Applicability of Dematerialization Requirements to Section 8 Companies under the Companies (Prospectus and Allotment of Securities) Rules, 2014
Introduction: On October 27, 2023, the Ministry of Corporate Affairs (MCA) issued Notification G.S.R. 802(E), which introduced amendments to the Companies (Prospectus and Allotment of Securities) Rules, 2014 (hereafter “PAS Rules”). Key changes included modifications to Rule 9 and the insertion of Rule 9B, both pertaining to the dematerialization of securities. This has led to discussions regarding the scope of mandatory dematerialization, particularly concerning companies registered under Section 8 of the Companies Act, 2013 (“Section 8 Companies”).
Issue: Is the mandatory dematerialization of shares applicable to all Section 8 Companies following the aforementioned amendments to the PAS Rules?
Relevant Legal Provisions: The requirements for dematerialization under the amended PAS Rules are tied to specific company classifications:
- Rule 9: Governs dematerialization for certain public companies.
- Rule 9A: Specifically mandates dematerialization for all unlisted public companies.
- Rule 9B: Imposes dematerialization requirements on all private companies, with an exemption for ‘small companies’.
Analysis: The text of Rules 9, 9A, and 9B of the PAS Rules does not contain any direct or explicit reference imposing dematerialization obligations on ‘Section 8 Companies’ as a separate class.
However, Section 8 Companies are incorporated under the Companies Act, 2013, and must necessarily fall under the broader classifications of either public or private companies, or potentially exist in a state not precisely fitting either definition based on their articles and compliance with Section 2(68) and 2(71).
Applicability based on Classification: If a Section 8 Company is constituted as a public company (whether listed or unlisted), it will be subject to the provisions of Rule 9 or Rule 9A, respectively.
If a Section 8 Company is constituted as a private company and does not qualify as a ‘small company’, it will be subject to the provisions of Rule 9B.
Potential Exception: The application of Rule 9, 9A and 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, hinges on a company’s legal classification as a public or private company, not on its operational objectives. The Companies Act, 2013 defines ‘private company’ in Section 2(68) based on specific restrictions required in its articles. A ‘public company’ is defined in Section 2(71) primarily as a company that is not private (and meets prescribed capital thresholds, if any). An argument exists that a Section 8 company could be formed without meeting the strict definition of a Section 2(68) private company, and potentially also not falling squarely under the definition or practical scope intended for a Section 2(71) public company. If such a Section 8 company exists, ex. CIN: U 72900AP2018NPL109467, that is definitively classified as neither ‘public’ nor ‘private’ under the terms triggering Rules 9, 9A, or 9B, then these specific rules mandating dematerialization would not apply to it.
Conclusion: The understanding that the MCA Notification G.S.R. 802(E) makes share dematerialization mandatory for all Section 8 Companies is inaccurate. The requirement is not universal for Section 8 companies qua Section 8 companies. Instead, the obligation to dematerialize is contingent upon the Section 8 company’s specific classification as a public company, an unlisted public company, or a private company (that is not a small company), thereby bringing it within the ambit of Rule 9, 9A, or 9B of the PAS Rules, respectively. Section 8 companies not falling into these specific categories regulated by the rules are not subject to these mandatory dematerialization requirements.”
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