Securities In Dematerialized Mode: Unlisted Public Companies

APPLICABILITY

Section 29 read with Rule 9 & Rule 9A of (Companies (Prospectus and allotment of securities) Third Amendment Rules 2018):

Classes of Companies

(a) every company making public offer; and (Rule 9)

(b) Unlisted Public Companies (Rule 9A)

(c) Any other company may voluntarily do so following provisions of Depositories Act, 1996 and regulations made there under.

Company making public offer

The provisions for company making public offer are as follows:

Rule 9. Dematerialisation of securities.—The promoters of every public company making a public offer of any convertible securities may hold such securities only in dematerialised form:

Provided that the entire holding of convertible securities of the company by the promoters held in physical form up to the date of the initial public offer shall be converted into dematerialised form before such offer is made and thereafter such promoter shareholding shall be held in dematerialized form only.

Unlisted Public Companies (Rule 9A)

Every unlisted public companies opting – offer for issue of any securities, buyback of securities or issue of bonus shares or rights offer shall compulsorily issue or buy back such securities in dematerialized form.

Note: Further, it must ensure that before the issue the entire holding of securities of promoters, directors and KMPs are in dematerialized form.

Compliance on holders of securities of unlisted public companies

The holder of securities to ensure that on or after 2^nd October 2018, any transfer of securities or before subscribing to new securities by way of rights issue, bonus issue or private placement shall ensure that all his existing securities are in dematerialized form and of course the new issue of securities will be made by the company only in dematerialized form. So his entire holding will be in dematerialization form on effecting transfer or subscribing to new securities.

Points to be noted:

1. An indirect compliance requirement is on all unlisted public companies to provide dematerialization facility to its shareholders before 2^nd October 2018.
2. Compliance burden seems to be more on unlisted public companies compared to companies making public offer as KMP and Directors are also required to ensure dematerialization of its holding before unlisted public company makes any issue or buy-back any securities. Section 29 is quite silent on the matter.
3. Deemed public companies – Whether Private Companies which are subsidiary of public companies are required to comply with this provision? Section 29 reads as follows – “Public offer of securities to be in dematerialized form” – Private companies (which continues to be private as per articles but being subsidiary of Public Company) are restricted by its articles to raise any money from public by way of issue of securities. Hence, the logic applies that such companies to be exempted from applicability of section 29 and any rules made there under. However, till we receive any clarification from the Ministry of Corporate Affairs, the deemed public companies are also called as public companies pursuant to Section 2(71) of Companies Act, 2013. Hence, it shall continue to comply.
4. Issue of shares under scheme of ESOPs and sweat equity are also part of the above rules (under “offer for issue of any securities”). So any issue of such securities made by the company shall comply with provisions of section 29 and rules made there.

Every Unlisted Public Company (UPC) to facilitate dematerialization:

Immediate compliance of Unlisted Public Company:

1. Make an application to Depository (NSDL or CDSL) and secure ISIN for each security.
2. Appoint Registrar to an Issue and share transfer agent.
3. Enter Tripartite agreement with Depository and Registrar to an issue and share transfer agents. (RTA).
4. Inform to all existing security holders about dematerialization process of securities.
5. Make timely payment of admission and annual fees to depository and RTA.
6. Maintain security deposit of not less than 2 years fees with depository and RTA.
7. To comply with all regulations as may be issued by SEBI, Depositories from time to time with respect to UPC.
8. An audit report as per reg. 55A of SEBI (Depositories and Participants) Regulations, 1996 be submitted to Registrar of Companies where the company has registered office on half-yearly basis.

Rights of security holders

1. Any grievance by security holders shall be filed before IEPF Authority.
2. IEPF shall initiate action against depository or RTA or depository participant after prior consultation with SEBI.

Points to be noted:

When to comply?

The security holders to ensure that any transfer or subscription shall be made only in demat mode on or after 2^nd October 2018. Hence, the company is suggested to comply with all requirements before 2^nd October 2018 and inform to its stakeholders accordingly. However, the rules are effective from 2^nd October 2018 onwards.

Practically, the Board must authorize any director/authorized person to comply with aforesaid rules. Further, as per section 88 of Companies Act, 2013, the register of members will be turned into dematerialized form and hence, the company to comply with section 88 and rules made there under.

Which depository, the company should make an application?

The application may be made to either one of the depository – NSDL or CDSL. However, the company must ensure that all demat accounts held by its shareholders are opened with same depositories.

If the above requirement is not satisfied, the company shall make application to both the depositories.

Is there any format of issuing letter to shareholders on providing demat facility?

The rules are silent on above matter, hence the company can mention following:

1. Steps to open demat account
2. Name of the depository where the company has registered itself.
3. Name and correspondence details of the RTA for processing dematerialization of physical securities.
4. Name and correspondence details of authorized person of the company for grievance redressal and clarifications.

Whether certification from qualified chartered accountant or a practicing company secretary required for filing report as per Regulation 55A?

Yes, the company shall comply all requirements of Regulation 55A audit report and file on half-yearly basis with RTA.

Is there any fee for filing half-yearly audit report?

The rules are silent on filing fees of Regulation 55A audit report. Hence, the company need not pay any filing fees unless prescribed. 

When the first report is filed?

The first audit report shall be filed for the half-year ended 31^st March, 2019 within 30 days from the end of the half-year. (As such no time limit is given under the rules; however as per requirement of Reg.55A, the report is filed within 30 days)

Any e-form is introduced?

No e-form is introduced till now and hence the company to file return in physical form with ROC unless prescribed.

Is there any form in which the complaint/grievance may be filed by security holder to IEPF Authority?

No form is introduced in the rules and hence the security holder may write a letter to IEPF Authority unless prescribed.

Can IEPF authority initiate any action against the company on receiving grievance from security holder?

The rules are silent on initiating any action against the company on grievance received from security holder on company. However, it may take action against RTA, Depository Participant and depository on grievance received from security holder against them under prior consultation with SEBI.

Is there any process on how company will be involved on any action initiated by IEPF Authority or any process is prescribed for IEPF Authority in order to initiate the action under rule 10?

The rules are silent on this matter.

What if the company do not comply with aforesaid provisions?

The company will not be able to process transfer or issue or buy-back any securities and further penal action may be imposed under section 450 of Companies Act, 2013.

What if the company does not comply with payment of fees and maintenance of security deposits with RTA & Depository?

It shall not make any offer of securities, buyback, bonus issue, rights offer unless it clear payments as such.

Process to be followed by the company to obtain connection with depositories:

https://nsdl.co.in/joining/issuer.php

https://www.cdslindia.com/issuer/issuer-joiningpro.html

Disclaimer: The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed.