Compulsory Dematerialization Of Securities – Impact On Business Environment

Update: 2024-01-10 06:32 GMT
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On October 27, 2023, the Ministry of Corporate Affairs issued the Companies (Prospectus and Allotment of Securities) (“PAS”) Second Amendment Rules, 2023, amending the Companies (PAS) Rules, 2014. These amended provisions were officially enforced on the same date i.e., October 27, 2023.

The revised PAS Rules now require all private companies, except for small companies to adhere to specified timelines. These companies must

  1. issue securities exclusively in dematerialized form; and
  2. facilitate the dematerialization of all their securities.

Under Rule 9B of the amended PAS Rules which talks about the issuance of securities in dematerialized form, every private company which is not a smaller company must ensure that every bearer of the shares surrender such shares to the company and get the shares dematerialized in their accounts on or before September 30, 2024. Moreover, any company subject to the amended PAS Rules initiating an offer for the issuance of securities, buyback of securities, or the issuance of bonus shares or rights offer on or after September 30, 2024, must ensure that the entire holding of securities belonging to its promoters, directors, and key managerial personnel has been dematerialized. However, the amendment doesn't explicitly forbid holding shares of a private company in physical form, the individuals with such shares must convert them into dematerialized form if they intend to transfer them after September 30, 2024. If the shareholder fails to submit the warrants within 6 months, the company is required to proceed to convert these warrants into dematerialized form and subsequently transfer them to the Investor Education and Protection Fund (under section 125 of the Companies Act, 2013).

As per the amendment to PAS Rules, private companies are obligated to undertake a series of crucial action items. They must acquire the International Securities Identification Number (“ISIN”) for all securities they have issued. Private companies are tasked with actively promoting, facilitating, and encouraging the dematerialization of their existing securities held by shareholders. Once the share capital has undergone dematerialization, it is imperative that any future issuances of securities be exclusively in dematerialized form. Furthermore, private companies are required to ensure that securities held by their promoters, directors, and key managerial personnel are already in dematerialized form before any new securities are issued. Adherence to regulatory compliance is emphasized through the mandatory filing of form PAS-6 (Reconciliation of the Share Capital Audit Report) with the Registrar of Companies (“ROC”) within the prescribed timeframe. These stipulations collectively reflect a comprehensive framework aimed at modernizing and streamlining the process of dematerialization of securities of private companies.

The PAS Rules amendments stem from a comprehensive approach aimed at ensuring the integrity of the financial market and maintaining transparency within the system. The measures aim to curb Benami transactions and mitigate the risks associated with improper share dealings and seek to create a more robust and accountable financial environment. This not only aligns with the overarching goal of maintaining market integrity but also addresses concerns related to the potential misuse of financial instruments. Furthermore, these amendments also address the issue of inadequate stamp duty paid on share transfers, emphasizing the need for a fair and equitable system that ensures appropriate contributions to public revenue. Overall, these provisions collectively form a strategic response to various challenges within the financial sector, working towards a more secure, transparent, and legally sound framework. Mandating the dematerialization of shares could impose additional compliance costs on private companies initially. Nevertheless, in the long term, this initiative is poised to enhance the overall business environment in India. The compulsory dematerialization of shares is anticipated to streamline and expedite various processes such as new issuances, share transfers, buybacks, and rights issues, making them more efficient and seamless for private companies. This regulatory shift underscores India's commitment to a modern, secure, and legally sound business environment, aligning with global standards and fostering sustainable growth.


Authors: Jayshree Navin Chandra (Senior Partner) And Ansuman Mishra (Associate) at ZEUS Law Associates. Views are personal.

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