The Ministry of Corporate Affairs in its drive to enhance transparency, investor protection and corporate governance, has notified Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 on 10 September 2018 effective from 02nd October, 2018.:-

In accordance with the said rules, unlisted public companies need to dematerialize its existing securities and ensure that further issue of securities and transfers are only in dematerialized form.

 A. Dematerialization:

Dematerialization is the process of converting Physical Securities into electronic format. It should be related to Listing of securities. A Shareholder intending to dematerialize its securities needs to open a Demat account with Depository Participant. Investor Deface and surrenders his Physical Securities and in turn gets Electronic Shares in his Demat Account:

B.Benefit of Dematerialization:

  • Elimination of risk of duplication, theft, fraud and loss with respect to physical share certificates.
  • Exemption from payment of stamp duty on transfer.
  • Ease in transfer and pledge of securities.

C. Applicability:

Every unlisted public company with effect from 02 October 2018 shall-

  • Issue its securities only in dematerialized form; and
  • Ensure dematerialization of all its existing securities

D. Major Impact on Company:

I. After 02.10.2018, Unlisted Company has to ensure that entire holding of securities of its Promoters, Directors, Key Managerial personnel is in dematerialized Form, otherwise company shall not be able to do followings:

  • Issue of securities;
  • Buy-back of securities;
  • Issue of bonus shares; and
  • Rights issue

II. After 02.10.2018, all new issue of securities or transfer of securities shall be only in Dematerialize form.

E. Impact on Security Holders (Transfer / subscription of Securities):

Rule 3 of the amendment specifies that every holder of Securities who intends to transfer securities or who intends to subscribe to any securities of an unlisted public company has to make sure that all their existing Securities are held in dematerialised form before such transfer or subscription to the Securities;

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at Disclaimer:

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