New Delhi: The Ministry of Corporate Affairs (MCA) has made significant changes in the way private companies issue shares to subscribers and maintain those shares. The MCA has directed that all private companies, except small companies below a threshold set under the law, have to convert all their shares into paperless form, popularly known as demat shares or dematerialised shares.
These changes are expected to bring transparency and fairness to the shareholding pattern of a large number of private companies. In a gazette notification issued on October 27, 2023, the Ministry of Corporate Affairs said that the Central government, in the exercise of the powers conferred by section 29, read with Section 469 of the Companies Act of 2013, has amended the Companies (Prospectus and Allotment of Securities) Rules of 2014. These rules were last amended in January this year.
Shares to be issued and converted into demat form
In the notification issued on Friday, the government said that after rule 9A, rule 9B will be inserted, which will deal with the issue of securities in dematerialised form by private companies. The ministry said that every private company will issue the securities only in dematerialised form and facilitate the dematerialisation of all its securities, in accordance with provisions of the Depositories Act of 1996 and regulations made under the law.
Regarding the timeline available to the private companies covered under the new rules, the ministry said that a private company, which is on the last day of a financial year, ending on or after March 31, 2023, is not a small company as per audited financial statements for such financial year, will within 18 months of the closure of such financial year, comply with the provisions of the new rules.
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Moreover, every private company, covered under the new notification, if it makes 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 then that private company must ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with the provisions of the Depositories Act of 1996 and regulations made the Depositories Act.
The ministry also clarified in the said gazette notification that every holder of securities of the private company covered under the new rules, if he or she wishes to transfer such securities on or after the date when the company is required to comply with this rule, will get such securities dematerialised (converted into the paperless form) before the transfer.
Secondly, if anyone subscribes to any securities of the private company concerned whether by way of private placement or bonus shares or rights offer on or after the date when the company is required to comply with this rule will ensure that all his or her securities are held in the dematerialised form before such subscription.
The MCA said that these new rules, with all the necessary changes, will apply to the dematerialisation of securities. The ministry also clarified that the provisions of this rule will not apply in the case of a government company. The gazette notification also made changes to the share warrant holders of public companies.
According to the notification, every public company that issued share warrants before the commencement of the Companies Act of 2013 and not converted into shares shall within three months inform the Registrar of Companies (RoC) about the details of such share warrants in the Form PAS-7.
Secondly, the MCA gazette notification said that within six months of the commencement of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, the bearers of the share warrants are required to surrender such warrants to the company and get the shares dematerialised (converted into paperless or demat format) in their account.
The Ministry of Corporate Affairs directed all companies they must publish a notice for the bearers of share warrants in Form PAS-8 on their websites. Companies are also required to publish the same in a newspaper in the vernacular language which is in circulation in the district and also in English language in an English newspaper, widely circulated in the State in which the registered office of the company may be located.
What will happen if a shareholder refuses to convert them into demat form?
The Ministry of Corporate Affairs made it clear that if any bearer of a share warrant does not surrender the share warrants within the period referred to in the gazette notification then the company shall convert such share warrants into dematerialised form and transfer the same to the Investor Education and Protection Fund established under Section 125 of the Act.
