Dematerialization of Share Capital: New Regulations and Compliance Requirements

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A welcome move to enhance corporate governance and transparency from the Ministry of Corporate Affairs (MCA).

Ministry of Corporate Affairs vide their notification dated 27^th October 2023, introduced the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, which mandates all private companies, except small and government companies, to dematerialize their share capital by 30^th September 2024, and thus ensuring that any issue of new securities shall be only in dematerialized form.

Below are the key highlights of the applicability and compliance requirements for private companies:

Applicability

• Every private company meeting any of the below mentioned criteria as on 31^st March 2023:
  i – Paid-up share capital is INR 40 million or more or
  ii – Turnover is INR 400 million or more
• Where the shareholding of the company is held majorly (more than 50%) by another body corporate i.e., it is a subsidiary of another company (including a foreign subsidiary)
• Where a company holds majority shares (more than 50%) of another entity i.e., it is the holding Company of any other domestic or foreign company
• Section 8 Company

However new rules do not apply to Small private companies with a paid-up share capital of less than ₹40 million and turnover of less than ₹400 million.

Due timeline for compliance

• All the companies meeting any of the above-mentioned criteria is required to comply with provisions of dematerialization within 18 months from 31st March 2023. In other words, they must complete the dematerialization of the entire share capital by 30th September 2024.
• In case any company ceases to be a small company as per audited financial statements on the last day of a financial year ending on or after 31st March 2023, it must comply with this rule within 18 months from the closure of such financial year.
• Further, any new issue or transfer or buyback of shares shall need to be made in dematerialized form post 30th September 2024 and securities of its promoters, directors, and Key Managerial Personnel should be dematerialized before such issue.

Broad Steps under Compliance:

To comply with these new rules, companies need to undertake the following important steps:

• Appoint a Registrar and Transfer Agent (RTA): RTA’s are SEBI-registered entities that provide services of share registry maintenance and assist on in share transfer compliance to several companies. These agents act as facilitators for obtaining ISIN (unique identification number) for every company. Appointment of the right agent to support this process is the first key step in the dematerialization process.
• Enter into an Agreement with NSDL & CDSL: National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are the two major depositories in India. Every company shall need to execute a service agreement with any depository which mandates the company to adhere to the requisite compliances as prescribed by the depositories from time to time.
• Creation of International Securities Identification Number (ISIN): ISINs is a unique identification number for the security which plays a key role in tracking and trading of securities in dematerialized form. This unique number is issued and approved upon by the depositories.
• Demat Accounts for Shareholders: Demat is a separate depository account for every shareholder (body corporate/individual). All shareholders of the company should have a Demat account to receive and manage their dematerialized shares.
• Subsequent Credit of Shares: The company to ensure that shares are credited to the respective Demat accounts of shareholders.

In conclusion, the Indian government’s efforts to boost transparency through legal amendments is highly appreciated and supported. These changes lay a strong foundation for good governance, and accountability, fostering a favourable environment for businesses and investors.

Incorp Group is Asia Pacific’s leading corporate service provider. With well-experienced expert team of company secretaries, InCorp Advisory Services, India is well equipped to assist end to end in the process of dematerialization of shares thus ensuring your company adheres to the new rules within the stipulated timelines with due accuracy.