New Amendment on Dematerialization of shares in Private Limited Companies

New Amendment on Dematerialization of shares in Private Limited Companies

The Ministry of Corporate Affairs (MCA) on September 10, 2018 notified the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018. According to the amendment rules, a new rule 9A has been added to the existing rules. The new rule specifies that each unlisted public company should give securities only in dematerialised form and facilitate the dematerialisation of all its existing securities as per the provisions of the Depositories Act, 1996 and the rules made thereunder.

Presently, the MCA vide notification no. GSR 802(E) dated October 27, 2023 notified Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. According to the revised norms, each privately owned company with the exception of a small company should issue the securities only in dematerialised form within 18 months from the closure of the FY i.e.March 31, 2023. Further, the company should facilitate the dematerialisation of all its securities as per the provisions of the Depositories Act which will be effective from 27.10.2023.

Effect of Dematerialization on Shareholders

The rule expresses that any holder of securities in a private company subject to rule 9B who expects to transfer or subscribe to securities after the compliance date should ensure that the securities are held in dematerialized form.

These amendments to the Companies (Prospectus and Allotment of Securities) Rules, 2014, indicates the government’s endeavors to modernize and digitize the process of securities issuance and ownership. By ordering the dematerialization of securities, the Ministry of Corporate Affairs aims to upgrade transparency, financial protection, and overall efficiency in the Indian corporate sector. Overall, these progressions are supposed to have a positive effect on the Indian business scene, guaranteeing a smoother and more secure process for companies and investors alike. 

Compliance Requirement for Private Limited Companies Under Rule 9B

The execution of Rule 9B in the PAS Rules has achieved a huge change in the way private limited companies (except small companies) handle their shares, and have a financial year ending on March 31, 2023. This rule mandates the conversion of shares into dematerialized form within 18 months after the conclusion of the financial year. This change has broad ramifications for the internal processes of these companies, adjusting how shares are held and transferred.

The vital provisions of Rule 9B for private limited companies is as follows :

  1. Necessary Dematerialization: The new rule requires that shares of these companies are exclusively issued and held in dematerialized mode. This means that physical share certificates will no longer hold any lawful standing, and all shares should be electronically stored in a demat account. This progress not just improves the effectiveness and security of shareholding yet additionally mitigates the risks related with physical share certificates, such as loss or fraud.
  2. Dematerialized Share Transfers: Share transfer inside these companies should happen in a dematerialized mode which is another essential part of Rule 9B. This implies that when shares are bought, the transfer should be led electronically through the demat account.

This smoothed out process facilitates the share transactions as well as further develops transparency and diminishes the probability of errors in maintaining such transactions. The execution of Rule 9B highlights the public authority’s devotion to modernizing business activities, promoting transparency, and smoothing out regulatory processes. This activity is in accordance with global patterns where various nations have embraced dematerialization as a way to improve on the effectiveness and security of their financial markets. 

Steps involved 

  1. Assessment: Ensure that your company comes under the rule 9B in view of its financials for the year ending March 31, 2023.
  2. Dematerialization Process: If the rule is applicable, start the dematerialization process for all shares held by the company. This ordinarily points towards opening demat accounts, changing physical shares into electronic form, and updating the company’s records accordingly.
  3. Transfer Mechanism: Ensure that all share transfers inside the company adhere to the dematerialized mode. Provide training to staff and partners on the new procedures and extend out any necessary support  to facilitate a consistent transition.
  4. Compliance Documentation: Maintain comprehensive records of compliance efforts, including the dematerialization process and share transfers. This documentation is vital for regulatory reporting and auditing purposes.

The implementation of Rule 9B on  private limited companies with the exception of small companies addresses a critical transition towards digitization and improved transparency in shareholding. It is pivotal for professionals to proactively acclimate to these progressions to prevent legal consequences and saddle the benefits given by dematerialization.