The Ministry of Corporate Affairs, through its Notification dated October 27, 2023, has amended the Companies (Prospectus and Allotment of Securities) Rules, 2014, to include provisions for the dematerialization of securities by private companies as well. Prior to this amendment, dematerialization provisions applied exclusively to listed companies and unlisted public companies, with certain exceptions. However, with this amendment, the Ministry has unequivocally demonstrated its intent to extend the scope of dematerialization to include even private companies.

The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, shall be effective from the date of their publication in the official gazette, i.e., October 28, 2023.

The following insertion has been made through this amendment:

“9B. Issue of securities in dematerialised form by private companies:-

(1) Every private company, other than a small company, shall within the period referred to in sub-rule (2) –

(a) issue the securities only in dematerialised form; and

(b) facilitate dematerialisation of all its securities, in accordance with provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder.

(2) A private company, which as on last day of a financial year, ending on or after 31st March, 2023, is not a small company as per audited financial statements for such financial year, shall, within eighteen months of closure of such financial year, comply with the provisions of this rule.

(3) Every private company referred to in sub-rule (2) making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer, after the date when it is required to comply with this rule, shall ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder.

(4) Every holder of securities of the private company referred to in sub-rule (2),-

(a) who intends to transfer such securities on or after the date when the company is required to comply with this rule, shall get such securities dematerialised before the transfer; or

(b) who subscribes to any securities of the concerned private company whether by way of private placement or bonus shares or rights offer on or after the date when the company is required to comply with this rule shall ensure that all his securities are held in dematerialised form before such subscription.

(5) The provisions of sub-rules (4) to (10) of rule 9A shall, mutatis mutandis, apply to the dematerialisation of securities under this rule.

(6) The provisions of this rule shall not apply in case of a Government company.”

DEMYSTIFYING RULE 9B

DEMATERIALIZATION MANDATE

1. Scope and Applicability:

Rule 9B mandates that every private company, excluding small companies, not only issues securities exclusively in dematerialized form but also facilitates the dematerialization of all its existing securities. The dematerialization process should align with the provisions of the Depositories Act, 1996 (22 of 1996) and its accompanying regulations.

2. Compliance Timeline:

Private companies falling outside the definition of a small company, based on audited financial statements for financial years ending on or after March 31, 2023, must comply with Rule 9B within eighteen months of the closure of the relevant financial year.

3. Offer Compliance:

Private companies subject to Rule 9B, making offers for the issuance of securities, buyback of securities, or the issuance of bonus shares or rights offer after the compliance deadline, must ensure that the entire holding of securities of promoters, directors, and key managerial personnel has been dematerialized.

4. Holder’s Responsibilities:

Holders of securities in private companies subject to Rule 9B, intending to transfer or subscribe to securities after the compliance deadline, must ensure that their securities are dematerialized before such transactions.

5. Application of Existing Rules:

The procedural aspects and compliance mechanisms outlined in sub-rules (4) to (10) of Rule 9A are applicable, with necessary modifications, to the dematerialization of securities under Rule 9B.

6. Exemption for Government Companies:

Rule 9B explicitly excludes government companies from its purview.

SIGNIFICANCE OF RULE 9B

1. Promoting Dematerialization:

The primary objective of Rule 9B is to promote the dematerialization of securities, aligning with global best practices. Dematerialization not only enhances transparency but also streamlines the securities market, making it more efficient and secure.

2. Enhancing Investor Confidence:

The mandatory dematerialization of securities adds an extra layer of security and trust for investors. With electronic records replacing physical certificates, the risk of loss, theft, or forgery is significantly reduced, fostering greater confidence in the financial system.

3. Modernizing Corporate Practices:

Rule 9B reflects a commitment to modernize corporate practices by introducing electronic methods for managing securities. This aligns with the broader trend of digitization and technological advancement in the business and financial sectors.

Conclusion: Rule 9B signifies a progressive step toward strengthening the regulatory framework governing private companies’ issuance and management of securities. As affected private companies embark on the journey of compliance, the dematerialization mandate is poised to bring about positive changes, paving the way for a more efficient, secure, and investor-friendly securities market in India.

Undoubtedly, this transition represents a paradigm shift for private companies, introducing new challenges and necessitating adjustments to established practices. However, it is crucial to recognize that this regulatory update aligns with global trends in financial markets, promoting transparency, and enhancing overall market integrity.

As private companies adapt to the dematerialization requirements, it’s foreseeable that the government may gradually extend similar mandates to small private companies in the future. This incremental approach allows businesses to acclimate to the changes progressively, ensuring a smoother transition and minimizing disruptions to their operations.

In conclusion, Rule 9B exemplifies the government’s commitment to fostering a business environment that is not only compliant but also in tune with contemporary global financial standards. By embracing these changes, private companies are not only meeting regulatory obligations but also positioning themselves for long-term success in an evolving financial landscape.

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Disclaimer: The author is based in Jabalpur and is a Practicing Company Secretary dealing in Corporate, Legal & Taxation services. The information contained in this write up, as provided by the author, is to provide a general guidance to the intended user. The information should not be used as a substitute for specific consultations. Author recommends that professional advice is sought before taking any action on specific issues.

The author can also be reached at cstanveersaluja@gmail.com.