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MCA mandates dematerialisation of shares for private companies amongst other changes.

Oct 30, 2023
  • Author(s) : Manendra Singh , Ambareen Khatri

    • MCA mandates dematerialisation of shares for private companies amongst other changes

    The Ministry of Corporate Affairs (MCA) has amended certain rules under the Companies Act, 2013 (CA2013). Key changes introduced by amendments are:

    A. In a much-awaited move, MCA has made it mandatory for private companies to dematerialise their securities and has given a window within which these shares have to be dematerialised. This is on the lines of earlier mandate for public companies to have their securities dematerialised. MCA has also directed public companies to convert all existing warrants (issued prior CA2013) into equity shares ;

    B. MCA has directed companies to designate an officer who will be responsible for furnishing, and extending co-operation for providing, information to ROC / any other authorised officer with respect to beneficial interest in shares of the company;

    C. Allowing the shifting of the new registered office of a company taken over under Insolvency Bankruptcy Code, 2016 (IBC).

    The above changes have been analysed below:

    A. Mandatory dematerialisation of securities of private companies and conversion of share warrants

    In order to boost the transparency and ease of doing business in India, MCA has issued an amendment to the Companies (Prospectus and Allotment of Securities) Rules, 2014 by inserting new clauses in the following manner:

    Subject Amendment
    Mandatory dematerisation of shares for private companies
    • Every private company, other than a small company, shall within the period specified hereunder:

    – issue the securities only in dematerialised form; and

    – facilitate dematerialisation of all its securities,

    in accordance with provisions of the Depositories Act, 1996 (“Depositories Act”) and regulations made thereunder.

    • Time period: A private company, which as on 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, shall, within 18 (eighteen) months of closure of such financial year, comply with the provisions of this rule.
    • Every private company referred to above making any offer for 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, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with the provisions of the Depositories Act, and regulations made thereunder.
    • Every holder of securities of the private company referred to above-

    – 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 dematerialised before the transfer; or

    – who subscribes to any securities of the concerned private company 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 shall ensure that all his securities are held in dematerialised form before such subscription.

    • The provisions of Rule 9A(4) to 9A(10) for unlisted companies shall, mutatis mutandis, apply to the dematerialisation of securities under this rule. These provisions deal with the requirements and procedure under the Depositories Act.
    • The provisions of this rule shall not apply in case of a Government company.
    Surrender and conversion of share warrants for public companies
    • The public companies which issued share warrants prior to commencement of CA2013 and not converted them into shares-

    – Shall within a period of 3 (three) months from October 27, 2023, inform the ROC about the details of such share warrants in newly introduced Form PAS-7;

    – Within a period of 6 (six) months from October 27, 2023, require the bearers of the share warrants to surrender such warrants to the company and get the shares dematerialised in their account and for this purpose the company shall place a notice for the bearers of share warrants in newly introduced Form PAS-8 on the website of the company, if any and shall also publish the same in a newspaper in the vernacular language which is in circulation in the district and in English language in an English newspaper, widely circulated in the State in which the registered office of the company is situated.

    • In case any bearer of share warrant does not surrender the share warrants within the period referred to above, 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 CA2013.

    The above amendments have been made vide the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 dated October 27, 2023 (available here) and is effective from October 27, 2023.

    ELP Comments
    The mandatory dematerisation of shares of the private company shall minimise the risk and will lead to faster transfer and crediting of new shares. Additionally, it shall curb the companies’ expense of printing and distribution of physical certificates, and also save stamp duty.

    B. Designate officer for beneficial ownership matters

    MCA has issued an amendment to the Companies (Management and Administration) Rules, 2014 by inserting new clauses after Rule 9(3) in the following manner:

    Subject Amendment
    Designation of a person for fulfilling the responsibilities with respect to beneficial interest in shares of the company
    • Every company shall designate a person who shall be responsible for furnishing, and extending co-operation for providing, information to the Registrar or any other authorised officer with respect to beneficial interest in shares of the company.
    • For the purpose of above rules, the company may designate-

    – a company secretary, if there is a requirement of appointment of such company secretary under CA2013 and the rules made thereunder; or

    – a key managerial personnel, other than the company secretary; or

    – every director, if there is no company secretary or key managerial personnel.

    • Until a person is designated as referred above, the following persons shall be deemed to have been designated person;

    – company secretary, if there is a requirement of appointment of such company secretary under CA2013 and the rules made thereunder; or

    – every Managing Director or Manager, in case a company secretary has not been appointed; or

    – every director, if there is no company secretary or a Managing Director or Manager.

    • Every company shall inform the details of the designated person in annual return.
    • If the company changes the designated person at any time, it shall intimate the same to the Registrar in e-form GNL-2 specified under the Companies (Registration Offices and Fees) Rules, 2014.

    The above amendments have been made vide the Companies (Management and Administration) Second Amendment Rules, 2023 dated October 27, 2023 (available here) and is effective from October 27, 2023.

    ELP Comments
    Such designation of responsibilities on the persons above will ensure timely information and intimations to the ROC when declarations of beneficial interest of shares are received by the Company.

    C. Change of registered office of companies taken over under IBC

    MCA has issued an amendment to the Companies (Incorporation) Rules, 2014 as a result of which, change of registered offices of companies whose management is taken over under Section 31 of IBC has been made easier. As per the prior norms, shifting of registered office was not allowed if any inquiry, inspection or investigation has been initiated against the company or any prosecution is pending against the company under CA2013. However, as per the amendment, where the management of the company has been taken over by new management under a resolution plan approved under Section 31 of IBC and no appeal against the resolution plan is pending in any Court or Tribunal and no inquiry, inspection, investigation is pending or initiated after the approval of the said resolution plan, the shifting of the registered office may be allowed.

    The above amendments have been made vide the Companies (Incorporation) Third Amendment Rules, 2023 dated October 20, 2023 (available here) and is effective from October 21, 2023.

    ELP Comments
    Such relaxation will help new management to easily change office of companies under IBC.

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Manendra Singh, Partner – Email  – ManendraSingh@elp-in.com ;
    Ambareen Khatri, Associate – Email – AmbareenKhatri@elp-in.com  

    Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.