MCA mandates Private Cos. except Small Cos. to issue securities only in De-mat form within 18 months from Mar 31, 2023
The Indian government has recently issued a significant amendment to the Companies (Prospectus and Allotment of Securities) Rules, 2023, impacting private companies, with the aim of further digitizing and streamlining their operations. This development, published on October 28, 2023, as G.S.R 802(E) under Company Law, mandates that all private companies, except for small companies, are now required to issue securities exclusively in dematerialized form. This transition to dematerialized securities must take place within 18 months from the fiscal year’s closure, which is set at March 31, 2023. Lets explore the MCA’s De-mat Mandate.
Understanding the Mandate
The MCA’s decision to make it compulsory for private companies to issue securities in dematerialized (Demat) form signifies a major shift from the traditional practice of issuing physical share certificates. This move aligns with the global trend toward electronic record-keeping and trading of securities.
Key Highlights of the Mandate
Applicability: The mandate is applicable to private companies, excluding small companies. Small companies are typically defined as those meeting certain specified criteria in terms of capital and turnover.
Deadline: Private companies falling under this mandate have a time frame of 18 months, starting from March 31, 2023, to comply with the new regulation. This period allows businesses to make the necessary adjustments and preparations to meet the requirements.
Dematerialization of Securities: De-mat involves the conversion of physical securities, such as share certificates, into electronic or digital form. This change is aimed at reducing the risks associated with physical certificates, including loss, theft, and forgery.
Benefits: The move toward demat mandate offers numerous advantages. It enhances the efficiency and security of securities trading, reduces the cost of transfer, and provides ease of ownership transfer for investors. Moreover, it eliminates the hassles associated with maintaining physical records of securities.
Impact on Investors: This mandate also has implications for shareholders. Existing shareholders of private companies will need to open Demat accounts to hold their securities in electronic form. This transition can be facilitated through Depository Participants (DPs) registered with depositories in India.
Compliance: Private companies should proactively work towards compliance with this mandate by ensuring that all their securities, including shares and debentures, are held and transferred electronically.
The key provisions of this amendment require private companies to facilitate the dematerialization of all their securities in accordance with the Depositories Act. This move underscores the government’s commitment to enhancing transparency and efficiency in the corporate sector. However, it’s important to note that these regulations do not apply to Government Companies.
The significance of this amendment lies in its impact on the way private companies manage and issue their securities. Dematerialization involves converting physical securities, such as share certificates, into electronic form. This change is expected to streamline the process of share transfer, reduce the risk of loss or theft of physical certificates, and improve the overall transparency and accessibility of shareholding data.
Private companies, excluding small companies, are now required to proactively work towards complying with this amendment by ensuring that their securities exist in a de-mat form within the stipulated 18-month timeframe. Failure to comply with these regulations could lead to legal and regulatory consequences.
The Indian government’s decision to implement this amendment is in line with the broader trend of digitization and modernization in the corporate and financial sectors. The move aims to align the country’s corporate governance practices with international standards and promote greater investor confidence in the Indian market.
The Companies Second Amendment Rules, 2023, will now require private companies, excluding small companies, to issue securities only in demat form within 18 months from the close of the fiscal year ending on March 31, 2023. The dematerialization process will involve the conversion of physical securities into electronic form, enhancing transparency and efficiency in the corporate sector. While this amendment represents a significant change, it is expected to contribute to the modernization and digitization of India’s corporate governance practices and align them with international standards. Private companies are urged to proactively comply with these new regulations to avoid potential legal consequences.
The MCA’s Demat mandate represents a significant shift in the corporate securities landscape, designed to modernize and enhance transparency. However, the consequences of non-compliance can be severe, including financial penalties, damage to reputation, and legal ramifications. To protect their interests, private companies should prioritize timely and accurate compliance with this mandate and all other statutory requirements.In an ever-evolving regulatory environment, staying ahead of compliance is a business imperative.
