Dematerialization of Securities of Private Companies

Dear Sir/Madam,

Further to our previous alert, we request your kind attention to the requirement and the process for Dematerialization of Securities as follows:

MCA vide Notification dated 27th October 2023, vide G.S.R. 802(E) has introduced Prospectus and Allotment of Securities Second Amendment Rules, 2023 (“The Rules”) (Rule 9B).   The salient requirements of the above-referred rules are as under :

1. The Private company’s shares shall be converted into Demat form within 18 months from the end of the Financial year 31/03/2023, which means on or before September 30, 2024.

3. Exception to the Rule: The exemption is available to those Companies who qualify as Small companies as defined in Sec 2 (85) of the Companies Act as per the audited financials of the previous year.
4. Small company definition: According to Sec 2 (85), a small company is a company that meets the following criteria:

• The company’s paid-up capital should not exceed INR 4 crores and
• The company’s turnover should not exceed INR 40 crores.
• The company should not be a Holding Company, Subsidiaries, or Section 8 Company.

Hence if the Private limited Company’s Paid-up capital is more than INR 4 crore or if the Turnover is more than INR 40 crore or if the Company is a Holding Company or a Subsidiary or a Section 8 Company, then the provision regarding Dematerialization of its securities is mandatory.

Click here to read the full Notifucation and FAQ’s.FAQs-on-mandatory-demat-by-private-companies Notification

In this regard, we suggest you take the following steps to get the physical shares converted to Demat.

1. Check Article of Association (AOA) for provision related to DEMAT of shares;
2. If there is no provision relating to DEMAT of shares in the AOA, then steps to be taken to amend the AOA;
3. The immediate actionable arising out of the amendment are as follows:
   A private company, covered under the Present Amendment will be required to –
   ● Obtain ISIN for all existing securities issued by the Company.   To secure a new ISIN, a company must engage a SEBI registered Registrar to an issue and Share Transfer Agent (RTA).
   ● Facilitate dematerialisation of all existing securities (as and when request is received from the holder of such securities);
   ● Ensure that the entire holding of its promoters, directors and KMPs are held in dematerialised form only, prior to making any offer for issuance or buyback of securities on or after September 30, 2024.
   ● Issue all securities in dematerialised form only.