Watch the latest edition of JSA Live, where our Principal Associate, Anindita Basu, discusses the mandatory requirement for private companies to issue securities exclusively in dematerialized form. The objective of this amendment is to ensure transparency, efficiency, and to mitigate the risks of fraud, loss, and theft. It streamlines the share issuance process. Anindita also delves into the compliance requirements associated with this initiative.
Transcript
Earlier, in September, 2018, the Ministry of Corporate Affairs (MCA) notified the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018. As per the amended norms, a new rule 9A was added to the existing rules, requiring every unlisted public company to issue securities only in dematerialised form and facilitate the dematerialisation of all its existing securities in accordance with the provisions of the Depositories Act, 1996 and the regulations thereunder.
Following up on this, MCA announced the PAS amendment on 27th October, 2023 impacting all companies, majorly the private companies by way of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (“PAS Amendment Rules”).
The PAS Amendment Rules encompass two major amendments: (i) with respect to the bearer share warrants under the erstwhile Companies Act, 1956, and (ii) mandatory dematerialisation for all private companies excluding small companies, which will briefly discuss In this session.
New Rule 9B has been inserted by way of the PAS Amendment Rules. It requires mandatory dematerialisation of securities issued by private companies. requiring all private companies other than small companies and govt co.s, to dematerialise their shares before October 1, 2024.
This amendment will ensure better transparency, efficiency, and mitigate fraud, risk of loss and theft. Streamlines the share issuance process.
Accordingly, twin obligations are placed on company & holder of shares. Under the amendment, every private company, which is not a small company, must within a period of 18 months of closure of such financial year: (a) issue the securities only in dematerialised form; and (b) facilitate dematerialisation of all its securities. Companies looking to fundraise / raise capital to note that before making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer, they must ensure that, (c) entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised.
Additionally, any security-holder who intends to transfer or subscribe to any securities of the private company, by the way of private placement, bonus or rights issue, need to ensure that all the securities are held in dematerialised form before such transfer or subscription.
Apart from this, compliances applicable to an unlisted public company pertaining to holding shares in demat form are also applicable to private companies. These include –
(a) Applications with depository for dematerialisation of all existing securities and securing ISIN for each type of security;
(b) Informing the existing security holders about the facility of dematerialisation;
(c) Complies with all applicable regulations with respect to dematerialisation;
To ensure such compliance, ROC now requires filing of return in form PAS-6 with ROC on a half yearly basis within 60 days from conclusion of such half of the financial year, with respect to reconciliation of the share capital of the company; Bring to the notice of the depositories, any difference in issued capital by the company and the capital held in dematerialised form;
Grievances of any security holders are now to be filed with IEPF Authority, which is entitled to initiate any action against a depository or depository participant or RTA or STA, as may be required, after prior consultation with SEBI.
Penalty: There are no specific penal provisions for non-compliance of these provisions and therefore, general penal provisions under section 450 of the Act should apply. Per Section 450, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of a continuing contravention, a further penalty of one thousand rupees for each day after the first during which the contravention continues, capped to two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.
