In this article the writer shall deliberate the provisions of the Companies Act, 2013 and other applicable Acts and Laws  which deals with the issue of dematerialization of share of unlisted public companies, he try to explain the process and procedure involved and also seeks to elaborate the likely benefits of the dematerialization. The article in question contains preface, applicability, impact of dematerialization, share capital and reconciliation audit, and benefits and compliance involved, grievance redressal.

Preface

With the introduction of compulsorily dematerialization of shares and securities of unlisted public companies, The Ministry of Corporate Affairs seeks to enhance the transparency, investor’s protection and corporate governance environment. In this regard ministry had notified Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 on 10 September 2018 effective from 02 October, 2018. The rule now made applicable on all the unlisted public companies, therefore every unlisted public companies has to ensure that on or after the said date further issue and transfers of shares and securities can only be made in dematerialized form and all the existing securities need to dematerialise.

Applicability

The amended rule made applicable on every unlisted company with effect from 2nd October, 2018, and every unlisted public company shall:

  1. Issue its securities only in dematerialized form.
  2. Transfer its securities in dematerialized form.
  3. Have to ensure dematerialization of all its existing securities.

In accordance with the provision of the Depositories Act, 1996 and regulation made there under.

Dematerialization of Existing Securities

Unlisted public companies have to adhere the provision of amendment and could facilitate the dematerialization of its existing securities by:

  1. Making application to a depository as per the provisions of the Depositories Act, 1996
  2. Securing International Security Identification Number (ISIN) for each type of security; and
  3. Informing its entire existing security holder about such facilities.

Impact of Dematerialization

A) On further issue of securities by the company

Prior making offer for issue of securities, buy back of the securities, issue of bonus share and right issue every unlisted public company needs to make sure that all its existing securities are dematerialized in accordance with the Depositories Act, 1996, therefore no further issue or transfer of the share and securities take place before dematerialization.

B) Impact on Securities holder willing to transfer or subscribe securities

From 2nd of October, 2018, any transfer of the securities of unlisted public companies takes place after dematerialization of all its existing securities. Therefore security holder who is willing to transfer its securities need to dematerialized its securities.

Subscription of the share and securities also not take place prior to dematerialization, thus one who wish to subscribe securities of unlisted public companies have to wait till dematerialization and existing security holders have to ensure that all his securities in the particular company are dematerialized before subscription.

Share Capital & Reconciliation Audit

Every unlisted public company require to submit bi-annually Audit report to the registrar of the company under whose jurisdiction registered office of the company situate and have to comply with the provision of regulation 55 A  of SEBI (Depositories and Participants) Regulation, 1996. The format of the report is yet to be prescribed.

Benefits & Compliance Involved

The likely benefits of dematerialization that will be available to the unlisted public companies are as follows.

  • Elimination of risk of duplication, theft, fraud and loss with respect to physical share certificates.
  • Enhancement of transparency in ownership, preventing mal-practices, such as benami shareholding, back dated issuance of shares/ transfers.
  • Exemption from payment of stamp duty on transfer.
  • Ease in transfer and pledge of securities.

Compliance

Every unlisted public company which has dematerialized its securities has to comply with the following:

1. Make timely admission and annual fees, maintain security deposit of at least two year’s fees (as applicable) with the following

  • Depository;
  • Registrar to an issue; and
  • Share transfer agent.

2. Have to comply with regulation, guidelines or circular, if any issued by Securities and Exchange Board of India and Depository from time to time.

3. Unlisted public companies which has defaulted in the compliance requirement shall not offer any securities or facilitate buyback, or issue any bonus or right shares until the payment to depositories or registrar to an issue or share transfer agent are made.

Grievance redressal

Grievance under said rule is to be placed before Investor Education Protection Fund Authority (IEPF). Authorities of (IEPF) will take appropriate action and initiate proceeding only after consultation with the Securities Exchange Board of India against following.

  • Depository;
  • Depository participant;
  • Registrar to an Issue; and
  • Share transfer agent.

Conclusion

Introduction of Dematerialization provision for the securities of the unlisted public companies and share capital audit is a right step in right direction which bring about change in the corporate governance and make share issue and transfer more transparent, which helps in washing ways under table transaction and stop benami shareholding, back dated issuance of shares/ transfers, it also eliminate the risk of duplication, theft, fraud and loss with respect to physical share certificates therefore it’s a welcome legislation and deserves to be appreciated and implemented in good spirit.

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