In its continuous effort to curb the black money and the Benami Transaction, Government of India, vide Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018, introduced the new rule, Rule 9A.

The new Rule 9A mandated every unlisted public company, with few exceptions which we will discuss later in the write-up, to issue further securities in dematerialised form and facilitate its securities holders in the dematerialization of their current holding of securities.

Overview of the system

Dematerialisation of securities simply means converting physical securities in the electronic form. Every security holder in place of having physical security will have security in electronic form in their account known as Demat Account. This is more or less like holding cash in Bank Account. The security holder can transfer the security in electronic form one security holder to others subject to the condition that both should have Demat Account. The organization/company which facilitate these services is called depository. The Securities and Exchange Board of India will grant registration under section 12 of the Securities and Exchange Board of India Act, 1992 to any company to act as depository subject to fulfilment of the condition specified.

In India, currently, there are two depositories, National Securities Depository Limited, or simply NSDL, and Central Depository Services (India) Limited, or simply CDSL. Both the company are promoted by a different set of promoters. Where’s the NSDL is promoted by the IDBI, NSE, UTI, etc. the CDSL is promoted by HDFC Bank, BSE, etc.

The Depository, however, does not extend their services directly to the companies, shareholders or investors; they rather appoint depository participants (DP) which act as an intermediary between them and provide services. DP is also registered by the SEBI under section 12 of the Securities and Exchange Board of India Act, 1992 to any company to act as depository participant subject to fulfilment of specified conditions.

To dematerialise their security, security holders need to surrender their physical certificate to the issuer, and issuer after receipt of such certificate cancel such certificate and enter the name of Depository as the registered owner and intimate the depository (practically to Depository Participant) and DP afterwards to enter the name of such security holder as a beneficial owner in its record. Once the shares are dematerialised the transfer will also take place electronically.

The Depository shall be deemed to be the registered owner for the purpose affecting the transfer of ownership of security on behalf of the beneficial owner and does not have any other right. All the rights and liabilities associated with the security such as voting right, right to receive dividend/interest, if declared, right to pay any unpaid amount, shall be vest only to the beneficial owner.

Provisions related to the Companies Act, 2013

The Companies Act, 2013 with effect from 10th September, 2018 inserted the Rule 9A by the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 dated 10.09.2018, however, which was subsequently amended and with the last amendment dated 22nd May 2019, Rule 9A come into effect from 30th September, 2019.

The Rule 9A applies to every unlisted public company except following;

(a) a Nidhi,

(b) a Government company, or

(c) a wholly-owned subsidiary.

The unlisted public company, except those specified above, shall

1. Issue the securities only in dematerialised form; and

2. Facilitate dematerialisation of all its existing securities

It is to be noted that it’s not only shares that need to be dematerialised, rather entire securities need to be dematerialised, hence, debentures, etc., also need to be dematerialised.

Rule 9A further make it mandatory that before taking the following transactions the entire holding of the securities (Equity Shares, Preference Shares, Debenture, etc) of the promoters, director, and KMP needs to be in dematerialised form.

1. Issue of Securities

2. Buyback of Securities

3. Issue of Bonus Shares

4. Right offer.

Rule 9A not only mandates the unlisted public company to dematerialise its securities but also its securities holders. If any security holder wants to transfer its shares then it needs to have such shares in dematerialised form.

Further, the new subscriber of securities of an unlisted public company shall ensure that its existing securities are in the dematerialised form before subscribing any new securities.

The Rule also makes it mandatory for the unlisted public company to facilitate its existing shareholders in the dematerialisation of their shares. The unlisted public companies to obtain the International Security Identification Number for its securities.

The Rule also makes it mandatory for the company;

1. To make payment to the Depository and RTA both one time and annual payment in a timely manner.

2. In addition to the above, company also need to maintain a security deposit with Depository and RTA, which shall not be less than equal to two years’ fees.

3. The company also need to follow the circulars issued by SEBI and Depository from time to time, in respect of dematerialisation of shares of unlisted public companies and matters incidental or related thereto.

In case the company fails to comply with the above three provisions then the unlisted public company won’t be able to come up with the following corporate actions until such default made good;

1. The offer of any securities.

2. Buy-back of securities;

3. Bonus issue;

4. Right issue;

All the provisions of the below mentioned Act and Regulation shall be applicable mutatis mutandis to the dematerialisation of the securities of the unlisted public company;

a. Depositories Act, 1996

b. SEBI (Depositories and Participants) Regulation, 2018, and

c. SEBI (RTA) Regulations 1993.

The company also need to file PAS-6 for the Reconciliation of Share Capital Audit Report within 60 days from the end of each half-year. The details which need to be provided in PAS-6 includes ISIN number, the period for which it is being filed, shares held with depository and physical form, change in the share capital during the period for which form is being filed, details of shares in Demat form and shares held in physical form, etc.

In case there is any discrepancy between issued capital and capital held in the dematerialised form then the company shall bring such discrepancy to the notice of the depository at the earliest.

Shareholders of the unlisted public company can file their grievances with Investor Education and Protection Fund Authority. IEPF Authority with the prior consultation of SEBI may take action against Depository, DP, Registrar, and Share Transfer Agent in case of any default by these intermediaries.

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February 2024