Govt Mandates Private Companies to Issue Dematerialised Shares

On October 27, 2023, the Central Government notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, requiring private companies to issue securities only in dematerialised form w.e.f. September 30, 2024. The amendment rules modify Rule 9 and insert Rule 9B, Form PAS-7 and Form PAS-8 in the 2014 rules.

When it comes to unlisted public companies, the Government had mandated the issue of securities in dematerialised form via an amendment to the 2014 rules and the addition of Rule 9A, in the year 2018. In this article, we look at the major changes introduced under the 2023 amendment rules.

Conversion of share warrants

By inserting Rule 9(2), the amendment rules require public companies which have not converted the share warrants issued prior to the commencement of the Companies Act, 2013, into shares, to inform the Registrar about the details of the share warrants in Form PAS-7 (including information such as date of issue, number of shares, name of person, etc.), within 3 months. Such companies should also ensure that the bearers of the warrants surrender them and get the shares dematerialised in their account within 6 months. To bring this requirement to the knowledge of the bearers of share warrants, the said provision mandates companies to display and publish a notice in Form PAS-8 on their websites and in newspapers (in vernacular and English languages), respectively.

In case the warrant bearers fail to surrender the warrants within the stipulated time, it is the company’s responsibility to convert the share warrants into dematerialised shares and transfer them to the Investor Education and Protection Fund.

Private companies to issue securities in dematerialised form

The amendment rules provide for the insertion of a new provision, Rule 9B which deals with the issue of securities by private companies. All private companies, other than small companies, have been mandated to issue securities only in dematerialised form and facilitate the dematerialisation of all its securities. As per Sub-rule (2) of Rule 9B, private companies have to comply with the requirements listed under Rule 9B within 18 months of the closure of the financial year, i.e., by September 30, 2024. A private company, which is a small company per the audited financial statements for such financial year, will not be required to comply with the provisions of Rule 9B. Moreover, Government companies have been excluded from the purview of the rule.

After the said date, private companies referred to in sub-rule (2), before making any offer for issue of any securities, buyback of securities, issue of bonus shares or rights offer, have to ensure that “entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder”.

On or after September 30, 2024, the transfer of securities of private companies by its holder would require the holder to get the securities dematerialised before the transfer. Further, a holder of securities of such private companies would be required to ensure that all his securities are held in dematerialised form before subscribing to any securities of the concerned private company (i.e. if the subscription is made on or after the said date).

The provisions pertaining to the filing of application before a depository, compliance with circulars of SEBI or depository, filing of security holders’ grievances before the Investor Education and Protection Fund Authority, etc. under Rule 9A(4) to (10) would apply “mutatis mutandis” to the dematerialisation of securities under Rule 9B.

Remarks

The amendment rules clearly specify that the provisions regarding the issue of securities in dematerialised form do not apply to small companies. As per a joint reading of Section 2(85) of the Companies Act, 2013, and Rule 2(1)(t) of the Companies (Specification of Definition Details) Rules, 2014, a small company means a company, other than a public company, whose: –

  • Paid-up share capital does not exceed Rs.4 crore; and
  • Turnover as per profit and loss account for the immediately preceding financial year does not exceed Rs.40 crore.

The thresholds for paid-up share capital and turnover were last amended in September 2022. The 2014 rules also specify that the said limits prescribed by the Government should not exceed Rs.10 crore and Rs.100 crore, respectively.

A proviso to Section 2(85) states that the said Section is not applicable to: –

  • Holding or subsidiary company;
  • Company registered under section 8 of the 2013 Act;
  • Body corporate or company governed by any special Act.

It follows that the abovementioned companies will not be treated as small companies even if they fulfil the conditions pertaining to paid-up share capital and turnover, and hence, would be bound by the present notification.

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The amendment rules provide for the insertion of a new provision, Rule 9B which deals with the issue of securities by private companies. All private companies, other than small companies, have been mandated to issue securities only in dematerialised form and facilitate the dematerialisation of all its securities. As per Sub-rule (2) of Rule 9B, private companies have to comply with the requirements listed under Rule 9B within 18 months of the closure of the financial year, i.e., by September 30, 2024. A private company, which is a small company per the audited financial statements for such financial year, will not be required to comply with the provisions of Rule 9B. Moreover, Government companies have been excluded from the purview of the rule.

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