In a significant step towards modernising the corporate ecosystem, the Ministry of Corporate Affairs (MCA) has introduced the compulsory demat of shares for private companies, aiming to improve investor protection, governance, and ease of doing business. This forward-thinking initiative will affect both private companies and their investors, making the compulsory dematerialisation of shares an essential consideration in corporate compliance. At Crystal Peak Wealth, we support private companies and investors in seamlessly navigating the compulsory dematerialisation of shares for enhanced compliance and security.
Mandatory Dematerialisation Timeline – Rule 9B
Private companies, excluding small companies, must now issue securities only in dematerialised form, under the mandatory dematerialisation of shares rule introduced by the MCA. The applicable timeline mandates that the conversion must be completed within 18 months from the close of the financial year ending on or after 31st March 2023.
The compliance deadline is 30th September 2024, marking a crucial milestone in the process of compulsory demat of shares for the private sector. Small companies, as defined by prevailing financial thresholds, are currently exempt from this rule.
Dematerialisation of Promoters/Directors/KMP Holdings
Post the stipulated date, any private company intending to undertake an offer of securities, such as a buyback, bonus issue, or rights issue, must ensure the dematerialisation of shares for private company promoters, directors, and key managerial personnel. This pre-condition must be met before initiating such offerings.
Dematerialisation for Security Holders Transferring Securities
After the compliance deadline of September 2024, holders looking to transfer their securities will be required to ensure the dematerialisation of shares private company as a mandatory prerequisite for processing such transfers.
Dematerialisation for Securities Subscription
Investors subscribing to shares through private placement, bonus issues, or rights offerings must hold their securities in dematerialised form, ensuring they comply with the rule of converting physical shares to demat before proceeding with new acquisitions.
Private Company’s Responsibilities – Rule 9B Compliance
Private companies are required to meet specific obligations related to depositories and share transfer agents.
Timely Payments to Depositories and Registrars
Private companies are obligated to honour financial commitments with depositories and registrars by making timely payments under agreements related to the compulsory demat of shares for private companies. Additionally, companies must maintain a security deposit equivalent to two years’ worth of such fees to ensure continued services.
Form PAS-6 and Reporting Capital Discrepancies
The new regulation requires companies to file Form PAS-6 with the Registrar of Companies within 60 days from the end of each half-year, capturing all relevant changes under compulsory dematerialisation of shares. If any discrepancies arise between the issued share capital and the capital held in dematerialised form, these must be reported promptly to the relevant depositories.
Impact of the Amendment
This amendment from the MCA represents a robust move towards streamlining operations and reinforcing trust in the corporate sector through mandatory dematerialisation of shares. By eliminating the risks of handling physical certificates, this system makes transactions safer, faster, and more transparent.
Furthermore, digital holdings reduce administrative overheads, improve compliance management, and are a clear benefit of embracing compulsory demat of shares. Investors also gain from exemptions on stamp duty when shares are transferred electronically, contributing to improved corporate governance.
Handling Grievances – IEPF Authority
All investor grievances relating to the dematerialisation of shares for private company shall now be addressed by the Investor Education and Protection Fund (IEPF) Authority. This centralised mechanism will improve accountability and provide a streamlined resolution process for any dematerialisation-related concerns.
Guidelines for Private Limited Companies and Security Holders
The key responsibilities of private companies and security holders regarding the mandatory dematerialisation of shares.
For Private Limited Companies
By 30th September 2024, all private companies not categorised as small must ensure complete dematerialisation of shares private company, covering equity, debentures, and other securities. This includes obtaining an ISIN (International Securities Identification Number) for every type of security issued and informing existing holders about the conversion process.
From this date onward, any future issuance or transfer of securities must be made in dematerialised form only, to fully align with the expectations around the compulsory demat of shares for private companies. Form PAS-6 must be submitted without fail every six months to maintain compliance with statutory reporting obligations.
For Security Holders
Security holders must take active steps to open a Demat account with a registered depository participant to hold their securities under compulsory dematerialisation of shares. Those holding physical certificates must ensure timely conversion of their holdings into dematerialised form to enable any transfer or subscription of shares after the deadline.
After 30th September 2024, it will be mandatory to convert physical shares to demat before engaging in any form of share-related transactions with private companies.
Penalties for Non-Compliance
Failure to comply with the dematerialisation requirement by September 30, 2024, carries consequences:
For Companies
If a private company fails to meet the deadline for mandatory dematerialisation of shares, it will lose the ability to issue or allot any type of securities until compliance is restored. This includes rights issues, employee stock options, and private placements.
For Security Holders
Non-compliant security holders will be unable to transfer or subscribe for shares in a private company unless their holdings comply with the compulsory demat of shares provisions.
Monetary Penalties
For companies:
Penalty for violating these norms includes a base fine of INR 10,000 and an additional INR 1,000 per day of continued non-compliance, capped at INR 200,000.
For officers:
In default may also face penalties up to INR 50,000 under the dematerialisation of shares for private company compliance framework.
In conclusion, the MCA’s mandate for dematerialisation of shares private company marks a pivotal change in India’s corporate compliance landscape. The adoption of electronic shareholding not only enhances transparency but also secures transactions and boosts overall investor confidence.
As the deadline approaches, companies and investors are encouraged to act proactively, ensuring a smooth transition to a digital shareholding environment. For professional guidance and to streamline your demat process, Crystal Peak Wealth is here to support your journey from physical shares to demat empowering you with real-time updates, secure holdings, and seamless access to corporate actions.