In a bid to enhance transparency, investor protection, and governance in the corporate sector, the Ministry of Corporate Affairs (MCA) has introduced a significant change: the compulsory dematerialization of shares in private companies. This move, aimed at streamlining processes and bolstering investor confidence, carries implications for private companies and their shareholders. Let’s delve into the key aspects and responsibilities associated with this new regulation.
1️⃣ Mandatory Dematerialisation Timeline – Rule 9B
Private companies, excluding small companies, must issue securities only in dematerialised form within 18 months from the closure of the financial year ending on or after March 31, 2023. The deadline for compliance is set for September 30, 2024. Small companies, defined by specific financial criteria, are exempt from this requirement.
Dematerialization of Promoters/Directors/KMP Holdings
Private companies making offers for securities, buyback, bonus shares, or rights issues post the specified date must ensure that the holdings of their promoters, directors, and key managerial personnel are dematerialised before making such offers.
Dematerialization for Security Holders Transferring Securities
Security holders intending to transfer securities 18 months after the closure of the financial year must dematerialise their securities before such transfers.
Dematerialisation for Securities Subscription
Subscribers to securities via private placement, bonus shares, or rights offers, 18 months from the closure of the financial year, must ensure all their securities are held in dematerialised form before subscription.
2️⃣ Private Company’s Responsibilities – Rule 9B Compliance
Private companies must fulfill certain responsibilities concerning depositories and share transfer agents:
Timely Payments to Depositories and Registrars
Ensuring timely payment of fees to depositories and registrars as per the agreement and maintaining a security deposit of not less than two years’ fees.
Form PAS-6 and Reporting Capital Discrepancies
Submission of Form PAS-6 to the Registrar within 60 days from the conclusion of each half-year, along with reporting any differences observed in issued capital and capital held in dematerialised form to the depositories.
3️⃣ Impact of the Amendment
The MCA’s step towards compulsory dematerialisation aims to enhance transparency, investor protection, and governance. The benefits include risk elimination associated with physical certificates, ease in the transfer of securities, exemption from stamp duty, and an improved corporate governance system.
Handling Grievances – IEPF Authority
Grievances arising from dematerialisation will be handled by the IEPF Authority, streamlining conflict resolution and boosting investor confidence.
4️⃣ Guidelines for Private Limited Companies and Security Holders
For Private Limited Companies
By September 30, 2024, private limited companies, and subsidiaries of foreign companies, must convert all shares and debentures into dematerialised form, secure an ISIN for each type of security, and notify existing security holders. Further issues and transfers post this date must be in dematerialised form, and Form PAS-6 must be filed with the ROC within 60 days of each half-year.
For Security Holders
Security holders must open a demat account with an authorised depository for holding dematerialised securities. Existing securities in private limited companies must be dematerialised before transferring or subscribing for new shares after September 30, 2024.
5️⃣ Penalties for Non-Compliance
Failure to comply with the dematerialisation requirement by September 30, 2024, carries consequences:
Inability to issue/allot any type of securities.
For Security Holders
Inability to transfer or subscribe for any type of security.
- Company: INR 10,000 + INR 1,000 for each day of violation (Maximum limit: INR 200,000)
- Officers in default: Same as above (Maximum limit: INR 50,000)
In conclusion, the MCA’s move towards compulsory dematerialisation signifies a proactive step in aligning private companies with modern financial practices, promoting efficiency, transparency, and investor protection. Companies and stakeholders need to be diligent in adhering to the specified timelines and procedures to avoid penalties and ensure a smooth transition towards a dematerialised future
Dematerialize your physical shares with Rurash Financials today to enjoy automatic dividend credits of your shares and stay effortlessly updated on corporate actions like stock splits, bonus issues, and the right shares in your Demat account.