Issue of Securities in Dematerialized form by Private Companies

The Ministry of Corporate Affairs (hereinafter referred to as ‘MCA’) through its recent notification no. G.S.R. 802(E) dated October 27, 2023, has introduced rule 9B in the Companies (Prospectus and Allotment of Securities) Rules, 2014, which articulates that every private company, other than a small company, shall issue the securities only in dematerialized form and facilitate dematerialization of all its securities in accordance with provisions of the Depositories Act, 1996 and regulations made thereunder.

Eligibility

This notification is applicable to all private company, as of the last date of a financial year, ending on or after March 31, 2023, is not small company as per audited financial statements for such financial year, and such eligible companies are required to issue the securities only in dematerialized form.

¹Explanation: Section 2(85) of the Companies Act, 2013, states that a small company means a company, other than a public company, where

1. the paid-up share capital of the company does not exceed INR 4,00,00,000/- (Indian Rupees Four Crores only).
2. the turnover of the company, as per profit and loss account for the immediately preceding financial year, does not exceed INR 40,00,00,000/- (Indian Rupees Forty Crores only).

Provided that nothing in this section shall apply to –

• a holding company or a subsidiary company.
• a company registered under section 8; or
• a company or body corporate governed by any special Act;

Statutory Timeline

Every eligible company is required to comply with the provisions of rule 9B within 18 (eighteen) months from the date of closure of the financial year ending on or after March 31, 2023.

Other Key Compliance Points

• Issue or Buyback of Securities: Every eligible company making any offer for the issue of any securities or buyback of securities or issue of bonus shares or rights offer, after the date when it is required to comply with this rule, shall ensure that before making such offer, the entire holding of securities of its promoters, directors, key managerial personnel has been dematerialized in accordance with the provisions of the Depositories Act, 1996 and regulations made thereunder.
  Therefore, it can be opined that eligible companies can only issue or buy back securities when the entire existing securities have been dematerialized in accordance with the provisions of the Depositories Act, 1996.
  Further, sub-rule 4 (b) of Rule 9B states that every holder of securities of the eligible private company who subscribes to any securities of the concerned private company, via private placement or bonus shares or rights issue, on or after the date when the company is required to comply with this rule shall ensure that all his/her securities are held in dematerialized form before such subscription.

• Transfer of securities: Every holder of securities of the eligible private company who intends to transfer such securities, on or after the date when the company is required to comply with this rule, shall get such securities dematerialized before the transfer.
  Further, sub-rule 5 of rule 9B states that the provisions of sub-rules (4) to (10) of rule 9A shall, mutatis mutandis, apply to the dematerialization of securities that specifies the manner to facilitate the dematerialization of securities.
  Moreover, it has been further clarified by the Ministry that the provisions of this rule shall not be applicable in the case of a government company.

Conclusion

This notification emphasizes the government's commitment to promoting transparency, reducing fraud, and facilitating ease of doing business within the corporate sector. It will bring large private companies in line with modern financial and regulatory practices, ensuring a more secure and efficient securities market in India.

¹The relevant information mentioned herein is taken from the Companies Act, 2013 available at the website of the Ministry of Corporate Affairs i.e., https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks.html.