[Opinion] Rule 9B | Demat of Shares for Private Companies – A Drafting Flaw
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- Last Updated on 24 January, 2024
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M.R. Thiagarajan – [2024] 158 taxmann.com 531 (Article)
In this article, the author has highlighted an error in drafting found in sub-rule (2) of Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 which is not in alignment with the definition of a “Small Company” as defined in Section 2(85) of the Companies Act, 2013 and suggests suitable change in wordings therein to make it meaningful.
Ministry of Corporate Affairs as per the Notification G S R 802 (E) dated 27th October, 2023, in exercise of its powers conferred by section 29 read with section 469 of the Companies Act, 2013 (“Act”), made the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 further to amend the Companies (Prospectus and Allotment of Securities) Rules, 2014 (“Rules”).
A major amendment brought about by the aforesaid Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 to the Rules is the insertion of a new Rule 9B to the Rules providing for the Issue of securities in dematerialised form by Private Companies.
As per the new Rule 9B of the Rules, every private company, other than a small company, shall within the period referred to in sub-rule (2) of Rule 9B of the Rules, issue the securities only in dematerialised form and also facilitate dematerialisation of all its securities, in accordance with provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder.
What is the period prescribed in Sub-rule (2) of Rule 9B of the Rules?
Sub-rule (2) of Rule 9B of the Rules reads as follows: (2) 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 eighteen months of closure of such financial year, comply with the provisions of this rule.
Plain reading of the above sub-rule (2) of Rule 9B of the Rules will mean and require that a private company will be required to comply with the requirements of issue of securities if it is not a “small company” as per audited financial statements for such financial year ending on or after 31.03.2023 within 18 months of closure of such financial year. In other words, if a private company is a small company as on 31.03.2023 [ which is the last date of the financial year ending/ended 31.03.2023 ] as per the audited financial statement for such financial year -that is 31.03.2023, it need not comply with Rule 9B of the Rules. Similarly, if a private company is not a small company as on 31.03.2023 as per the audited financial statement for 31.03.2023, it has to comply with Rule 9B of the Rules on or before 30.09.2024. This will apply for each financial year ending after 31.03.2023.
What is the Flaw?
The flaw is in the wordings in Sub-rule (2) of Rule 9B of the Rules stating that the Rule 9B is not applicable to a small company as on the last date of the (same) Financial Year as per audited financial statement for such (same) financial year.
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