Government Mandates Dematerialization of Private Company Securities by September 2024

Government

In a significant move aimed at enhancing transparency and accountability, the government has issued a directive requiring private companies to dematerialize their securities by September 2024. This directive is expected to have far-reaching implications for the corporate landscape in India. However, it’s essential to note that this requirement applies to private companies, excluding small companies and government entities.

As per data from the Ministry of Corporate Affairs (MCA), there are approximately 1.4 million private companies registered under the Companies Act in India. The new mandate stipulates that private companies must issue securities exclusively in dematerialized form and ensure the complete dematerialization of all securities by the specified deadline, as outlined in an MCA notification.

Dematerialization, in this context, refers to the conversion of securities from physical certificates to digital or dematerialized form. To facilitate this transition, the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, have been introduced. According to the notification dated October 27, any private company that, as of the last day of a financial year ending on or after March 31, 2023, is not categorized as a small company based on audited financial statements for that year, must comply with the provisions of this rule within eighteen months from the closure of that financial year.

Given the vast number of private companies registered with the MCA, this mandate is expected to have a profound impact. Many private companies impose contractual or other restrictions on share transfers, and it is imperative that depository participants implement this regulatory change effectively and establish mechanisms to uphold contractual provisions. Moreover, this shift towards dematerialization is anticipated to significantly bolster transparency and mitigate potential unscrupulous activities related to shares in physical form.

Under the Companies Act of 2013, private companies are subject to restrictions on the transfer of shares, and their membership is limited to a maximum of 200 individuals. Typically, a small company is defined as one with a paid-up share capital not exceeding Rs 4 crore and a turnover of up to Rs 40 crore, subject to specific conditions.

After September 2024, private companies are also required to ensure that any offers related to the issuance of securities, buyback of securities, issuance of bonus shares or rights offers, and securities held by promoters, directors, and key managerial personnel are all dematerialized, as per the amended rules. Among other changes, private companies will be allowed to transfer shares exclusively in dematerialized form after the stipulated date.

In addition to the dematerialization mandate, the Ministry has also introduced amendments to rules concerning Limited Liability Partnerships (LLPs). According to the new rules, every LLP must maintain a register of its partners in a specific format from the date of its incorporation. This register should be kept at the LLP’s registered office and must include various details about each partner, such as their address, email address, Permanent Account Number or Corporate Identification Number, Unique Identification Number (if applicable), and details about their parents or spouse, including name and occupation. These amendments are aimed at further enhancing transparency and record-keeping within LLPs.

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