MCA’s New Demat Rule for Private Companies – Impact | Compliance | Practical Insights

By Gaurav Pingle – Practising Company Secretary and Avani Ghate – Manager | Link Intime India Pvt. Ltd.

Table of Contents

1. Relevant Provisions in the Companies Act, 2013
2. Relevant Provisions in the Companies Rules
3. Extant Provisions Applicable to Public Cos. Made Applicable to Not Small Cos.
4. Applicability of mandatory dematerialization of private company
5. Parties involved in Dematerialization of Shares
6. Roles of above parties in Dematerialization of Shares
7. Two Stages for Dematerialization of Shares

1. Relevant Provisions in the Companies Act, 2013

1.1 Section 29 of the Cos. Act, 2013 – Public offer of securities to be in dematerialised form

(1) Notwithstanding anything contained in any other provisions of this Act,—

(a) Every company making public offer; and

(b) Such other class or classes of public companies as may be prescribed,

shall issue the securities only in dematerialised form by complying with provisions of Depositories Act, 1996 and Regulations made thereunder.

Word “Public” omitted by the Companies (Amendment) Act, 2019, w.e.f. 15-8-2019.

(1A) In case of such class or classes of unlisted cos. as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in Depositories Act, 1996 and the regulations made thereunder.

(2) Any Co., other than Co. mentioned in sub-section (1), may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 and the regulations made thereunder.

2. Relevant Provisions in the Companies Rules

Companies (Prospectus and Allotment of Securities) Rules, 2014

2.1 Provisions mandating private Cos. (other than Small Cos.)

Every Private Company, other than a Small Company, shall within the period referred to in sub-rule (2):-

(a) Issue the securities only in dematerialised form; and

(b) Facilitate dematerialisation of all its securities, in accordance with provisions of the Depositories Act, 1996 and regulations made thereunder.

Rule 9B(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014.

2.2 Definition of ‘Small Company’

Section 2(85) of the Companies Act, 2013 read with Rule 2(1)(t) of Cos. (Specification of definitions details) Rules, 2014

“Small Company” means a Company, other than a Public Company–

(i) Paid-up share capital of which does not exceed Rs. 50 lacs or such higher amount as may be prescribed which shall not be more than Rs. 10 crore; AND

(ii) Turnover of which as per P&L A/c for the immediately preceding FY does not exceed Rs. 2 crore or such higher amount as may be prescribed which shall not be more than Rs. 100 crore.

Cos. (Specification of definitions details) Rules, 2014:
“Small Company” means a Company, other than a Public Company, wherein paid-up capital does not exceed Rs. 4 crores AND turnover does not exceed Rs. 40 crores.

2.3 Following are ‘Small Companies’, irrespective of monetary thresholds

Nothing in this clause shall apply to—

a) Holding Co.

b) Subsidiary Co.

c) Co. registered u/s 8 of CA, 2013 or u/s 25 of CA, 1956

d) Company governed by any Special Act

e) Body corporate governed by any Special Act.

2.4 Mandatory compliance for ‘private companies’ – within 18 months

A private company, which as on last day of a financial year, ending on or after 31st March, 2023, is not a small company as per audited Financial Statements for such Financial Year,
shall, within 18 months of closure of such Financial Year, comply with the provisions of this rule.

Rule 9B(2) of Companies (Prospectus and Allotment of Securities) Rules, 2014.

2.5 Issue, buy-back, bonus shares, rights offer – mandatory demat for promoters, directors & KMP

Every Pvt. Co. referred to in sub-rule (2) making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer, after the date when it is required to comply with this rule, shall ensure that before making such offer, entire
holding of securities of its Promoters, Directors, KMP has been dematerialised in accordance with the provisions of the Depositories Act, 1996 and Regulations made thereunder.

Rule 9B(3) of Companies (Prospectus and Allotment of Securities) Rules, 2014

2.6 Mandatory demat for transfer, rights issue, bonus issue, Pvt. Placement

Every holder of securities of Pvt. Co. referred to in sub-rule (2), —

(a) who intends to transfer such securities on or after the date when Co. is required to comply with this rule, shall get such securities dematerialised before the transfer; OR

(b) who subscribes to any securities of the concerned Pvt. Co. whether by way of private placement or bonus shares or rights offer on or after the date when the company is required to comply with this rule shall ensure that all his securities are held in dematerialised form before such subscription.

Rule 9B(4) of Companies (Prospectus and Allotment of Securities) Rules, 2014.

3. Extant Provisions Applicable to Public Cos. Made Applicable to Not Small Cos.

3.1 Application of certain provisions of Rule 9A (Public Co.) to Rule 9B (Pvt. Co.)

• Securing International Security Identification Number (ISIN) for each type of security
• Informing all its existing security holders about demat facility
• Timely payment of fees (admission & annual) to the Depository and R&TA
• Maintaining deposits with Depository and R&TA
• Comply with regulations or directions or guidelines or circulars, if any, issued by SEBI or Depository
• In case of default in fees/deposits – Pvt. Co. shall not make offer of any securities or buyback its securities or issue any bonus or right shares till the payments are made;
• Provisions of Depositories Act, 1996, SEBI (Depositories and Participants) Regulations, 2018 and SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 shall apply mutatis mutandis;
• Co. shall immediately bring to the notice of depositories any difference observed in its issued capital and the capital held in dematerialised form
• Grievances, if any, of security holders of Pvt. Co. shall be filed before IEPF Authority
• IEPF Authority shall initiate any action against Depository or Participant or R&TA, after prior consultation with SEBI

