Dematerialization of Securities by Private Limited Companies

Introduction

A significant shift is underway in the corporate world as private limited companies (excluding small companies) are now mandated to facilitate the dematerialization of their securities, including shares and debentures, by September 30, 2024. Ministry of Corporate Affairs vide notification dated 27th October 2023, brings about substantial changes in how securities are held and managed by these entities. In this article, we’ll delve into the key aspects of this notification and the implications for both private and public limited companies.

Key Points of the Notification 

i. Dematerialization Deadline: Private companies, except small companies, are required to facilitate the dematerialization of all their securities by September 30, 2024.

ii. Issuance of Dematerialized Securities: After September 30, 2024, these companies can only issue securities in dematerialized form.

iii. Promoter and Director Holdings: In cases where a company plans to offer securities or shares or conduct a buyback after the specified date, it must ensure that the entire holdings of its promoters, directors, and key managerial personnel have been dematerialized.

iv. Shareholder Obligations: Shareholders intending to transfer shares or subscribe to securities in private companies after September 30, 2024, are obligated to convert their shareholdings into dematerialized form before initiating any transfer or application for new issues.

The notification also results in amendments to the Companies (Prospectus and Allotment of Securities) Rules, 2014, which will now be known as the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023.

Key Amendments Applicable for Public Limited Companies

The scope of these changes also extends to public limited companies with specific amendments. Public companies that have issued share warrants before the commencement of the Companies Act, 2013, must inform the Registrar about these share warrants within three months. Additionally, they must ensure that these share warrants are dematerialized within six months by notifying the share warrant holders.

In cases where warrant holders do not comply with the dematerialization process within the stipulated timeframe, public limited companies are required to take proactive measures. They must suo-moto convert the share warrants into dematerialized form, and the underlying shares will be transferred to the Investor Education and Protection Fund (IEPF).

It’s important to note that these rules do not apply to Government Companies.

Detailed Analysis

Dematerialization of securities involves converting physical securities, such as share certificates, into an electronic or digital format. This move aims to enhance transparency, reduce the risk of loss or theft, and streamline the process of transferring securities.

For private limited companies, the mandate for dematerialization by September 30, 2024, is a transformative step. It ensures that securities are held and traded electronically, aligning with global trends in modernizing financial markets. This not only simplifies the process of issuing and trading securities but also enhances accountability and reduces the risk of fraud.

The emphasis on converting the entire holding of promoters, directors, and key managerial personnel into dematerialized form before making any security offers or buybacks is aimed at ensuring uniformity and transparency in dealings within the company.

The amendments applicable to public limited companies, especially regarding share warrants, underscore the need to modernize older forms of securities and bring them in line with contemporary practices.

Conclusion

The dematerialization of securities is a significant step forward in modernizing the corporate landscape. While private limited companies must adapt to these changes by September 2024, the benefits in terms of transparency, efficiency, and security are expected to be substantial. These changes are not only in line with international practices but also contribute to making the Indian corporate sector more robust and investor-friendly. It’s crucial for affected companies to adhere to the new rules and embrace the advantages of dematerialization while ensuring compliance with the regulatory framework.