In a crucial regulatory update, the Ministry of Corporate Affairs (MCA) has mandated the dematerialization of shares for private limited companies, with the exception of small companies, through Notification [GSR 802(e)] dated October 27, 2023. This requirement, effective from October 1, 2024, aims to improve transparency and efficiency in capital market operations. This guidance note provides a detailed overview of the process, costs, timelines, and a comprehensive checklist to ensure compliance.
Definition of Small Company
According to Section 2(85) of the Companies Act, 2013, a "small company" is defined based on the following criteria:
- Paid-up Share Capital: Does not exceed ₹4 crore, or such higher amount as may be prescribed.
- Turnover: Does not exceed ₹40 crore, or such higher amount as may be prescribed.
Important Notes:
- Both conditions must be met for a company to be classified as a small company.
- Exceptions: The classification does not apply to:
- Holding companies
- Subsidiary companies
- Companies registered under Section 8 (non-profit organizations)
- Companies governed by any special act
Conclusion: A company must meet both criteria to be considered a small company and therefore exempt from the dematerialization requirement.
Dematerialization Process for Private Limited Companies
1. Board Resolution
- Action Required: Pass a board resolution authorizing the dematerialization of securities.
- Documents Needed:
- Draft board resolution
- Updated Articles of Association (if required)
- Cost: ₹5,000 - ₹10,000 (Legal Fees)
- Timeline: 1-2 weeks
2. Obtain International Securities Identification Number (ISIN)
- Action Required: Apply for ISIN through a SEBI-registered Registrar to an Issue and Share Transfer Agent (RTA) or directly with a depository if using in-house connectivity.
- Documents Needed:
- Board resolution
- Agreement with depository and RTA (3 copies with ₹200 franking each, or 2 copies with ₹300 franking for in-house connectivity)
- Certified copies of audited balance sheets for the last two years
- Certified copies of Memorandum of Association (MoA) and Articles of Association (AoA)
- Confirmation letter from RTA
- Net worth certificate from a Chartered Accountant
- Payment details for Joining Fees and Annual Custody Fees
- Cost:
- ISIN Fee: ₹10,000 - ₹20,000
- Franking and Agreement Fees: ₹600 - ₹1,000
- Timeline: 2-4 weeks
3. Open DEMAT Account with Depository Participant (DP)
- Action Required: Select a Depository Participant (DP) and open a demat account.
- Documents Needed:
- Letter of intent cum master creation form
- Certified copies of audited balance sheets for the last two years
- Certified copies of MoA and AoA
- Latest balance sheet and audit report
- Cost:
- Account Opening Fee: ₹5,000 - ₹10,000
- Annual Maintenance Charges: ₹2,000 - ₹5,000
- Timeline: 2-3 weeks
4. Intimation to Shareholders
- Action Required: Notify shareholders about the dematerialization process and provide instructions.
- Documents Needed:
- Notification letter to shareholders
- Instruction guides for converting physical shares to demat form
- Cost: ₹2,000 - ₹5,000
- Timeline: 1-2 weeks
5. Annual Compliance
- Action Required: Submit Form PAS-6 to the Registrar of Companies (ROC) within 60 days of the end of each half-year.
- Documents Needed:
- Form PAS-6
- Certification by Company Secretary or Chartered Accountant
- Cost:
- Form Filing Fee: ₹1,000 - ₹2,000
- Certification Fees: ₹5,000 - ₹10,000
- Timeline: Within 60 days of the end of each half-year
6. Dematerialization Process for Shareholders
- Action Required: Shareholders must open a demat account and submit their physical shares for conversion.
- Documents Needed:
- Self-attested PAN and Aadhar cards
- Income proof or other documents required by the DP
- Cost:
- Account Opening Fee: ₹500 - ₹1,000
- Processing Fee: ₹10 - ₹20 per certificate
- Timeline: 2-4 weeks
Applicability and Exemptions
Table 1: Applicability of Dematerialization
| Criteria | Applies to | Exemptions |
|---|---|---|
| Companies Required to Dematerialize | Private Limited Companies exceeding the thresholds of paid-up capital and turnover specified under Section 2(85). | Small companies, as defined under Section 2(85) |
| Small Companies | Not required to dematerialize shares. | Companies with paid-up capital ≤ ₹4 crore and turnover ≤ ₹40 crore |
| Government Companies | Exempted | Government Companies are not required to dematerialize shares. |
| Section 8 Companies | Exempted | Companies registered under Section 8 (non-profit) are exempted. |
| Companies under Special Acts | Exempted | Companies governed by any special act are exempted. |
Impact and Compliance
Mandatory Compliance:
- The dematerialization requirement applies to all private limited companies that are not classified as small companies. Companies must ensure all shares and securities are dematerialized by the deadline to comply with the regulations.
Exclusions:
- The following companies are exempt from the dematerialization requirement:
- Nidhi Companies
- Government Companies
- Section 8 Companies
- Small Private Limited Companies meeting the criteria under Section 2(85).
Consequences of Non-Compliance:
- Penalties:
- Under Section 450 of the Companies Act, 2013:
- Fine of ₹10,000 for the company.
- Additional fine of ₹1,000 per day for continuing contravention, up to ₹2,50,000 for the company and ₹50,000 for an officer in default.
- Restrictions on issuing new securities, buying back shares, issuing bonus shares, and rights issues if shares are not dematerialized.
- Under Section 450 of the Companies Act, 2013:
Compliance Checklist
| Compliance Requirement | Details | Cost | Timeline |
|---|---|---|---|
| Board Resolution | Pass a resolution for dematerialization. | ₹5,000 - ₹10,000 | 1-2 weeks |
| Obtain ISIN | Apply for ISIN from RTA or directly with depository. | ₹10,000 - ₹20,000 | 2-4 weeks |
| Agreement with Depository/RTA | Execute and submit required agreements. | ₹600 - ₹1,000 | 2-4 weeks |
| Open DEMAT Account with DP | Select DP and open demat account. | ₹5,000 - ₹10,000 | 2-3 weeks |
| Intimation to Shareholders | Notify and guide shareholders about dematerialization. | ₹2,000 - ₹5,000 | 1-2 weeks |
| Annual Compliance (Form PAS-6) | File Form PAS-6 with ROC. | ₹1,000 - ₹2,000 | Within 60 days of each half-year |
| Dematerialization by Shareholders | Shareholders to open demat account and convert shares. | ₹500 - ₹1,000 | 2-4 weeks |
Conclusion
Private limited companies, with the exception of small companies as defined under Section 2(85), are required to complete the dematerialization of shares by October 1, 2024. Adherence to this requirement is crucial to avoid penalties and restrictions on share transactions.
Companies should promptly initiate the dematerialization process, ensure all agreements and filings are completed, and communicate effectively with shareholders. This structured approach will facilitate compliance and ensure a smooth transition to the new regulatory framework.
