Issue Of Securities in Dematerialized Form by Private Companies
On 27-Oct-2023, the Central Government amended the Companies (Prospectus and Allotment of Securities) Rules, 2023 by issuing the 2nd amendment rules. A new Rule 9B has been inserted with the header “Issue of securities in dematerialised form by private companies”. This Rule has 6 sub rules.
First
The first sub-rule deals with the applicability and ‘provide what’ under Rule 9B specifying
Applicability:
- Types of private company on which Rule 9B will be applicable and
- Types of securities on which Rule 9B is applicable.
Do what:
- Issue securities only in dematerialised form
Every private company to which this Rule 9B will apply should issue its securities to the members/ holders in dematerialised form.
- Facilitate- that is give the option for dematerialisation of all its securities.
Thus, every private company should undertake to get its ISIN and give the option and facility to all its shareholders to get their holdings converted into dematerialised form.
Applicability:
To all private companies except a small company.
To all securities issued by the private company and not just equity shares.
Defining the terms:
Private company- has been defined u/s 2(68) of the Companies Act, 2013 as a company that has restrictions with respect to issue/ownership/transfer of its shares and with the number of shareholders.Thus, a private company’s Articles of association has to expressly provide for:
(i) restriction of right to transfer the shares of the private company.
(ii) number of members of a private company cannot exceed 200.
There are exclusions in calculating these 200 members. To know more visit our webpage on private limited companies.
(iii) the private company cannot make any public offer for subscription to its securities.
Small Company- this is a concept that was introduced in the Companies Act, 2013 and has created a subclass under a private company called a small company on the basis of paid up capital and turnover. A private company which has paid up capital of upto Rs. 4 crores and turnover of upto Rs.40 crores, will be categorised as a small company under the umbrella of a private company. Generally in the annual budget, the Finance Ministry makes changes to these limits but within the upper limit of Rs. 10 crores of paid up capital and Rs.100 crores of turnover.
Further, the following classes of companies will not qualify for being a small company:
A. a holding company
B. a subsidiary company (includes a wholly owned subsidiary company)
C. a Section 8 company (not for profit company); or
D. a company/ body corporate governed by any special Act;
Securities- has been defined u/s 2(81) of the Companies Act, 2013 to have the same meaning as defined u/s 2(h) of the Securities Contracts (Regulation) Act, 1956.
In SCRA, instead of defining the word, it is an inclusive term where it states that securities ‘include’ and then goes on to give a list of instruments that will be considered as securities. This includes shares like- equity, preference, debentures, bonds, derivatives, units etc. Even share warrants are covered as securities include rights or interest in securities.
Do what:
A company can issue securities only in dematerialised form.
It has to give the infrastructure to all existing shareholders to
Second
The Second sub-rule talks of the time lines-
- This Rule will be applicable from f.y. closing 31-Mar-2023 or thereafter.
- Any private company has to check, on the last day of its financial year closing, whether it is a small company or not. If not, then within 18 months from the closure of the financial year, comply with the mandatory dematerialisation of its securities.
For eg. for the if the financial year closes on 31st March 2023, then the company has to check if on 31-Mar-2023, its paid up capital is upto 4 crores and turnover upto Rs. 40 crores. If it is upto these limits, then it will be a small company and issue of securities in dematerialised form by such a private company will not be applicable to it..
- If the f.y closing is 31-Dec, then this Rule will be applicable from 31-Dec-2023. Such a company has to dematerialise If on this date the company is within the limits of a small company, then the issue of securities in dematerialised form by such a private company will not be applicable to it.
Third
The third sub-rule talks of compulsory dematerialisation of shares of certain entities:
Those companies as referred in sub rule 1 and 2, on whom this section is applicable, when they make an offer for:
- issue of any security(ies)
- Buyback of security (ies)
- Issue of bonus shares
- Rights offer
Prior to such issue(s), have to compulsorily dematerialise the entire shareholding of :
- the promoters of the company
- The directors of the company
- Key managerial personnel (KMP) of the company
Thus, every private company should undertake to get its ISIN and give the option and facility to all its shareholders to get their holdings converted into dematerialised form.
Fourth
The Fourth sub-rule talks of making the holder of securities responsible for ensuring that the private company issues securities in dematerialised form:
-
A holder who wants to transfer securities
- An entity who subscribes to any securities
Security holders of private company (ies) on which this Rule is applicable in case of :
Transfer:
will have to get the securities held by them first dematerialised before they can transfer the securities to another entity.
Subscription to new securities:
The entity has to ensure that the company in which it is subscribing by way of private placement or rights issue or receiving bonus shares is receiving these securities in the dematerialised form.
Fifth
The Fifth sub-rule talks of the applicability of sub-rules 4 to 10 of Rule 9A:
Rule 9A made it mandatory for all unlisted public companies to issue its shares in dematerialised form, in almost a similar manner to these new Rules. Rule 9A has also detailed other responsibilities of the company to whom dematerialisation of its securities have become mandatory. These responsibilities are as follows:
- To take International Security Identification Number (ISIN) for each type of security
- Informing all its existing security holders about that dematerialisation facility is available with complete details of the Registrar and Transfer Agent (RTA) and the process of how to get one’s holdings dematerialised.
- The private company should make timely payments of fees to the RTA
- The private company should maintain security deposits etc with the Depository (CDSL/NSDL) and with RTA.
