In India every company incorporated under the Indian Companies Act, 2013 and erstwhile Act of 1956, which is limited by shares, is required to issue certain types of securities to its stakeholders, viz. equity shares, preference shares, debentures etc., depending upon various factors. These securities are issued by the Company either in physical or dematerialized form. Till now, only public limited companies and certain prescribed unlisted public companies were required to issue their securities in dematerialized form and private limited companies were exempted and hence could issue their securities in the form of a physical document.
However in October of 2023, the Ministry of Corporate Affairs (MCA) amended The Companies (Prospectus and Allotment of Securities) Rules 2014 (PAS Rules) via the Companies (Prospectus and Allotment of Securities) Second Amendment Rules 2023 (PAS Amendment Rules) by adding rule 9B on 27th Oct 2023. This new rule mandates dematerialization of securities for all private companies excluding small companies and government companies.
“Small Company”: Section 2 (85) of the Companies Act 2013:
a small company is a company that is not a public company and has:
- A paid-up share capital equal to or below Rs.4 crore or such a higher amount specified not exceeding, more than Rs.10 crores.
- A turnover equal to or below Rs.40 crore or such a higher amount specified not exceeding, more than Rs.100 crores.
But, the following types of companies are not considered as small companies, even if they meet the above criteria:
- A holding company or a subsidiary company.
- A company registered under Section 8 (non-profit company).
- A company or body corporate governed by any special Act.
“Dematerialization” is a process by which physical security certificates are converted into electronic form.
These electronic holdings are then stored in a demat account, managed by a depository.
In India, there are two depositories registered with SEBI:
- NSDL (National Securities Depository Ltd.)
- CDSL (Central Depository Services (India) Ltd.)
NSDL and CDSL are both safe custodians for your dematerialized securities in India.
Details & Requirements to ensure as per PAS Amendment Rules:
- Every private company which is not a small company as per its audited financial statements on or after 31 March 2023, shall facilitate dematerialization of all its securities within 18 months from the end of its financial year (i.e. by 30 September 2024 if such company’s financial year ended on 31 March 2023) (“Specified Date”) by making relevant application to a depository. Further, with effect from the Specified Date, such private company shall issue the securities only in Dematerialized Form.
- After the Specified Date, a private company making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer shall ensure that before making such offer, the entire holding of securities of its promoters, directors, key managerial personnel has been dematerialized.
- If a security holder intends to transfer securities on or after the Specified Date 30th Sept 2024, such security holder shall ensure the securities are held in dematerialized form before the transfer.
- If a security holder intends to subscribe to any securities of such private company whether by way of private placement or bonus shares or rights offer on or after the Specified Date, such security holder shall ensure that all securities of such person are held in dematerialized form before such subscription.
- The requirement of dematerialization applies to all securities (including stocks, bonds, debentures) and not just equity shares of the concerned private company.
- A private company can issue securities in physical form before the Specified Date 30th Sept 2024. However, if such private company intends to issue securities after the Specified Date, it has to issue them in dematerialized form, as such, it is advisable to consider issuing securities in a dematerialized form even if issuance takes place before the Specified Date.
- Transfer of securities of a private company can happen in physical form before the Specified Date. However, if a security holder intends to transfer its securities on or after the Specified Date, all of its securities have to be dematerialized before the transfer.
- Relevant private companies may need to alter their articles of association to provide for issuance of securities in dematerialized form.
Steps to follow for Dematerialization of Securities by the Company:
Step 1: Amendment of Articles of Association (AoA)
Step 2: Appointment of Registrar and Transfer Agent (RTA)
Step 3: Obtaining International Securities Identification Number (ISIN)
Step 4: Opening Demat Account
Step 5: Dematerialization of Existing Shares
Step 6: Dematerialization for Promoters, Directors & Key Managerial Personnel (KMP)
Step 7: Regular Reporting in Form PAS 6 as per following due dates:
| Due Date | Period for which Form PAS-6 is filed |
| 29th November | For April-September period |
| 30th May | For October-March period |
Consequences and penalties for non-compliance:
In case the company or the security holders do not comply with the requirements to dematerialize their securities by 30 September 2024, following consequences will apply:
- The company will not be able to issue/allot any type of securities.
- The security holder will not be able to transfer or subscribe for any type of security.
- Monetary penalties on company and every officer in default, in view of provisions of Section 450 of Companies Act, 2013:
- On the company: INR 10,000 + INR 1,000 for each day violation continues. Maximum limit is INR 200,000
- Every officer of the company who is in default – Same as above. Maximum limit is INR 50,000
Conclusion:
The private limited companies who are not a small company, Govt. company and Section 8 Company should mandatorily start dematerialization of their securities at the earliest, so as to comply with Rule 9B before 30th Sept 2024 as this process is time consuming and requires various KYC compliances and documentations. No private limited company can issue / allot shares as well as no shareholders can transfer the shares in physical form, w.e.f. 1st Oct 2024. It is mandatory to comply first with the process of dematerialization of existing shares. We at Bizsolindia can help to comply with the process of dematerialization of securities and subsequent compliances for Rule 9B.
