The Ministry of Corporate Affairs (“MCA”) vide its circular dated October 27, 2023 (available, here), has notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (“Amendment Rules”). The amendments lay down the construct for dematerialization of securities issued or to be issued by private companies as well as share warrants issued by the public companies.

Background:  

The key changes proposed in the amendment are stated below:-

Rule 9(2)

1. Legal Rule
   There has been an insertion of Rule 9(2) which state certain filing needs to be made by the public companies that have issued share warrants before the commencement of the Companies Act, 2013, and such warrants have not been converted into shares.

2. Timeline
   1. Form PAS-7 - within 3 (three) months of the commencement of the Amendment Rules on or before January 27, 2024.
   2. Share Warrants, Form PAS-8, Non-surrendered Share Warrants - within 6 (six) months of the commencement of the Amendment Rules- (a) Share warrants issued prior to the commencement of the Companies Act, 2013; (b) filing of form PAS-8 and (c) conversion of non-surrendered such share warrants into dematerialized form and transfer the same to the Investor Education and Protection Fund. 
3. Obligations
   Every private company that has issued share warrants before the commencement of the Companies Act, 2013, and such warrants have not been converted into shares shall be obligated to:-
   1. inform the Registrar of Companies of the details of the share warrants issued by them prior to the commencement of the Act as per the prescribed timeline stated above in Form PAS -7.
   2. require the bearers of share warrants to surrender the warrants to the company and get the shares dematerialized in their account.
   3. place a notice for such bearers in Form PAS-8 on their website and publish the same in a newspaper in the vernacular language and a widely published English language newspaper.
   4. convert the non-surrendered share warrants of the bearer, dematerialize such warrants and transfer the same to the Investor Education and Protection Fund.

Rule 9B

1. Legal Rule
   There has been an insertion of Rule 9B which states the dematerialization of securities of every private company.

2. Exemption
   Small company(ies) are being exempted from this category. As per Section 2(85), Companies Act, 2013, a Small Company is a company which is not a public company and has a paid-up share capital equal to or below Rs 4 crore and turnover equal to or below Rs 40 crore and it does not include (a) a holding or subsidiary company; (b) a company registered under section 8 of the Companies Act, 2013; or (c) a company or body corporate governed by any special legislation.

3. Timeline
   Within 18 months from the close of the financial year ending on or after March 31, 2023, and by September 30, 2024.

4. Obligations
   Every private company that is not a small company as per the audited financial statements as on the financial year ending on or after March 31, 2023, within the prescribed timeline stated above shall be obligated to:
   1. issue the securities in dematerialized form only;
   2. facilitate in the dematerialization of its securities; and
   3. dematerialize the entire holding of securities of its promoters, directors and key managerial personnel before making any offer for the issue of any securities, buyback of securities, issue of bonus shares or rights offer after the above prescribed timeline.

Author`s View: 

This is a welcoming move by the MCA towards the digitization age in India. It would add a more secure financial environment for both companies as well as the investors. Additionally, this will make the transfer of securities much easier and solve problems that come with handling physical certificates and resolve issues like mutilation, forgery, loss, and theft.

Please find a copy of the MCA Amendment, here.

This update has been contributed by Jitendra Soni (Partner) and Harsh Garg (Associate).

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