Demat of Shares
If ISIN is applied by a non-small private company
But still, companies have not received ISIN.
Can they do allotments in physical form for the time being?
MCA Notification Dated: 27.10.2023.
SHORT SUMMARY
The author will cover a very controversial question amongst professionals and corporations in relation to the demat of shares of non-small private companies. IF ISIN is applied by a non-small private company before 30 September 2024, but still, companies still have not received ISIN, they can do allotments in physical for the time being?
The MCA has issued a notification. Dated: October 27th, 2023—Subject: Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023.
As per the provisions of the Companies Act, 2013, the MCA has already made it mandatory for public companies to keep and transact their shares in demat w.e.f. 2nd October 2018. That time it was not mandatory for Section 8 private companies to demat their shares.
The Ministry of Corporate Affairs, in its drive to enhance transparency, investor protection, and corporate governance, has notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, effective from 30th September 2024.
In accordance with the said rules, all non-small companies need to dematerialize their existing securities and ensure that further issues of securities and transfers are only in dematerialized form.
MCA has given 18 months' time to non-small companies, w.e.f. 31 March 2023 to 30 September 2024, for compliance with the provisions of these rules.
Provisions of Companies Act, 2013
- Section 29 of the Companies Act, 2013
- Rule 9B of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023
- Form PAS 6
Discussion on the Question
1. Que: Last date for submission of application by non-small private company with depository?
As per the above-mentioned provisions, a non-small private company was required to apply for ISIN on or before 30th September 2024. However, as per the practical situation, a lot of applications of ISIN are pending with NSDL and CDSL; due to this, companies are getting a delay in obtaining ISIN.
2. Que: If the company has not received ISIN by 15 December 2025. Whether the company can allow the transfer of shares by shareholders between 1st October 2024 and 15th December 2024?
As per Rule 9B(4a). Every holder of securities of the private (a) who intends to transfer such securities on or after the date when the company is required to comply with this rule shall get such securities dematerialized before the transfer.
Therefore, after reading the above provision, one can opine that the transfer of shares in physical form is not possible in a non-small private company after 30 September 2024. Therefore, the transfer of shares is possible after complying with the below-mentioned two conditions:
a) Company will receive ISIN
b) Shareholder shall convert their physical shares in Demat.
After completion of the above two conditions, a private company can allow the transfer of shares.
3. Que: If the company has not received ISIN by 15 December 2025. Will the company give an offer for a new allotment through any mode (rights issue, private placement, preferential allotment, etc.) between 1st October 2024 and 15th December 2024?
As per Rule 9B(4a).
Every private company referred to in sub-rule (2) making any offer for the issue of any securities or buyback of securities or issue of bonus shares or rights offer, after the date when it is required to comply with this rule, shall ensure that before making such offer, the entire holding of securities of its promoters, directors, and key managerial personnel has been dematerialized in accordance with the provisions of the Depositories Act, 1996.
Therefore one can opine that, as per the above-mentioned provisions, unless the shares of directors, promoters, and KMP are converted into a demat company, they cannot issue any offer or allotment. Therefore, a company shall be able to issue an offer only after complying with the two conditions mentioned below:
a) The company will receive ISIN.
b) Directors, promoters, and KMPs shall convert their physical shares into demat
Once shares of directors, promoters, and KMPs convert into demat, the company can issue offers.
Note: An offer shall not be given to those shareholders whose shares shall be in physical form on the date of the offer.
Conclusion
Due to the delay in receipt of ISIN from NSDL and CDSL, companies are facing a lot of difficulties and issues. Company not able to raise funding, issue new shares, or allow transfer of shares.
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