- Compliance with directions of SEBI (Securities and Exchange Board of India) or the Depository (CDSL/ NSDL) from time to time with respect to dematerialisation of shares
- If any dues of RTA or Depository is pending or the private company has defaulted in the payment of fees, such a private company cannot make any issue of securities or go for buyback.
- E-form PAS-6 has to be submitted for every half year with the ROC through the MCA platform, certified by a CS in practice or CA in practice.
- any difference between the issued capital of such private company and the capital held in dematerialised form, has to be intimated immediately to the Depository.
- Investor Education and Protection Fund (IEPF) will be the authority in charge of addressing the grievances of the security holders.
Sixth
The Sixth sub-rule talks of the Rule not being applicable to a government company:
Government Company- a company in which the government ( State and Central) hold either jointly/ singly, not less than 51% of the paid up share capital of the company.
The provisions of Rule 9B will not be applicable to a government company as defined u/s 2(45) of the companies act, 2013
Conclusion:
Section 29 read with Rule 9 of the Companies Act, 2013 has clearly stated that any company that makes a public offer shall issue the securities in dematerialised form.
Since a private company cannot make a public offer, section 29 was not applicable to it.
Thus any public company that made a public offer was to issue the securities in dematerialised form. Eg. NSE shares are unlisted but being traded off-market in demat form.
Then in 2018, section 29 was amended and all unlisted public companies that were in existence, maybe incorporated under the 1956 Act or the 2013 Act, had to dematerialise its holdings before any further issue/ buyback/ rights/ private placement/ preferential issue or transfer. Rule 9A was introduced under the corresponding Rules to Chapter III.
Thereafter, in 2019, section 29 was again amended and the word public was deleted from section 29(1)(b) and the sub section now read ‘.......such other class or classes of public companies as may be prescribed shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.’
Further sub-section 1A was introduced that read as follows:
(1A) In case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder.
Thus the groundwork that was laid in 2019 for addition of any class of company, specifically private company, has been given effect to now in 2023.
This is being done to bring transparency in the market, proper implementation of the provisions of law in both letter and spirit and to curb the transactions of unaccounted money.
FREQUENTLY ASKED QUESTIONS (FAQs)
Will a private company, if it is being incorporated with a subscribed capital of more than 4 crores, have to have an ISIN at the time of incorporation or immediately after that?
NO. Such a private company will not have to do so because of the following reasons:
A company has to breach both the limits- that of paid up capital and turnover together, to stop being a small company. A newly incorporated company cannot have ‘turnover’ on its incorporation. Hence, the issue of securities in dematerialised form by such a private company will not be applicable to it immediately on incorporation. Rather, if on the last date of the closure of its first financial year, this private company is not a small company (wrt both paid up capital and turnover), then within 18 months thereof, it will get ISIN.
Private company being incorporated as a subsidiary company of a private company- will such a company require to comply with Rule 9B?
As per Section 2(85) of the Companies Act, 2013 a subsidiary company will not be taken as a small company, even though its paid up capital and turnover qualify it to be a small company
The rule provides a window as stated in sub rule 2 of Rule 9B, within which the Company has to comply with the issue of securities in dematerialised form by a private company. We can thus understand that a private company has to comply within 18 months of the closure of the financial year.
Private company being incorporated as a subsidiary company of a public company- will such a company require to comply with Rule 9B?
If we refer to Section 2(85) of the Companies Act, 2013 subsidiary company is not a ‘small company’, even though its paid up capital and turnover qualify it to be a small company.
As per section 2(71) of the Companies Act, 2013, a subsidiary of a public company is ‘deemed’ to be a public company, even when the Articles of the private subsidiary company have the limitations of section 2(68) incorporated in it.
Thus, Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014 will be applicable to such a company and the subsidiary company has to dematerialise securities.
Is Rule 9B applicable to a private company which is being incorporated as a WHOLLY OWNED subsidiary company of a public company?
If we refer to Section 2(85) of the Companies Act, 2013 subsidiary company is not a ‘small company’, even though its paid up capital and turnover qualify it to be a small company.
As per section 2(71) of the Companies Act, 2013, a subsidiary of a public company is ‘deemed’ to be a public company, even when the Articles of the private subsidiary company have the limitations of section 2(68) incorporated in it.
In such a scenario, Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014, relating to unlisted public companies, becomes applicable on such a company.
Still, dematerialisation of securities may not be applicable to such a wholly owned subsidiary as sub rule 11 of Rule 9A gives exemption to a wholly owned subsidiary.
Will this Rule be applicable to an OPC?
OPC means a One Person Company. Since shares of the company are held by one individual and therefore, dematerialisation provisions are not applicable here as no offer of shares, transfer to multiple individuals can be done.
Transfer will only happen in case the one member makes another individual as member in his stead.
What will be the penalty for non-compliance with Rule 9B?
Rule 9B has no penalty provision nor any penalty has been mentioned u/s 29 of the Companies Act, 2013. Thus, the provisions of section 450 will be applicable, wherein this section’s header states 'punishment where no specific penalty or punishment is provided’. The penalty will be as follows:
The Company, officer in default of the company or any other person violates/ contravenes any provisions of the Act/ rules and for which no penalty or punishment has been provided provided in the Act,will be liable to a penalty of
Rs. 10,000/-, and
in case of a continuing default, with
a further penalty of Rs. 1,000/- for each day of such contravention continuing,
but to a maximum of Rs. 2,00,000/-in case of a company and
Rs. 50,000/- on an officer in default or any other person
