In a significant move aimed at enhancing corporate governance practice among Indian companies, the Ministry of Corporate Affairs on October 27, 2023 notified an amendment to the Companies (Prospectus and Allotment of Securities) Rules, 2014, and has subjected private companies to norms of mandatory dematerialization of shares.
Following are the key aspects of the amendment:
- Every private company, other than a Small Company* and government company, are mandated to issue securities only in dematerialized form and facilitate dematerialization of all its securities.
- Every such private company making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer shall ensure that before making such offer, the entire holding of securities of its promoters, directors, key managerial personnel has been dematerialized.
- Every security holders (a) who intends to subscribe to any securities of the company whether by way of private placement or bonus shares or rights offer or (b) who intends to transfer securities held in the company, are mandated to ensure all securities are held in dematerialized form before subscription or transfer, as the case may be.
- The amendment has prescribed a compliance timeline, wherein such private companies which are not categorized as small company as of the last day of a financial year ending on or after 31st March, 2023 as per audited financial statements, are required to comply with the dematerialization requirements within 18 (eighteen) months following the closure of that financial year.
- Please refer to illustration hereinbelow for a better clarity on the compliance timeline:
For example, if a private company does not qualify as a small company as of 31st March, 2023, it is required to adhere to the dematerialization requirements by 30th September, 2024. Similarly, if the company falls outside the small company classification as of 31st March, 2024, it must comply with the dematerialization requisites by 30th September, 2025.
It is pertinent to note that, upon coming under the purview of the above dematerialization norms, companies shall be required to appoint a Registrar and Transfer Agent (RTA) registered with Securities and Exchange Board of India and obtain an International Securities Identification Number (ISIN) from the National Securities Depository Limited (NSDL) or Central Depository Services (CDSL).
Further, every concerned company shall submit Form PAS-6 (Half yearly return for reporting of shares held in Demat form) to the Registrar of Companies, along with the relevant fee, within 60 days from the conclusion of each half-year, duly certified by a company secretary in practice or chartered accountant in practice.
While the amendment brings additional mandatory compliances for private companies, this move could substantially reduce the issues due to loss, theft, or tampering with physical share certificates, and will ease the process of issuing and transferring shares.
Furthermore, opening a dematerialized shares’ account in India requires significant Know Your Customer (KYC) information, and also requires to obtain a permanent account number with Indian tax authorities, this will act as deterrent to fraudulent activities related to physical certificates like benami transactions, money laundering and back dated issuance of physical certificates, and will also will facilitate for an ownership tracking mechanism for the regulators.
*Under the Companies Act, 2013, ‘Small Company’ is defined as a company, other than a public company, with a paid-up share capital not exceeding Rs. 4 Crores, and a turnover, based on its last profit and loss account for the immediately preceding financial year, not exceeding Rs. 40 Crores. However, the following types of companies are not eligible for classification as a Small Company: (a) holding companies or subsidiary companies, (b)companies registered under section 8, and (c) companies or body corporates governed by any special Act.