Until recently, only public limited companies were required to issue their securities in dematerialised form, while private limited companies were allowed to issue securities in physical form. However, this has changed with a new mandate from the Ministry of Corporate Affairs (MCA).
What has changed?
The MCA introduced the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, on 27 October, 2023, which requires private limited companies to issue and manage their securities in dematerialised form. Under this rule, private companies (excluding small companies) must ensure all securities are issued in dematerialised form and facilitate the conversion of their existing securities into dematerialised form, in compliance with the Depositories Act, 1996.
Who needs to comply?
This regulation applies to private companies that do not qualify as small companies. A small company is defined as one with:
- A paid-up share capital of ₹40 million (INR 40,000,000) or less, and
- A turnover not exceeding ₹400 million (INR 400,000,000) in the immediately preceding financial year.
In addition, certain entities are explicitly excluded from the definition of a small company:
- Holding companies
- Subsidiary companies (whether of Indian companies or foreign corporations) are not considered small companies.
- Companies registered under Section 8 (non-profit organizations) are also excluded.
Thus, holding companies, subsidiaries of foreign companies and Section 8 companies must comply with this rule, regardless of whether they meet the financial thresholds for small companies.
Compliance timeline
Private companies falling under the scope of this regulation must ensure compliance within 18 months from the close of the financial year ending on or after March 31, 2023. For most companies, this means the deadline for full compliance is September 30, 2024.
What needs to be done?
Companies required to comply with this rule must:
- Issue all securities in dematerialised form.
- Facilitate the dematerialisation of all existing securities.
- Before making any offers for the issue of new securities, buybacks, or bonus or rights offers, ensure that all securities held by promoters, directors, and key managerial personnel are in dematerialised form.
- Any security holder intending to transfer their securities or subscribe to new securities must ensure that their holdings are dematerialised before completing such transactions.
Broad steps for dematerialisation:
- Appoint an RTA and Depository: The company must select a Registrar and Transfer Agent (RTA) and a Depository, and enter into a tripartite agreement.
- Complete documentation and obtain ISIN: Submit the necessary applications, documentation, and fees to the depository and RTA in order to obtain an International Securities Identification Number (ISIN) from the Depository for its securities.
- Facilitate Dematerialisation: Assist shareholders in converting their physical certificates into dematerialised form by coordinating with the RTA and Depository.
By following these steps, private companies will ensure compliance with the MCA’s requirements for the dematerialisation of securities.
