The Ministry of Corporate Affairs of India (MCA) introduced the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (PAS Amendment Rules) on October 27, 2023. These rules mandate the compulsory conversion of securities of private companies into electronic form, excluding small and government companies, encompassing stocks, bonds, debentures, share warrants, and preference shares. Dematerialization is the process of converting physical security certificates into electronic format. Previously, only public companies, with certain exceptions, were obligated to have their securities in dematerialized form.
Key Provisions of the PAS Amendment Rules:
Key Takeaways:
Exception: Above provisions on mandatory dematerialisation of securities by private companies are not applicable to small companies and Government company.
Small company means a company, other than a public company, whose paid-up share capital is less than or equal to (<=) Rs. 4 Crores and turnover as per the last financial year is less than or equal to (<=) Rs.40 Crores.
Following are not considered as small company viz.
• Holding company or a subsidiary company
• Section 8 company
• Company/ body corporate governed by any special Act
Rationale behind the move:
While the concept of dematerializing shares isn't entirely new, this requirement aligns with the amendment to the Allotment Rules in October 2018. This amendment mandated the issuance of securities by all public unlisted companies in dematerialized form. The rationale behind this change appears to be twofold: to enhance the ease of doing business in India and to address concerns regarding benami transactions and fraudulent share transfers or pledges.
Holding shares in dematerialized form offers advantages for shareholders. It streamlines processes and reduces the risk of litigation associated with fake share transfers or improper pledges. Additionally, for financial institutions grappling with challenges related to foreclosing pledges of shares in physical form, this requirement represents a significant improvement. Foreclosing dematerialized shares is a much simpler process.
Moreover, this shift towards dematerialization promotes transparency and facilitates governmental agencies in tracing shareholders of private companies. It also facilitates the collection of adequate stamp duty on share transfers.
Other Considerations:
Consequences and Penalties for Non-Compliance:
In case the company or the security holders do not comply with the requirement to dematerialize their securities by 30 September 2024, the following consequences will apply:
The compulsory dematerialisation of the shares of the private company overall seems to be the move in the right direction and will lead to a more transparent and efficient system of share transfers, more financial inclusivity, better bankability of the shares (owing to ease of foreclosures of pledges shares in dematerialised form) and access for retail investors, reduction of frauds and cost, time effectiveness for investors, financial institutions and issuer companies alike.