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Ministry of Corporate Affairs (MCA) vide notification dated 27th October 2023 has made dematerialisation of securities mandatory for private companies expect small companies and issue of dematerialised shares against share warrants by all public companies. The amendment is applicable to all private companies, excluding small companies and government companies.
This rule mandates that private companies that are not small companies as on the last day of financial year ending on or after March 31, 2023 are required to issue securities in dematerialised form only, within 18 months from the closure of the said FY i.e. by 30th September, 2024.
What is dematerialization of securities?
Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited into the beneficial owner’s demat
account. In this context, securities include any kind of shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a similar nature.
Applicable Companies for Dematerialization of Securities:
- All the private limited companies (other than small companies) incorporated in India.
- Shareholders and debenture holders of the private limited companies (other than small companies
Non-Applicable Companies for Dematerialization of Securities:
- Nidhi Companies
- Government Companies
- Wholly Owned Subsidiary Companies of Public Companies
- Small Private Limited Companies
What is the deadline for compliance?
18 months from the date of closure of financial year ending on or after 31 March 2023 i.e., 30 September 2024 or later depending on the company’s financial year end.
Definition of “Small company“:
Small company means a company, other than a public company, whose paid-up share capital is less than or equal to ₹ 40 million and turnover as per the last financial year is less than or equal to ₹ 400 million. Following are not considered as small company viz.
- Holding company or a subsidiary company
- Section 8 company
- Company/ body corporate governed by any special Act
Benefits of dematerialization of securities:
- Elimination of risks associated with physical certificates such as loss, theft etc,
- Ease in transfer of securities
- Exemption from payment of stamp duty on transfer
- Improvement in the corporate governance system by increasing transparency and preventing malpractices
What are the penalties for non-compliance?
In case the company or the security holders do not comply with the requirement to dematerialize their securities by 30 September 2024, the following consequences will apply:
- The company will not be able to issue/allot any type of securities.
- The security holder will not be able to transfer or subscribe for any type of security.
- Monetary penalties on company and every officer in default:
- On the company: INR 10,000 + INR 1,000 for each day violation continues. Maximum limit is INR 200,000
- Every officer of the company who is in default – same as above. Maximum limit is INR 50,000
Conclusion:
Previously, unlisted public companies were obligated to issue securities in a dematerialised mode. Now, these dematerialization provisions have been extended to include private companies as well (except small companies). Extending the applicability to private companies would facilitate tracking of ownership of
securities on real time basis, enhance transparency, protect investors, and improve governance in the corporate sector.
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Note: This Post was last updated on December 14, 2023
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