The Ministry of Corporate Affairs (MCA) has set in motion significant changes in the norms governing the shift to dematerialized shares for private limited companies. These changes are intended to elevate transparency and contemporize financial practices. While small companies are exempted from these requisites, other private firms are now obliged to release securities exclusively in dematerialized format and oversee the conversion of their existing securities. This article offers an insightful exploration of these fresh directives, their applicability, adherence conditions, and the repercussions they bear for private enterprises.
The journey toward mandatory dematerialization for private companies commenced with the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018. These rules initially applied solely to unlisted public companies, mandating that securities be issued exclusively in dematerialized form and that all existing securities undergo dematerialization. The latest Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, broaden the scope, encompassing private companies. Small companies, however, remain exempt from these requirements.
These regulations apply to private companies, with the exception of small enterprises, and entail the following obligations:
i. The issuance of securities solely in dematerialized form.
ii. Facilitation of the dematerialization process for all existing securities in compliance with the provisions of the Depositories Act, 1996, and the associated regulatory framework.
Definition of Small Company-Sec.2(85):
A small company is defined as one whose paid-up capital does not exceed Rs. 4 Crores and whose turnover does not surpass Rs. 40 Crores. This definition does not apply to:
– Holding companies or subsidiary companies.
– Companies registered under section 8.
– Companies or body corporates governed by any special Act.
Non-small private enterprises must comply with the stipulations for dematerialization within 18 months from the conclusion of the financial year in which they no longer qualify as small companies. For instance, a company ceasing to meet the small company classification in a financial year ending on or after March 31, 2023, must ensure compliance by September 30, 2024.
Responsibilities of Promoters, Directors, and KMPs:
Following the compliance deadline, promoters, directors, and key managerial personnel must ensure the dematerialization of their securities before undertaking actions such as offering securities, initiating buybacks, issuing bonus shares, or conducting rights offers.
Compliance by Securities Holders:
Individuals holding securities in private companies subject to Rule 9B must dematerialize their shares before transferring them or subscribing to new securities after the compliance deadline stated above.
9 Steps to Ensure Compliance:
To ensure a smooth transition to a dematerialized securities framework, private companies and their stakeholders should follow these 9 steps:
i. Apply for an International Security Identification Number (ISIN).
ii. Facilitate the dematerialization of existing securities.
iii. Inform existing security holders about the dematerialization process.
iv. Ensure timely payment of fees to depositories and share transfer agents.
v. Maintain a security deposit of at least two years’ fees with depositories and share transfer agents.
vi. Comply with all relevant regulations and guidelines.
vii. Report any discrepancies in issued capital and dematerialized capital.
viii. Promptly address grievances through the Investor Education and Protection Fund Authority (IEPFA).
ix. Submit Form PAS-6 to the Registrar within 60 days of each half-year, duly certified by a practicing-chartered accountant or company secretary.
The expansion of dematerialization requisites to private companies represents a pivotal move toward modernizing financial practices and fortifying transparency. Private companies must ensure strict compliance with these regulations to circumvent penalties and effect a seamless transition to a dematerialized securities framework. All stakeholders, including promoters, directors, key personnel, and security holders, must be cognizant of their responsibilities to guarantee compliance. These changes signify a significant milestone in India’s corporate compliance landscape, underscoring the necessity for private companies to embrace them to remain aligned with regulatory mandates.
(The above article is Author’s opinion compiled by him based on the relevant Section/notifications/circulars of the Act, for further clarifications, please refer The Companies Act, 2013)