Private Companies Must Dematerialize Securities: Rule 9B Amendment

Introduction: The Companies Act 2013, through Section 29(1A), grants authority to the Central Government to prescribe dematerialisation of securities for certain unlisted companies. A pivotal amendment, Rule 9B of the Companies  (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, mandates private companies’ dematerialisation of securities.

DEMATERIALISATION OF SECURITIES BY PRIVATE LIMITED COMPANIES

Existing provision:

Section 29(1A) of the Companies Act 2013 (“the Act”) empower the Central Government to prescribe such class or classes of unlisted companies for which the securities shall be held and/ or transferred in dematerialised form only.

Inserted rule:

In exercise of the powers conferred under the above section, Rule 9B has been inserted vide the Companies  (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (referred as ‘PAS’) specifying the requirement of mandatory dematerialisation of securities issued by private companies on 30th October, 2023.

Applicability of mandatory dematerialisation

Compliances

Every private company (which is not a small company as on last day of the financial year, ending on or after 31^st March, 2023) should within 18 months from closure of such financial year, issue its securities only in dematerialized form & ensure dematerialization of all its existing securities. (i.e., on or before 30^th September, 2024. In case a company ceases to be a small company after 31^st March, 2023, the timeline of 18 months apply from the end of the financial year in which it ceases to be a small company.

Every private company covered under above provisions must ensure that the entire holding of its promoters, directors and KMPs are held in dematerialised form only, prior to making any: –

1. Issue of securities

2. Buy back of securities

3. Issue bonus shares

4. Rights offer

Apart from the aforesaid, the compliances given under sub-rule (4) to (10) of Rule 9A are also applicable to private companies.

Transfer of securities: – On or after 18 months from the date of applicability of dematerialisation provisions to a private company, the holders of securities should ensure the following:

• Transfer or transmit shares in demat form
• Subscribe the securities of such private company in demat form

Non-compliance: – Since, there are no specific penal provisions for the non-compliance, the general penal provisions under section 450 of the Act shall apply.

Conclusion: The dematerialization mandate for private company securities brings a significant shift. Timely compliance is crucial to avoid repercussions outlined in the general penal provisions of the Companies Act 2013. Companies need a strategic approach to navigate this regulatory landscape successfully.