Moving Towards a Demat World

The Ministry of Corporate Affairs (“MCA”), on 27th October, 2023, notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 to amend the Companies (Prospectus and Allotment of Securities) Rules, 2014, effective from October 27, 2023.

The amendment introduced Rule 9B, which mandates every private company, other than a small company, among other things, to issue securities only in dematerialised form (i.e., in electronic form as opposed to physical share certificates) and facilitate dematerialisation of all its existing securities within a certain time period. The language provides a period of 18 (eighteen) months from closure of financial year (31st March 2023 or a later date depending on the company) to comply with this provision.

Further, when a private company issues securities relating to any offer for issue, buyback or issue of bonus shares or rights offer after the effective date of the amendment, it is to ensure that before making such offer, the entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and the corresponding regulations. Where a person wishes to transfers its holdings, then the holder of the securities shall also ensure that its securities are in dematerialised form only, before such transfer.

Effectively, physical share certificates would soon be obsolete in such private companies. For private companies, the amendment could mean limited additional compliance, but considering the significant benefits, private companies should not be too worried. The amendment has the scope to vastly improve the ease of doing business in India by also ensuring transparency in holdings, lesser risk, fewer litigations regarding transfer of shares and potential curbing of benami transactions. The amendment also clearly lays down that onus is borne by both the companies and its holders to ensure compliance with the provisions of this amendment. Thus, the amendment can vastly improve the ease of doing business in India, as it has set out to do.