Introduction: In a significant development, the Ministry of Corporate Affairs (MCA) amended the Companies (Prospectus and Allotment of Securities) Rules, 2014, impacting private companies. The amendment mandates dematerialization of securities, previously required only for public companies. This change necessitates prompt actions by private companies, ensuring compliance within the stipulated timeline.
Recently, by way of a notification dated 27 October 2023 (Amendment), the Ministry of Corporate Affairs (MCA) amended the Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules), inserting a new rule[1], to require every private company (other than small company and government company) (Private Company) to dematerialise all its securities, issue securities only in dematerialised form and permit transactions in securities only in a dematerialised form. Until now, only public companies were required to do this.
Applicability
A private company, shall within 18 months from closure of such financial year, need to:
- issue the securities only in dematerialised form; and
- facilitate dematerialisation of all its securities
Fresh issue / Buy-back of securities: A private company which is required to dematerialise its securities as above, shall ensure that before making the following offers, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised
- Fresh issue / offer of any securities
- Buyback of securities
- Bonus shares
- Rights offer
Transfer of securities: On or after 18 months from the date of applicability of dematerialisation provisions to a private company, the holders of securities of private company shall ensure the following:
- Transfer of shares in dematerialised form only
- Prior to subscribing to the shares of such private company, all their securities are held in dematerialised form before such subscription
The Amendment is applicable to a Private Company as defined under the Companies Act except for:
(a) small company, i.e., a private company with a paid-up share capital of INR 4 crores or below, and turnover of INR 40 crores or below; and
Following are not considered as small company viz.
- Holding company or a subsidiary company
- Section 8 company
- Company/ body corporate governed by any special Act
(b) government company.
Timeline
A private company, which as on last day of a financial year, ending on or after 31st March, 2023, is not a small company as per audited financial statements for such financial year, shall, within eighteen months of closure of such financial year, comply with the provisions of this rule.
Hence, for all the existing private companies, whose FY ended on March 31, 2023, the deadline to comply is on or before September 30, 2024.
Actions to be taken
Amendment of AOA of the Company to authorise shareholders to hold securities in dematerialised form
Decide on Depository (NSDL/CDSL) where International Securities Identification Number (ISIN) is to be generated
Appointment of SEBI registered Registrar and Transfer Agent (RTA)
Opening of Demat Account
Submission of the DRF (Dematerialization Request Form) along with the physical share certificates to your DP
DP will send the dematerialization request to the concerned RTA (Registrar and share transfer agent)
On approval of DRF, your physical share certificate gets destroyed, and De-mat account gets credited with the relevant no. of shares.
Penal Provisions
In case of any non-compliance of requirements under the Amended PAS Rules, there are no specific penal provisions stipulated under Section 29 of the Act read with Amended PAS Rules, as a general rule, the penalties under Section 450 of the Act would apply.
Section 450 : If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be 1 [liable to a penalty of ten thousand rupees (10,000), and in case of continuing contravention, with a further penalty of one thousand rupees (1,000) for each day after the first during which the contravention continue, subject to a maximum of two lakh rupees (2,00,000) in case of a company and fifty thousand rupees (50,000) in case of an officer who is in default or any other person].
Conclusion: In conclusion, private companies must act swiftly to align with the recent MCA amendment. Complying with the dematerialization requirements involves a series of steps, each crucial for a seamless transition. The looming deadline of September 30, 2024, underscores the urgency for private companies to undertake necessary actions, ensuring they navigate the regulatory landscape effectively and avoid potential penalties. Stay informed, stay compliant!
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