Dematerialization of shares: Mandatory for private companies

Private companies (other than a ‘small company’) are required to take steps towards dematerialization of all its securities with effect from 27 October 2023. The requirement applies to fresh issuance of securities and securities already issued by the relevant private company. This is the latest diktat from the Ministry of Corporate Affairs, which notified the ‘Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023’ (the “Amendment Rules”) on 27 October 2023 (the “Notification Date”).

Among other things, the Amendment Rules have inserted a new rule, i.e., Rule 9B, to the Companies (Prospectus and Allotment of Securities) Rules, 2014. The new Rule 9B and what it means to private companies has been examined below:

Within eighteen (18) months from the close of a “financial year” (the “Cut-off Date”), every private company other than a “small company” that intends to issue securities must issue securities only in a dematerialized form. Further, every private company must “facilitate” the conversion of securities held in physical form into a dematerialized form. Such efforts must be undertaken with immediate effect. “Financial Year” for the purpose of Rule 9B means a financial year ending on or after 31 March 2023, in respect of which audited financial statements are available.

Please click here to read the full article by Ajay G Prasad, published in Lexology.