FAQs: Demat of Shares of Private Limited Company

SHORT SUMMARY

The author will cover "FAQ's Mandatory Demat of Securities of Private Limited Companies" in this column. Some of these questions were asked by professionals through social media or YouTube webinars.

The MCA has issued a notification. Dated: October 27th, 2023. Subject: Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. In accordance with the said rules, Non-Small Private Limited Companies need to dematerialize their existing securities and ensure that further issue of securities and transfers are only in dematerialized form.

The Ministry of Corporate Affairs in its drive to enhance transparency, investor protection, and corporate governance, has notified Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 effective from 30th September 2024.

MCA has given 18 months' time to Private Limited Company w.e.f. 31 March 2023 to 30 September 2024 for compliance of the provisions of these rules.

I hope that after reading this editorial, the doubts of professionals in relation to Demat will be clarified.

Applicability

Que 1: Which companies are exempt from the provisions of dematerialization?

Ans 1: The provisions of dematerialization are not applicable to thefollowing Companies.

1. Nidhi Company.
2. Government company
3. A wholly owned subsidiary of a public company
4. Small Private Limited Company

Que 2: Which companies are mandatorily required to dematerialize?

Ans 2: The provisions of dematerialization are applicable to thefollowing Companies:

1. Public limited companies
2. non-small private limited companies
3. Section 8 Company
4. Subsidiary of a Foreign or Indian Company
5. Producer Company (non-small)
6. Dormant Company (non-small)
7. a wholly owned subsidiary of a private company
8. NBFC

Que 3: Whether small companies are required to convert their securities into demats?

Ans 3:Small Companies are exempt from the provisions of dematerialization.

"small company" means a company, other than a public company, —

• paid-up share capital of which does not exceed Four Crore rupees or such higher amount as may be prescribed and
• turnover of which as per profit and loss account for the immediately preceding financial year does not exceed Forty crore rupees or such higher amount as may be prescribed

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company.

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act.

Que 4: Whether provisions of dematerialization applicable to the Section 8 Company?

Ans 4: Section 8Company shall always be considered as a Non-Small Company. Therefore, Section 8 applies to companies, public or private, the provisions of Demat applicable to them.

Que 5: Whether provisions of dematerialization applicable to Producer Company?

Ans 4: As the name of the company ends with Producer Company Limited, it seems to be a public company, but as per clause (5) of Section 581C of the Companies Act, 1956, on registration, the producer company shall become a body corporate as if it were a private company and shall not, under any circumstances, be deemed to be a public company . Therefore, small producer companies are exempt from the provisions of the dematerialization.

Que 6: Whether provisions of dematerialization applicable to a wholly owned subsidiary of a private limited company?

Ans 6: The provisions of Demat shall apply to the wholly owned subsidiary of a private limited company. The exemptions available under Rule 9A (11) are not applicable to private companies under Rule 9B. Therefore, the provisions of Demat do not apply to the wholly owned subsidiary of a public limited company.

Que 7: Whether provisions of dematerialization applicable to a subsidiary of a foreign company?

Ans 7: A subsidiary company shall always be considered as a Non-Small company. Therefore, the provisions of Demat are applicable to subsidiaries of foreign companies.

Que 8: Are the provisions of dematerialization applicable to a subsidiary of an Indian private or public company?

Ans 8: A subsidiary company shall always be considered as a Non-Small company. Therefore, the provisions of Demat are applicable to subsidiaries of a private or public company.

Que 9: Whether provisions of dematerialization applicable to Nidhi Company?

Ans 8: A Nidhi Company shall always be considered a public company as per the provisions of the Companies Act. Further, Nidhi companies are exempted from the applicability in terms of Rule 9A (11) of the PAS Rules. Therefore, the provisions of Demat will not be applicable to Nidhi Company.

Que 10: Whether the provisions of dematerialization applicable to government companies?

Ans 10: Government Companies are exempt from the provisions of dematerialization.

"Government company" means any company in which not less than 51 percent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company that is a subsidiary company of such a government company.

Impact of Amendment

Que 2.1: Whether shareholders of a private limited company can transfer shares in physical before September 30, 2024?

Ans 2.1:The provisions of Demat shall be applicable to private companies w.e.f. September 30, 2024. Until this date, shareholders can freely transfer their shares physically.

Que 2.2: Whether private limited company can issue shares in physical form before September 30, 2024?

Ans 2.2:The provisions of Demat shall be applicable to private companies w.e.f. September 30, 2024; until this date, companies can freely issue shares in physical.

Que 2.3: Can a shareholder of a private limited company continue holding shares physically even after September 30, 2024?

Ans 2.3:As per the amendment, it is not mandatory for shareholders to convert their shares into Demat. But if they do not convert their shares into Demat, they will not be able to transfer and will not be eligible for new issue offers or buybacks of shares after September 30, 2023, unless they do not convert such shares into Demat.

Que 2.4: Whether shares of a private company shall be transferred freely by overriding the impact of Section 2(68) after the applicability of the provisions of dematerialization?

Ans 2.4: Under the Companies Act, private companies are recognized by certain basic features and attributes that distinguish them from public companies, viz.: (a) restriction on the transfer of shares or securities in a manner prescribed by the articles of association; (b) prohibition to invite members of the public to subscribe to any securities of the company; and (c) the number of members of the company shall not exceed 200 except in certain exceptional circumstances. The amendment is not intended to amend the basic structure of a private company. A private company has the power to reject the transfer of shares.

