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09 Oct 2018

Dematerialisation Mandatory for Public Companies

The Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 (hereinafter “Rule(s)”) was published in the official gazette on 10th September, 2018 which is effective from 02nd October 2018. According to the Rules, the Ministry of Corporate Affairs, Govt. of India (hereinafter “MCA”) has mandated that every unlisted public company shall issue its securities only in dematerialised form and shall dematerialise all its existing securities as well.

Further an unlisted company looking for issuance of security, buyback of securities, issue of bonus shares or rights offer shall mandatorily require to cause the dematerialisation of securities held by its promoters, directors and key managerial personnel. In addition to this, the Rule also mandates that the provisions of the Depositories Act, 1996, SEBI (Depository Participants) Regulations, 1996, and SEBI (Registrar to an Issue and Share Transfer Agents) Regulations, 1993 shall apply mutatis mutandis to dematerialisation of securities of unlisted public companies, except for the requirement of quarterly filing of audit report with the concerned stock exchange, which can be filed in this case on a half-yearly basis to the concerned registrar of company as provided in regulation 55A of SEBI (Depository Participants) Regulations, 1996.

In order to streamline the provisions for listed public companies, the Security Exchange Board of India (hereinafter “SEBI”) has, on 11th September 2018, also notified the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (hereinafter “Regulation”), which is effective from 27th September 2018, rescinding the earlier SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (hereinafter “Rescinded Regulation”) which also mandates that the specified securities (i.e. equity shares and convertible securities) shall be allotted by public companies only in dematerialised form and prospective allottees will not have the option of getting the allotment of specified securities in physical form. However, prospective allottees may get the specified securities rematerialized subsequent to such allotment.  

Prior to the notification of the said Rule and the Regulation, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter “LODR Regulation”) read with Rescinded Regulation only required the entire shareholding of promoter(s) and promoter group to be in dematerialized form, however the same was not required for other shareholders of public companies. It is to be noted that this requirement of shares of promoter(s) and promoter group to be held in dematerialized form, still holds good.  

Thus, capital market regulator and the MCA has collectively mandated public companies to maintain securities in dematerialised form only (though the security holder shall always have the right in terms of the Depositories Act, 1996 to opt out and rematerialize the security allotted to him subsequent to the allotment). On one hand, while the change brings out a lot of benefits viz. (i) reduced risk of holding securities in physical form such as losing of securities due to theft etc., forgery of physical certificates and paperwork led errors etc.; (ii) increases the acceptability and the liquidity of security; (iii) curbs fraud and manipulation risk in physical transfer of securities by unscrupulous entities/ security holders; (iv) improve the ease, convenience and safety of transactions related to the security, however on the other hand, it increases the compliances and related cost for the unlisted companies, which were earlier exempted from such compliance requirements.

References:

  1. http://www.mca.gov.in/Ministry/pdf/CompaniesProspectus3amdRule_10092018.pdf
  2. https://www.sebi.gov.in/legal/regulations/sep-2018/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-_40328.html
  3. https://www.sebi.gov.in/legal/regulations/feb-2017/sebi-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-february-15-2017-_37269.html

https://www.sebi.gov.in/legal/acts/sep-1995/the-depositories-act-1996-as-amended-by-finance-act-2017-_1.html

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