The Ministry of Corporate Affairs (MCA) has expanded the scope of dematerialization through the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. Initially, only public companies were mandated to dematerialize their securities, but this amendment now extends the requirement to private companies, with specific exemptions. This move aims to enhance transparency, corporate governance, and streamline transactions within the corporate sector.
What is Dematerialization?
Dematerialization refers to the conversion of physical shares and other securities into electronic or digital form, facilitating smoother transactions such as buying, selling, and transferring shares. This process reduces the risks associated with physical certificates, such as theft, loss, or damage, and enables faster and more secure transactions.
Scope of Securities for Dematerialization
The securities that are required to be dematerialized under this amendment include:
- Shares
- Scrips
- Stocks
- Bonds
- Debentures
- Debenture stock
- Warrants
- Other marketable securities of a similar nature issued by companies
These instruments must be dematerialized to ensure compliance with the new regulatory framework.
Applicability of the Amendment Rules
The amendment’s applicability is crucial for understanding which companies must comply and which are exempt. The following table summarizes the applicability:
| Company Type | Applicability of Dematerialization Rules |
|---|---|
| Private Companies | Applicable, except for small and government companies. |
| Public Companies | Already applicable since the 2018 notification. |
| Small Companies | Exempt as per Section 2(85) of the Companies Act, 2013. |
| Government Companies | Exempt as per Section 2(45) of the Companies Act, 2013. |
Detailed Exemption Clarification
Small Companies:
- Defined under Section 2(85) of the Companies Act, 2013, a small company is characterized by:
- Paid-up share capital not exceeding ₹4 crore.
- Turnover not exceeding ₹40 crore during the immediately preceding financial year.
- Both conditions must be satisfied for a company to qualify as a small company. Additionally, the following types of companies do not qualify as small companies regardless of their capital and turnover:
- Holding companies or subsidiary companies.
- Section 8 companies (companies incorporated for charitable purposes).
- Any company or body corporate governed by any special Act.
- Defined under Section 2(85) of the Companies Act, 2013, a small company is characterized by:
Government Companies:
- As defined in Section 2(45) of the Companies Act, 2013, a government company is one in which not less than 51% of the paid-up share capital is held by:
- The Central Government.
- Any State Government.
- Partly by the Central Government and partly by one or more State Governments.
- This definition also includes any company that is a subsidiary of a government company, thereby exempting them from the dematerialization requirement.
- As defined in Section 2(45) of the Companies Act, 2013, a government company is one in which not less than 51% of the paid-up share capital is held by:
Compliance Requirements for Private Companies
For private companies that are not classified as small or government companies, the compliance obligations are as follows:
Timeline:
- Compliance Deadline: Within 18 months from the closure of the financial year ending on or after March 31, 2023.
- Key Date: September 30, 2024—the final deadline for these companies to ensure compliance.
Mandatory Actions:
- Issuance of Securities: All securities must be issued in dematerialized form post-compliance.
- Facilitation of Dematerialization: Companies must ensure the dematerialization of all existing physical securities.
Key Considerations for Security Holders:
- Post-September 30, 2024: All transfers of securities must be in dematerialized form.
- New Subscriptions: Any new securities issued must also be in dematerialized form.
Specific Requirements for Applicable Private Companies:
- Ensure that promoters, directors, and key managerial personnel (KMP) hold their securities in dematerialized form before initiating:
- Fresh issue of any securities.
- Buyback of securities.
- Bonus issue.
- Rights issue.
Additional Compliance Measures
Private companies must adhere to additional procedural requirements to ensure full compliance:
- Filing PAS-6: A half-yearly return in Form PAS-6 must be filed with the Registrar of Companies within 60 days of the end of each half-year. This form provides details on the reconciliation of share capital held in dematerialized form with the total issued and listed capital.
- Appointment of Registrar and Transfer Agent (RTA):
- Companies must appoint a SEBI-registered RTA to manage the dematerialization process.
- The RTA acts as an intermediary between the company and the depository participant (NSDL/CDSL), facilitating the conversion of physical shares to dematerialized form and managing corporate actions thereafter.
- Obtaining ISIN: Companies must apply for an International Securities Identification Number (ISIN) for each type of share or security issued. The ISIN uniquely identifies securities and is necessary for dematerialization.
- Opening a Demat Account: The company needs to open a demat account with a depository participant (DP) to facilitate the electronic holding of securities.
- Facilitating Dematerialization: Companies must facilitate the conversion of existing physical shares into dematerialized form. Shareholders must submit their original share certificates to convert them into electronic form.
Consequences of Non-Compliance
Failure to comply with the dematerialization rules will result in significant penalties and restrictions:
- Restrictions on Issuance:
- The company cannot issue or allot any securities, including bonus shares, in physical form.
- Shareholders will be unable to transfer their securities or subscribe to additional securities if they are not dematerialized.
- Penalties:
- For the Company: A penalty of ₹10,000 plus ₹1,000 for each day of continuing violation, up to a maximum of ₹200,000.
- For Officers in Default: Similar penalties, with a cap of ₹50,000 for each officer responsible for non-compliance.
This amendment represents a significant shift towards a more transparent and regulated corporate environment. The mandatory dematerialization of securities for private companies underscores the government’s commitment to improving corporate governance and ensuring the seamless operation of the securities market in India.