3.2 Half-yearly compliance introduced for certain ‘Pvt. Cos.’

• Every applicable Pvt. Co. shall submit Form PAS-6 to the Registrar within 60 days from the conclusion of each half year duly certified by CS in practice or CA in practice;
• Reconciliation of shares

3.3 Recommendations

• Exemption should be considered for Pvt. Cos. that are wholly-owned subsidiary companies
• Exemption should be considered for Sec. 8 Cos.
• Clarity on timelines
• Consolidating half yearly returns along with annual compliances.

4. Applicability of mandatory dematerialization of private company

• The mandatory dematerialization requirement is applicable for all securities of every private company, excluding small companies and government companies.
• For example: A private company (other than a company that is a small company as on 31st March 2023) is required to comply with mandatory dematerialization of securities within a period of 18 months from the end of FY 22-23, i.e., on or before 30th September 2024.
• The provisions are applicable with immediate effect, and a timeline of 18 months is provided from the closure of the financial year in which a private company is not a small company for the compliance with the mandatory dematerialization requirements.
• For Example: In case a company ceases to be a small company after 31st March 2023, the timeline of 18 months triggers from the close of the financial year in which it ceases to be a small company. Therefore, if a company ceases to be a small company at any time during FY23-24, the timeline of 18 months will trigger from 31st March 2024 and therefore, shall be complied with by 30th September 2025.

5. Parties involved in Dematerialization of Shares

• Issuer Company
• Shareholders [Beneficial Owner]
• Depository Participant (DP)
• Registrar and Transfer Agent (RTA)
• Depository i.e. CDSL or NSDL [Registered Owner]

6. Roles of above parties in Dematerialization of Shares

• Depository – A depository is an organization which holds securities of investors in electronic form.
• Depository Participant (DP) – A DP is an agent of the depository through which it interfaces with the investor and provides depository services.
• Issuer – means any entity issuing securities which can be held by depository in electronic form.
• Registrar and Transfer Agent (RTA) – An RTA is an agent of the issuer. RTA acts as an intermediary between the issuer and depository for providing services such as dematerialization, rematerialisation, initial public offers (IPO) and corporate actions.
• Registered Owner of Securities – When physical shares are converted into electronic form, the depository becomes ‘Registered owner” in the books of the company and investor’s name is removed from books of the company.
• Beneficial Owner (BO) – All the benefits of the dematerialized shares are given to the actual investor.

7. Two Stages for Dematerialization of Shares

7.1 Pre – Stage

• Appoint a share Registrar and Transfer agent for obtaining ISIN and opening a Depository Account.
• Obtain ISIN and intimate the same to the company shareholders who are holding securities in physical form for dematerialization of shares.

N.B. ISIN Stands for ISIN (International Securities Identification Number) is a unique 12 digit alphanumeric identification number allotted for a security (e.g.- INE383C01018)

7.1.1 Issuer Admission Process @ NSDL

• Online submission of complete documents leads to quick and smooth process of Company admission & ISIN allocation
• Certified true copies of Memorandum & Articles of Association along with Certificate of Incorporation
• Certified true copy of Board Resolution mentioning name of signatories who are authorized by Board to execute documents and list of Authorised Signatories along with specimen signature
• Certified true copy of Audited annual report for the last financial year
• Net Worth certificate as per audited annual report for the last financial year
• Confirmation letter from Registrar & Transfer Agent (R&T Agent)
• Undertaking (incase of Private Limited company)
• Tripartite agreement should be executed between Issuer, R&T Agent and NSDL

7.1.2 Issuer Admission Process @ CDSL

• Master Creation Form (MCF)
• Certified true copies of Memorandum & Articles of Association along with Certificate of Incorporation
• Certified true copy of Board Resolution mentioning name of signatories who are authorized by Board to execute documents and list of Authorised Signatories along with specimen signature
• Certified true copy of Audited annual report for the last financial year
• Net Worth certificate as per audited annual report for the last financial year
• Undertaking (incase of Private Limited company)
• Letter for Freezing/Unfreezing of securities
• Security Details (Excel Format)
• Tripartite agreement should be executed between Issuer, R&T Agent and NSDL

7.1.3 Expenses for Dematerialisation

7.2 Post Stage

• Shareholders will directly contact their respective Depository participants (DP) with whom they have their demat account for dematerialization of their physical Shares and surrender their physical share certificates. In case Shareholder don’t have their demat account with any depository participant they have to open the same. Demat account is mandatory for dematerialization of physical shares. x Shareholder whether Individuals/Corporates should have PAN No for opening demat account this mandatory requirement.
• DP will then process the application and generate the Demat Request Number (DRN).
• DP will submit the DRN along with physical shares certificate with Issuer Company Compliance team. Issuer company will cancel the physical share certificate and issue a letter to Company Share Registrar and transfer agent stating it consent for processing the demat request.
• Once Concurrence given by company to its RTA. RTA will process the demat request and post which credit will appear in shareholder’s account.