Dematerialisation Of Securities Of Private Companies

Dematerialisation Of Securities Of Private Companies

Compliance Requirements Under Rule 9b Of The Companies (Prospectus And Allotment Of Securities) Rules, 2014

1. INTRODUCTION

Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 was introduced with effect from October 27, 2023. In accordance with this Rule, every private company, other than a small company, shall –

(a) issue the securities only in dematerialised form; and

(b) facilitate dematerialisation of all its securities, in accordance with provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder.

2. APPLICABILITY

Pursuant to Rule 9B(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, a private company that, as of the last day of any financial year ending on or after March 31, 2023, ceases to be a ‘small company’ (as per its audited financial statements), shall comply with the provisions within eighteen (18) months from the end of such financial year.

In instances where a private company exceeded the prescribed monetary thresholds on March 31, 2023, but in the subsequent financial year (March 31, 2024), qualifies as a ‘small company’ due to a reduction in share capital or turnover, the company shall still be required to comply with the provisions by September 30, 2024.

*Definition of Small Company: As per the Companies Act, 2013, and the amended Rules, private companies not exceeding the prescribed monetary thresholds, i.e., a paid-up share capital of Rs. 4 crores or more, or a turnover of Rs. 40 crores or more (either of the conditions if satisfied), shall qualify as ‘small companies.’

The definition excludes private companies that are holding companies, subsidiary companies, companies registered under Section 8 of the Companies Act, or companies governed by any special Act.

3. ISSUE, BUY-BACK, AND BONUS OF SECURITIES

According to Rule 9B(3), every private company falling within the ambit of Rule 9B(2) and proposing to undertake any of the following corporate actions:

  • Issue of securities,
  • Buy-back of securities,
  • Issue of bonus shares, or
  • Rights offer,

shall ensure that before such actions, the entire holding of securities of its promoters, directors, and Key Managerial Personnel (KMP) is dematerialised in compliance with the Depositories Act, 1996, and the relevant regulations.

A practical concern arises regarding companies undertaking corporate actions between October 27, 2023, and September 30, 2024. A plain reading of the Rules suggests that immediate compliance is not mandatory from the date of notification, as MCA has provided a timeline for companies to ensure adherence.

4. FACILITATION OF DEMATERIALISATION OF SECURITIES

To facilitate dematerialisation, companies must comply with the following procedural requirements as stipulated under Rule 9A and Rule 9B:

  • Submitting an application to a Depository,
  • Obtaining an International Securities Identification Number (ISIN) for each type of security,
  • Notifying all existing security holders about the availability of demat facilities.

5. AMENDMENT OF ARTICLES OF ASSOCIATION

As shares and securities of private companies are transferable in accordance with their Articles of Association (AOA), companies must amend their AOA before applying for dematerialisation of securities to ensure alignment with the provisions of the amended Rules.

6. EXEMPTIONS UNDER RULE 9B

Under the extant provisions, only Government Companies are exempt from compliance with Rule 9B. In contrast, Rule 9A had previously exempted Nidhi Companies, Government Companies, and wholly-owned subsidiary companies. However, wholly-owned subsidiary companies are not exempt from compliance under Rule 9B. The MCA should consider extending similar exemptions to wholly-owned subsidiaries under Rule 9B, aligning it with past exemptions under Rule 9A.

7. HALF-YEARLY COMPLIANCE REQUIREMENT

All private companies that are not classified as ‘small companies’ must submit e-Form PAS-6 to the Registrar of Companies (ROC) within sixty (60) days from the end of each half-year, duly certified by a Company Secretary (CS) in practice or a Chartered Accountant (CA) in practice.

The cost implications of such half-yearly compliance will significantly impact companies incorporated under Section 8, wholly-owned subsidiaries, and subsidiaries with unchanged share capital since incorporation but having substantial Indian operations. A more pragmatic approach would have been to mandate annual compliance instead of half-yearly filings.

8. FREQUENTLY ASKED QUESTIONS (FAQs)

(i) Applicability to Companies Transitioning to ‘Small Company’ Status

Question: If a private company exceeded the monetary thresholds as of March 31, 2023, but subsequently qualified as a ‘small company’ on March 31, 2024, is it required to comply with the provisions by September 30, 2024?

Answer: Yes, based on the extant provisions, compliance is required.

(ii) Applicability to Holding Companies Undergoing Corporate Restructuring

Question: If a private company was a holding company on March 31, 2023, but due to corporate restructuring, its holding reduced to 20% by March 31, 2024, thereby ceasing to be a holding company, is compliance still required?

Answer: Yes, based on the extant provisions, compliance is required.

(iii) Applicability to Section 8 Companies

Question: Do the Rules apply to companies incorporated under Section 8 of the Companies Act, 2013?

Answer: Yes, Section 8 companies do not qualify as ‘small companies.’ Hence, the provisions apply irrespective of share capital or turnover, leading to a high compliance cost for such entities. Given the transparent nature of Section 8 companies and their role in Corporate Social Responsibility (CSR), the applicability of these Rules poses an unnecessary regulatory burden.

(iv) Applicability to Foreign Subsidiaries in India

Question: Are foreign subsidiaries in India required to comply with these Rules?

Answer: Yes, the Rules apply to private companies (which are not ‘small companies’) as of the last financial year ending on or after March 31, 2023. However, the Rules do not specify the treatment of companies with financial years ending on dates other than March 31. Many foreign subsidiaries align their financial years with their parent companies per Section 2(41) of the Companies Act. The applicability should have been based on the company’s opted financial year, subject to necessary approvals.

(v) Requirement for Transfer of Securities in Demat Form

Question: Is the transfer of securities required to be in demat form immediately upon notification?

Answer: No, taking into consideration the wording of the Rules, immediate compliance is not mandatory. The MCA has provided a timeframe for companies to comply with the provisions.

CONCLUSION

The amendments introduced under Rule 9B impose significant compliance requirements on private companies that exceed the prescribed monetary thresholds. While the objective of ensuring transparency and corporate governance is commendable, the cost burden on certain entities, particularly Section 8 companies and wholly-owned subsidiaries, should be reconsidered. The MCA may need to clarify ambiguities regarding applicability timelines and foreign subsidiary compliance to ensure smooth implementation.