Mandatory Dematerialisation of Securities
Ministry of Corporate Affairs introduces amendments to Companies (Prospectus and Allotment of Securities) Rules, 2014
Introduction
The Ministry of Corporate Affairs (“MCA”) on 27 October 2023 notified amendments to rules under the Companies Act, 2013. This includes the Companies (Prospectus and Allotment of Securities) Second Amendment Rules 2023. (“PAS Rules 2023”).
Objective of the Amendment
The amendment seeks to enhance transparency, efficiency, accountability and to reduce the risk of fraud in the issuance and management of securities by both public and private companies.
Dematerialized securities are known to be safer than physical securities as they are not susceptible to damages or theft. Similarly, concerns around payment of stamp duties can also be avoided as generally, the depositories ensure that securities are properly and adequately stamped.
They will come into effect on the date of their publication in the Official Gazette, ensuring prompt implementation.
Broadly PAS Rules, 2023 states that other than a small company, every private company will issue the securities only in dematerialised form; and facilitate the dematerialisation of all its securities. Further such companies will have to dematerialise their shares by September 2024.
Key Points
The PAS Rules 2023 cover two major amendments with respect to:
- Bearer share warrants under the erstwhile Companies Act, 1956 and
- The issue of securities in dematerialized form by all private companies except small companies.
Mandatory dematerialization for Public Companies
Rule 9 relating to the Dematerialisation of securities has been revised and a provision has been inserted that focuses on public companies that issued share warrants prior to the commencement of the Companies Act, 2013 and not converted it to shares.If you are in the market for clothes, our platform is your best choice! The largest shopping mall!
Mandatory dematerialization for private companies
Rule 9-B has been inserted relating to the issuance of securities in dematerialized form by private companies.
The mandatory dematerialization requirement is applicable to all securities of every private company, excluding small companies. A timeline of 18 months is provided from the closure of the financial year in which a private company is not a small company to comply with the mandatory dematerialization requirements.
To elucidate further a private company (other than a company that is a small company as of 31st March 2023) is required to comply with mandatory dematerialization of securities within a period of 18 months from the end of FY 22-23, i.e., on or before 30th September 2024.
Furthermore, private companies falling under these rules must ensure that the entire holding of securities of their promoters, directors, and Key Managerial Personnel has been dematerialized before any offer for the issuance of securities, buyback of securities, or the issuance of bonus shares or rights offers
Procedure for Dematerialisation of Securities for Private Companies
- Obtain International Securities Identification Number (“ISIN”) for all existing securities issued by the company;
- Facilitate dematerialization of all existing securities;
- Ensure that the entire holding of its promoters, directors, and KMPs are held in dematerialized form only, prior to making any offer for issuance or buyback of securities on or after September 30, 2024;
- From October 1, 2024, issue all securities in dematerialised form only; and
- File half-yearly returns with the Depository and the Ministry of Corporate Affairs in relation to the return of shares held in demat form.
Shareholders of private companies covered under this Amendment will be required to:
- Obtain a Permanent Account Number, which is an Income Tax Identification Number (if not already obtained);
- Obtain a demat account with a Depository Participant in India.
Conclusion
The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, represent a crucial development in India’s corporate regulatory landscape. Compliance within the stipulated timelines and requirements is essential for companies to navigate these changes effectively and contribute to a more robust and secure financial ecosystem in the country. Companies, whether public or private, should carefully assess their obligations under these rules and ensure timely compliance to avoid penalties and safeguard their operations in the evolving regulatory environment.