India moves closer to 100% dematerialization
Introduction:
The Indian regulators have been time and again emphasizing on dematerialization of shares of public companies. Specially Securities and Exchange Board of India (‘SEBI’) has taken special efforts to promote dematerialization of shares amongst public shareholders of listed companies. Now the Ministry of Corporate Affairs (‘MCA’) has extended this facility of dematerializing the shares to private companies. Also, the MCA has mandated to dematerialize the shares issued through share warrants before the enforcement of the Companies Act 2013.
Background:
Rule 9 of Companies, Prospectus and Allotment of Securities Rule 2014 [‘PAS Rules’] which were notified on 1st April 2014, prescribes that the promoters of all unlisted public companies may hold securities in demat form only. As per proviso to this rule, if the promoters are holding securities in physical mode, then they must convert the same in to demat before going for initial public offer (IPO). Further as rule 9A (2) of PAS Rules before making any buyback offer, bonus issue, making any offer for issue of securities or rights issue unlisted public companies shall ensure that its holding of promoters, directors, and key managerial personnel is in demat.
MCA has now through amendment notification dated 27th October 2023, inserted a new sub-rule to rule 9 and added a new sub-rule 9B in PAS Rules. These newly inserted sub-rules address the treatment of share warrants issued by public companies to shareholders before commencement of the Companies Act 2013 that is, under section 114 of Companies Act 1956 and has not yet been converted into shares. Further the newly inserted rule 9B requires the private companies to dematerialize their shares.
Amendment to rule 9 of PAS Rules – Conversion of warrants issued under Companies Act, 1956:
Up till now the Companies Act 2013 has not had any provision dealing with share warrants. But now for the first time the MCA has added provisions under rule 9 of PAS Rules that deal with share warrants issued under Companies Act 1956 but have not been converted into shares yet. As per these provisions, the companies who have issued such share warrants, should disclose details of these share warrants to the concerned Registrar of Companies (‘ROC’) within 3 months of the date of this amendment becoming effective that is 28th October 2023 (i.e., this information must be given by January 27, 2024). Thereafter, within 6 months of amendment becoming effective (i.e., by April 27, 2024), the holders of these warrants should deposit this warrant with the company and get it converted into demat shares. For this purpose, the company is required to give notice to all warrant holders through an advertisement in one English and one vernacular language newspaper and by hosting the same on the company’s website.
The provision further states that, if the holder of warrant does not get his warrant converted in to shares within specified time, then the company shall convert such warrants in to shares and transfer the same to IEPF under section 124 of the Companies Act 2013. The amended rule 9 prescribes for a form named PAS-7 in which the company is required to give information regarding unconverted share warrants to ROC within 3 months of the amendment becoming effective. One point worth noting about this form is that this form requires certification from a practicing professional stating that he/she has verified all the records relating to share warrants maintained by the company and they are mentioned accurately in the form. Further, the amended provisions also prescribe a specified format for giving notice/advertisement to warrant holders for conversion of warrants in to shares.
Insertion of new rule 9B. – Demat of shares by private companies:
MCA by inserting a new rule 9B to PAS Rules has provided for dematerialization of shares of private companies which are not small companies. As per rule 9B, those private companies who are not small companies as per audited financial statements as of 31st March 2023, shall within eighteen months from 31st March 2023, facilitate dematerialization of existing securities and issue further shares in demat form only. Also, if the shareholders of such private companies are desirous of transferring their shares, then it would be mandatory for unlisted private companies to make facility for demat available. This will allow the shareholders to first dematerialize the shares and then transfer. The company will not be able to make further offer of shares or buyback of shares unless the shares of promoters, directors and key managerial persons are in demat form. As mentioned above this new rule 9B is not applicable to small companies and government companies.
MCA has further stated that provisions of sub-rule (4) to (9) of rule 9A shall mutatis mutandis apply to private companies. This would mean that the provision of Securities Contract Regulation Act, 1956 and the rules made thereunder would be applicable to private companies also. It would also mean that provisions relating to ‘spot delivery of securities’ would also become applicable to private companies.
Conclusion:
The recent amendments to Rule 9 and the introduction of Rule 9B signify the government’s commitment to enhancing transparency, reducing paper-based processes, and aligning with global best practices. Dematerialization of securities of private companies is expected to bring private companies on par with their public counterparts in terms of dematerialization, promoting efficiency and transparency.
These regulatory changes underline India’s commitment to staying at the forefront of corporate governance and compliance, offering investors a secure and transparent environment for their investments. In the ever-evolving corporate landscape, embracing dematerialization is a significant stride forward, reducing paperwork and enhancing efficiency for businesses and shareholders alike.
The article is written by Ms. Rutuja Umadikar – Research Associate.
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