to producer companies on share dematerialisation for further 5 years i.e. till March 2028. MCA fives additional Five years to meet the requirement for Producer Companies.

Application Process for ISIN:

This article will explain to you the detailed process of how private limited companies can apply for an ISIN after the introduction of new rule. The ISIN is a crucial identifier for securities, which is unique for each security, and obtaining it involves specific procedures and considerations.

Private limited companies looking to apply for an ISIN need to follow a structured step as prescribed. Here are some key steps involved for application:

• Board Meeting: Board of directors of company shall convene a board meeting to select or appoint the following:

1. Registrar
2. Transfer Agent (RTA) and a
3. depository to manage the records and transactions of securities like stocks and bonds.

• Agreement with RTA: The company enters into a contractual agreement with parties. Enter into tri-party agreement between parties, which are the depository, RTA, and the company. In addition, it prepares necessary documentation for share conversion into dematerialized form.
• Analysis and Submission Documents:  Documents as provided by the RTA needs to be evaluated, analyzed, signed, and submitted to the RTA. Afterwards, the RTA forwards all these documents to the NSDL (National Securities Depository Limited) or CDSL (Central Depository Services Limited) for ISIN application.

Costs Associated with the ISIN Process:

• RTA service charges can vary significantly. It ranges from ₹3,000 to ₹20,000 per year. Companies can choose an RTA as per their service requirements.
• Depository fees for both NSDL and CDSL has similar fees for ISIN applications.
• Joining fees are approximately ₹15,000 for each company, this is one-time fee.
• Security deposit is dependent upon paid up share capital of the company, subject to minimum security deposit is Rs. 10,000 per company.
  The annual fee is based on the company’s capital, typically ranging from ₹5,000 to ₹7,000 for NSDL or CDSL.

Company Registration with Depositories:

Private companies can choose between NSDL and CDSL for ISIN application as per their own flexibility. It is not mandatory for companies to register with both depositories. However, directors or shareholders must open demat accounts with the chosen depository. Company ensure, compliance with the prescribed procedures and agreements because it is crucial for a smooth ISIN application process.

Conclusion:

Companies (Prospectus and Allotment of Securities) Rules, 2014 introduce to enhance transparency, efficiency, and security in shareholding management. Simply put, navigating the process of converting shares into dematerialized form through an ISIN application for companies. By understanding the steps, costs, and considerations involved, companies can streamline the application process and comply with requirements of rule effectively introduce by MCA.