Dematerialization of Securities for Private Limited Companies: Latest Developments and Impact
In the ever-evolving world of corporate governance and securities management, staying abreast of the latest regulations is crucial for businesses and investors. One such critical development is the “Dematerialization of Securities for Private Limited Companies.” On October 27th, 2023, the Ministry of Corporate Affairs (MCA) issued a notification introducing significant changes that will affect how private limited companies manage their securities. In this blog, we delve into the latest developments and explore the impact these changes have on businesses and shareholders.
Background:
To understand the latest developments, let’s first look at the historical context. The Companies Act, 2013, had mandated that public companies maintain and transact their shares in dematerialized (Demat) form starting from October 2nd, 2018. However, this requirement did not extend to private limited companies at that time.
The Change: Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023
The game-changer arrived on October 27th, 2023, with the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. This new set of rules aims to bolster transparency, safeguard investor interests, and strengthen corporate governance. The rules come into effect on September 30th, 2024, and have significant implications for private limited companies.
Applicability and Non-Applicability:
The applicability of the new rules is a key point to consider. Public Limited Companies had already been required to comply since October 2, 2018. However, the rules will now apply to non-small private limited companies as well. It’s important to note that specific types of companies, such as Nidhi Companies, Government Companies, Wholly Owned Subsidiary Companies of Public Companies, and Small Private Limited Companies, are exempt from these regulations.
Definition of Small Company:
The Companies Act, 2013, provides a definition for “small company,” which is relevant in determining the applicability of the dematerialization rules. A small company is one with paid-up share capital not exceeding Four Crore rupees and a turnover not exceeding Forty crore rupees. This definition excludes holding companies, subsidiary companies, companies registered under section 8, and those governed by special Acts.
Amendment: Rule 9B
To implement these changes, the MCA introduced Rule 9B after Rule 9. Under this amendment, every non-small private company, starting from September 30, 2024, is required to:
- Issue its securities only in dematerialized form.
- Ensure the dematerialization of all its existing securities.
Impact on Companies:
The impact of dematerialization on companies is significant. Since October 2, 2018, unlisted companies were required to ensure that the entire holding of securities of their promoters, directors, and key managerial personnel was in Demat form. Failure to comply meant companies couldn’t issue securities, buy back shares, issue bonus shares, or rights issues.
From September 30, 2024, all new issuances or transfers of securities for non-small private companies must be exclusively in Demat form.
Impact on Security Holders:
Security holders face new requirements when it comes to transferring or subscribing to securities. As per the rules, holders who intend to transfer securities on or after September 30, 2024, must dematerialize their securities before the transfer. Those who wish to subscribe to securities of the concerned private limited company must ensure that their existing securities are held in Demat form.
Process of Compliances:
The compliance process involves several key steps:
- First Step: Companies must apply for an International Security Identification Number (ISIN) on or before September 30, 2024, regardless of whether shareholders intend to transfer their shares. This is the company’s responsibility to facilitate dematerialization for shareholders.
- Second Step: After obtaining ISIN, non-small private limited companies are required to file a Reconciliation of Share Capital Audit Report with the Registrar within 60 days from the conclusion of each half year. This report should detail shares in physical as well as shares in Demat.
- Third Step: Companies must make timely payments of fees and maintain a security deposit of two years’ fees as per agreements with depositories, registrars, and share transfer agents. They also need to comply with regulations, guidelines, or circulars issued by regulatory bodies.
Consequences of Non-Compliance:
While the rules do not specify penalties, Section 450 of the Companies Act comes into play. Companies and their officers can be subject to fines for non-compliance. The fine may extend up to ten thousand rupees, with further fines for continuing contraventions.
Conclusion:
The latest developments in the dematerialization of securities for private limited companies mark a significant shift in India’s corporate landscape. These changes aim to enhance transparency, protect investor interests, and strengthen corporate governance. Private limited companies, especially non-small ones, must prepare for these new regulations and ensure timely compliance to avoid legal consequences. As the September 30, 2024, deadline approaches, it’s essential for businesses and shareholders to stay informed and adapt to the evolving regulatory environment.