Operationally, at the time of applying for dematerialization, private companies should inform the depositories about the restrictions in their charter documents and request both the depository and the depository participant to act in such a manner so as to preserve, protect, effectively enforce, and implement the inherent restrictive characteristics of such a private company. The depositories and depository participants will have to evolve uniform practices to ensure that dematerialization does not enable any rogue security holder to bypass the restrictive covenants in the charter documents of a private company.

Que 2.5: Whether private limited companies need to amend their Article of Association (AOA) to add a demat clause?

Ans 2.5: The private limited companies have to amend their Article of Association to authorise shareholders to hold securities in dematerialized form. The company should amend the AOA before applying for the ISIN with the depository.

Process of Demat

Que 3.1:Immediate actions required by the Company?

Ans 3.1:The Company must take the following action Immediately:

Hold the Board meeting for following purposes:

• To call general meetings for amendment in the AOA (if required)
• To select the RTA to apply for ISIN.

1. To Appoint an RTA
2. To enter into triparty agreement between Company, RTA and Depository
3. Submission of Application with depository through RTA
4. Issuance of ISIN by Depository
5. Communicate the ISIN to Shareholders

Que 3.2: Is the company required to register with both NSDL and CDSL?

Ans 3.2: It is not mandatory for companies to apply for ISINs with both depositories. However, shareholders have to make sure that their demat account is with the same depository as the company; otherwise, they will not be able to convert their shares into demat.

Que 3.3: What is the role of RTA?

Ans 3.3: The role of the RTA is to act as an intermediary between the issuer and the depository, facilitating dematerialization and corporate actions undertaken by the issuer thereafter.

It is not mandatory to appoint an RTA. But in this case, a company will have to purchase the software from the relevant depository.

Que 3.4: Is the company required to obtain a separate ISIN for different types of securities?

Ans 3.4:The company is required to obtain a separate ISIN for each type of security. All kinds of securities, such as equity-fully paid up, equity-partly paid up, equity with differential voting or dividend rights, preference shares, and debentures issued by the same issuer, will have different ISINs.

Que 3.5: What is ISIN?

Ans 3.5: ISIN (International Securities Identification Number) as a unique 12-digit alpha-numeric identification number allotted for security.

Que 3.6: How can shareholders convert their shares into demat?

Ans 3.6:The shareholders will have to open a demat account with a depository participant and undertake the process of demat by submitting the Demat Request Form (DRF) along with the share certificates for dematerialization.

Que 3.7: A company has issued different classes of preference shares. Whether an ISIN for each class is required to be obtained?

Ans 3.7: Yes, the company has to obtain a separate ISIN for each class of shares. In the given question, the company has to obtain more than one ISIN for preference share classes.

Compliances - PAS 6

Que 4.1: What are the compliances of the company?

Ans 4.1: The Company must comply with the following after receiving the ISIN:

1. Facilitate all its shareholders to dematerialization of all its existing securities.
2. Make timely payment of Fees (admission as well as annual).
3. Maintenance of Security deposit of 2 years' Fees, as per agreement executed with the followings:

• Depository.
• Registrar to an issue.
• Share Transfer Agent

1. Comply with the regulations, guidelines, or circulars, if any issued by the Securities and Exchange Board or Depository from time to time.
2. The company shall submit Form PAS-6 to the registrar with such fee as provided in the Companies (Registration Offices and Fees) Rules,2014 within sixty days from the conclusion of each half year duly certified by a company secretary in practice or chartered accountant in practice.

Que 4.2: What is the Due Date of PAS 6?

Ans 4.2: The Company is required to file PAS 6 within 60 days from the date of the conclusion of each half year. i.e.

• Half year ended 31st March: 30th May; and
• Half year ended 30th September: 28th November.

Que 4.3: If a company has multiple securities, does it need to file multiple Form PAS 6?

Ans 4.3: Yes, Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014 is applicable for each class of security, and in Form PAS-6, only one ISIN can be entered. Hence for multiple types and classes of securities, multiple forms are required to be filed.

Que 4.4: If the shareholders of an unlisted public company have not yet converted their shares in Demat Form? Whether such a company needs to file PAS-6?

Ans 4.4: It doesn't matter whether shares of shareholders are converted into demats or not. Companies have to file PAS 6 every half year.

Que 4.5: Does the Company have to file PAS 6 for Debentures?

Ans 4.5: As per the instructions on the form, it should be filed only for shares. Therefore, there is no need to file PAS 6 for debentures.

Que 4.6: Does the company need to attach any documents to PAS 6?

Ans 4.6: There is no need for any attachments for the filing of PAS-6.

Que 4.7: Who can certify PAS 6?

Ans 4.7: Only the practicing company secretary or a practicing chartered accountant is authorised to certify the form PAS-6.

Que 4.8: What are the consequences for non-filing of PAS-6?

Ans 4.8: As there is no penalty prescribed under Rule 9A for non-compliance, therefore Section 450 of the Companies Act, 2013 (punishment where no specific penalty or punishment is provided) will be applicable.

As per Section 450, the company and every officer of the company who is in default or such other person shall be punishable with a fine that may extend to Rs. ten thousand, and where the contravention is continuing, with a further fine which may extend to Rs. one thousand for every day after the first during which the contravention continues.