In an effort to enhance transparency, protect investor interests, and strengthen corporate governance, the Ministry of Corporate Affairs (MCA), on October 27, 2023, has introduced the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (PAS Amendment Rules). This amendment mandates private companies, excluding small companies, to facilitate the dematerialization of their existing securities within a stipulated timeline and issue new securities only in dematerialized form.
Class of Companies Affected:
Rule 9(B) of the PAS Amendment Rules specifies the prescribed classes of companies required to comply. Private companies, excluding small Companies, as of the financial year ending on or after March 31, 2023, fall under the ambit of this rule.
Small companies, as defined under section 2(85) of the Companies Act, 2013, are exempt from these provisions.
“Definition of Small Companies”
(85) small company ‘‘means a company, other than a public company:
(i) paid-up share capital of which does not exceed ₹ Four Crore
Or
(ii) turnover of which as per its last profit and loss account does not exceed ₹ Forty Crores.
Exclusions from the definition of small company:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
Compliance Timeline:
Private companies falling under this mandate must comply within eighteen months of the financial year concluding on March 31, 2023. Accordingly, the Due Date for compliance is set for September 30, 2024.
Consequences of non-dematerialization:
On the Applicable Company:
Failure to dematerialize securities by the Due Date restricts the company from making offers for securities, buybacks, or issuing bonus shares or rights offers unless promoters, directors, and key managerial personnel securities holdings are dematerialized.
On Security Holders:
Security holders failing to dematerialize by the Due Date cannot transfer, purchase, or subscribe to any securities of the Applicable Company post-Due Date unless their securities are dematerialized.
Procedure for Dematerialization:
- Applicable Company Procedure:
- Pass a Board Resolution.
- Select a Depository Participant (DP) and open a Demat account.
- Appoint a Registrar and Share Transfer Agent (RTA).
- Execute a Tripartite Agreement.
- Obtain International Securities Identification Number (ISIN).
- Inform shareholders.
- Ensure completion of the dematerialization process.
- Shareholders Procedure:
- Select a Depository Participant
- Open a Demat account.
- Submit Dematerialization Request Form
- Verify Dematerialization Request by Depository Participant
- Confirm and update records.
The recent amendment serves as a pivotal reminder for Applicable Companies to make the crucial shift from physical to electronic shares, ushering in a new era of operational efficiency. This mandatory transition not only mirrors global regulatory trends but also contributes to the creation of an eco-friendly and fraud-resistant financial landscape. By dematerializing shares, these companies stand to gain significant advantages, including streamlined tracking, diminished transaction costs, and heightened transparency. As we navigate these regulatory waters, embracing this change will undoubtedly steer private companies toward a more efficient and secure future.
