Dematerialisation for Enhanced Governance and Transparency ON Ownership

The Ministry of Corporate Affairs, on October 27, 2023, has introduced certain amendments for companies especially Private Limited Companies focusing on corporate governance and transparency with respect to ownership of shares/ securities. Dematerialization of securities by Private Limited Companies will enable stepped-up disclosures of beneficial ownership of securities and enable government/ authorities to access all the transactions pertaining to issue/ allotment/ transfer of securities and tighten the leash on Benami transactions/ tax evasion.

The amendments are briefly discussed below:

A. Amendment to Companies (Prospectus and Allotment of Securities) Rules - Companies (Prospectus and Allotment of Securities) Second Amendment Rules 2023:

I. Insertion of Sub-rule (2) in Rule 9 (Dematerialisation of Share Warrants)

Every public company which has issued share warrants prior to commencement of the Companies Act, 2013 and not converted such warrants into shares, shall:

• within a period of 3 (Three) months of the commencement of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (hereinafter “CPAS”) inform the Registrar about the details of such share warrants in Form PAS-7; and

• further, within a period of 6 (Six) months of the commencement of the CPAS, 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 Form PAS-8 on the website of the company, if any and shall also publish the same in a newspaper in the vernacular language and in English language, having a wide circulation in the State in which the registered office of the company is situated.

• In the event any bearer of share warrant does not surrender the share warrants within the prescribed period, the company shall convert the such share warrants into dematerialised form and transfer the same to the Investor Education and Protection Fund.

II. Insertion of Rule 9B (Dematerialisation of Securities by Private Companies)

• Every private company, which as on last day of a financial year, ending on or after 31st March, 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 (for financial year ended 31st March 2023 - on or before September 30, 2024) shall issue the securities only in dematerialised form; and facilitate dematerialisation of all its securities, in accordance with provisions of the Depositories Act, 1996 and regulations made thereunder.

  Small company means a company whose paid-up share capital is equal to or less than INR 4 crore and turnover is equal to or less than INR 40 crore. However, concept of small company does not apply to following companies:

  1. Holding or a Subsidiary Company;

  2. Company registered under Section 8 of the Companies Act, 2013; and

  3. A body corporate or a company governed by any special act.

• Every private company referred 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, 1996 and regulations made thereunder.

• Every holder of securities of the private company referred 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 subscribes to any securities of the concerned private company whether by way of private placement, bonus shares, rights offer on or after the date when the company is required to comply with this rule shall ensure that all his/ her securities are held in dematerialised form before such subscription.

• The provisions of sub-rules (4) to (10) of rule 9A shall, mutatis mutandis, apply to the dematerialisation of securities by Private Companies under this rule 9B, including making application for dematerialization to a Depository (as defined in Section 2 (1) (e) of the Depositories Act, 1996 (E.g. CDSL/ NSDL); making timely payments of admission/ annual fees to the Depository and the Registrar to an issue and share transfer agent (RTA); filing of Reconciliation of Share Capital Audit Report in Form PAS-6 with the ROC within 60 (Sixty) days from the conclusion of each half year.

• The provisions of this rule shall not apply in case of a Government company.

B. Amendment to Companies (Management and Administration) Rules - Companies (Management and Administration) Second Amendment Rules 2023:

• 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 authorized officers with respect to beneficial interest in shares of the company.

• For the purpose of this rule, the company may designate:

  1. company secretary, if there is a requirement of appointment of such company secretary under the Act and the rules made thereunder, or

  2. key managerial personnel, other than the company secretary, or

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

• Until a person is designated as referred under this rule, the following persons shall be deemed to be designated person:

  1. company secretary, if there is a requirement of appointment of such company secretary under the Act and the rules made thereunder, or

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

  3. 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 (Form MGT-7/ MGT-7A). If the company changes the designated person at any time, it shall intimate the same to the Registrar in Form GNL-2 specified under the Companies (Registration Offices and Fees) Rules, 2014.

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