Summary: Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules 2014 mandates that private companies, excluding small and government entities, must issue and facilitate the dematerialization of securities. Small companies, defined as those with a paid-up capital under ₹4 crore and turnover below ₹40 crore, are exempt. Non-small private companies must comply within 18 months if they exceed these thresholds by the end of the fiscal year post-March 31, 2023. Companies must ensure that all securities held by promoters, directors, and key managerial personnel are dematerialized before issuing new securities, buying back shares, or offering bonus and rights shares. The dematerialization process includes amending the articles of association, appointing a SEBI-registered registrar, obtaining an ISIN number, and opening a demat account. Companies must also file Form PAS-6 semi-annually with the MCA. Non-compliance can lead to significant penalties for the company and its officers, including fines and restrictions on issuing securities. Dematerialization is designed to streamline share management, enhance security, and improve market liquidity, with NSDL and CDSL serving as the primary depositories in India.
This new rule 9B of Companies (Prospectus and Allotment of Securities) Rules 2014 mandates dematerialization for all private companies excluding small companies and government companies.
Rule 9B of Companies (Prospectus and Allotment of Securities) Rules 2014 discusses the issue of securities in dematerialized form by private companies and states that:
1. Every private company, other than a small company, shall-
a) Issue the securities only in dematerialized form and
b) Facilitate dematerialization of all its securities
As per provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder. A small private company is referred to as a company with a paid-up capital of less than ₹4 crore and a turnover of less than ₹40 crore.
2. If a private company isn’t considered small based on its financial records at the end of a financial year ending after March 31, 2023, it must follow these rules within 18 months after the end of that financial year.
3. Any private company as specified above, when making offers for issuing securities, buying back securities, issuing bonus shares, or offering rights after it needs to follow this rule, must ensure that all securities held by its promoters, directors, and key managerial personnel have been dematerialized as per the rules of the Depositories Act, 1996 (22 of 1996), and related regulations before making such offers.
4. Every holder of securities of the private company referred to in sub-rule (2),-
a) Planning to transfer these securities should dematerialize them before the transfer.
b) Similarly, anyone subscribing to securities of the private company through private placement, bonus shares, or rights offered after this rule applies to the company must make sure their securities are dematerialized before subscribing.
5. The rules from (4) to (10) of rule 9A of Companies (Prospectus and Allotment of Securities) Rules 2014will apply accordingly to the dematerialization of securities under this rule.
6. The provisions of this rule shall not apply in the case of a government company.
Dematerializing the shares of private companies is expected to streamline share management and enhance security for both, companies and investors. It could also potentially improve liquidity within the private securities market.
The step by step process of the dematerialization of shares are as follows:
1. Amendment in the articles of association for the acceptance of holding shares in the demat form,
2. Appointment of SEBI registered Registrar and share transfer agent,
3. Obtaining the ISIN number for distinguishing the shares of the company from the another,
4. Opening an Demat account with the banks or brokerage firms,
5. Dematerialization of shares in the demat format of promoters and other shareholders,
6. There is a requirement of the filling obligation of form PAS-6 every half yearly, with the MCA.
Consequences for non-compliance of provisions specified under Rule 9B of Companies (Prospectus and Allotment of Securities) Rules 2014 as specified:
1. The company and office liable for the penal provisions specified under section 450 of the companies act, 2013,
2. Shareholders would be unable to sell or transfer their shares,
3. The company faces monetary penalties of INR 10,000 plus INR 1,000 for each day the violation continues, with a maximum of INR 200,000.
4. Every officer of the company in default also faces the same penalties, with a maximum of INR 50,000.
5. The company can’t issue or allot any securities including bonus shares in any form and buyback of shares/securities.
6. Any other penal provision as covered or specified by the authorities.
In India, there are two depositories registered with SEBI:
NSDL (National Securities Depository Ltd.)
CDSL (Central Depository Services (India) Ltd.)
NSDL and CDSL are both safe custodians for your dematerialized securities in India. Depending on who your Depository Participant (DP) i:e bank or broker, is registered with, your demat account will be held with either NSDL or CDSL.
Author Bio
Is there any exemption for Section 8 company from this provision ? As they are not considered as small company.