The Ministry of Corporate Affairs (MCA) has notified that with effect from 2nd October, 2018, issue of further shares and transfer of all shares by unlisted public companies shall be in dematerialized form only. The MCA has taken this step as a measure for further enhancing transparency, investor protection and governance in the corporate sector. The rules in this regard have been amended accordingly.
According to the MCA, the major benefits of dematerialization of securities which will now be available to unlisted Public companies include:-
i. Elimination of risks associated with physical certificates such as loss, theft, mutilation, fraud etc.
ii. Improving the corporate governance system by increasing transparency and preventing mal-practices such as Benami shareholding, back dated issuance of shares, etc.
iii. Exemption from payment of stamp duty on transfer.
iv. Ease in transfer, pledge etc. of securities.
Unlisted Public Companies are expected to facilitate the dematerialization of their securities in coordination with Depositories and Share Transfer Agents. Any grievances arising out of such Dematerialization of securities will be handled by the IEPF Authority. The measure is expected to significantly enhance the Corporate Governance standards in the country.
In the Companies (Prospectus and Allotment of Securities) Rules, 2014, after rule 9, the following rule shall be inserted, namely:-
"9A. Issue of securities in dematerialized form by unlisted public companies.-
(1) Every unlisted public company shall -
(a) issue the securities only in dematerialized form; and
(b) facilitate dematerialization of all its existing securities in accordance with provisions of the Depositories Act, 1996 and regulations made there under.
(2) Every unlisted public company making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer shall ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialized in accordance with provisions of the Depositories Ac! 1996 and regulations made there under.
(3) Every holder of securities of an unlisted public company,
(a) who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialized before the transfer; or
(b) who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure that all his existing securities are herd in dematerialized form before such subscription.
(4) Every unlisted public company shall facilitate dematerialization of all its existing securities by making necessary application to a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996 and shall secure International security Identification Number (ISIN) for each type of security and shall in-form all its existing security holders about such facility.
(5) Every unlisted public company shall ensure that _
(a) it makes timely payment of fees (admission as well as annual) to the depository and registrar to an issue and share transfer agent in accordance with the agreement executed between the parties;
(b) it maintains security deposit at all times, of not less than two years, fees with the depository and registrar to an issue and share transfer agent in such form as may be agreed between the parties; and
(c) it complies with the regulations or directions or guidelines or circulars, if any, issued by the securities and Exchange Board or Depository from time to time with respect to dematerialisation of shares of unlisted public companies and matters incidental or related thereto.
(6) No unlisted public company which has defaulted in sub-rule (5) shall make offer of any securities or buyback its securities or issue any bonus or right shares till the payments to depositories or registrar to an issue and share transfer agent are made.
(7) Except as provided in sub-rule (s), the provisions of the Depositories Act 1996′ the securities and Exchange Board of India (Depositories and participants) Regulations, 1996 and the securities and Exchange Board of India (Registrars to an Issue and share Transfer Agents) Regulations, 1993 shall apply mutatis mutandis to dematerialisation of securities of unlisted public companies.
(8) The audit report provided under regulation 55A of the securities and Exchange Board of India (Depositories and participants) Regulations, 1996 shall be submitted by the unlisted public company on a half-yearly basis to the Registrar under whose jurisdiction the registered office of the company is situated.
(9) The grievances, if any, of security holders of unlisted public companies under this rule shall be filed before the Investor Education and protection Fund Authority.
(10) The Investor Education and protection Fund Authority shall initiate any action against a depository or participant or registrar to an issue and share transfer agent after prior consultation with the securities and Exchange Board of India.
A copy of the above relevant Notification can be viewed and downloaded using the following link:
http://www.mca.gov.in/Ministry/pdf/CompaniesProspectus3amdRule_10092018.pdf
The author can also be reached at rocguru.com@gmail.com
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