Demat of Shares – If ISIN applied by Non-Small Private Company But Still Companies have not received ISIN Whether they can do allotments in Physical for the time being?
Summary: The Ministry of Corporate Affairs (MCA) has notified vide Notification Dated: 27.10.2023 the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, which mandate that all Non-Small Private Companies dematerialize their shares and ensure future transfers and allotments are only in demat form by 30th September 2024. While the deadline for applying for an ISIN was set for 30th September 2024, delays in receiving ISIN from depositories like NSDL and CDSL have caused difficulties for companies. These delays have led to uncertainty regarding the transfer of shares and the issuance of new securities (such as rights issues or private placements) in physical form. According to the rules, transfers of shares in physical form are not permissible after 30th September 2024 unless the company has received the ISIN and the shareholders have dematerialized their shares. Similarly, companies can only issue offers for new allotments after ensuring the shares of promoters, directors, and key managerial personnel (KMP) are dematerialized. These provisions have created challenges for companies seeking to raise funds or make new share allotments. Until the ISIN is received and all required shares are converted to demat, companies are restricted from conducting these activities. Therefore, timely compliance with demat regulations is crucial to avoid operational disruptions.
As per provisions of Companies Act, 2013 MCA has already made it mandatory for Public Companies to keep and transact their shares in Demat w.e.f. 02nd October 2018. That time it was not mandatory for Section 8 Private Companies to Demat their Shares.
The Ministry of Corporate Affairs in its drive to enhance transparency, investor protection and corporate governance, has notified CCompanies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 effective from 30th September 2024.
In accordance with the said rules, All Non-Small Companies need to dematerialize their existing securities and ensure that further issue of securities and transfers are only in dematerialized form.
MCA has given 18 months’ time to Non-Small Company w.e.f. 31 March 2023 to 30 September 2024 for compliance of provision of these rules.
Provisions of Companies Act, 2013:
- Section 29 of Companies Act, 2013
- Rule 9B of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023
- Form PAS 6
Discussion on the Question:
1. Que: Last date for submission of Application by Non Small Private Company with Depository?
As per above mentioned provisions, a non-small private Company was required to apply for ISIN on or before 30th September 2024. However, as per practical situation lot of applications of ISIN are pending with NSDL and CDSL, due to this Companies are getting Delay in obtaining ISIN.
2. Que: If Company has not received ISIN by 15 December 2025. Whether the Company can allow transfer of Shares by shareholders between 1st October 2024 to 15th December 2024?
As per Rule 9B(4a). Every holder of securities of the private (a) who intends to transfer such securities on or after the date when the company is required to comply with this rule, shall get such securities dematerialized before the transfer.
Therefore, after reading the above provision one can opine that transfer of shares in physical is not possible in Non-Small Private Company after 30 September 2024. Therefore, transfer of shares is possible after complying below mentioned two conditions:
a. Company will receipt ISIN
b. Shareholder shall convert their physical shares in Demat
After completion of above two conditions private company can allow transfer of shares.
3. Que: If Company has not received ISIN by 15 December 2025. Whether the Company can give offer for new allotment through any mode (Right issue, Private Placement, Preferential allotment etc.) between 1st October 2024 to 15th December 2024?
As per Rule 9B(4a).
Every private company referred to in sub-rule (2) making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer, after the date when it is required to comply with this rule, shall ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with the provisions of the Depositories Act, 1996
Therefore one can opine that, as per above mentioned provisions, until unless shares of Directors, Promoters and KMP not converted into Demat company can not issue any offer or allotment. Therefore, a Company shall be able to issue offer only after complying below mentioned two conditions:
a. Company will receipt ISIN
b. Directors, Promoters and KMP’s shall convert their physical shares in Demat
Once shares of Directors, Promoters and KMP’s convert in to Demat Company can issue offers.
Note: offer shall not be given to those shareholders whose shares shall be in physical form on the date of offer.
Conclusion:
Due to the delay in receipt of ISIN from NSDL and CDSL Companies are facing a lot of difficulties and issues. Company not able to raise funding, issue new shares or allow transfer of shares.
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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).
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