MCA’s big reform mandates dematerialisation for private companies

India is taking a significant step towards enhancing the integrity of its financial markets with a new mandate from the Corporate Affairs Ministry (MCA). The MCA has made it mandatory for private companies to dematerialise their securities, marking a pivotal development in the evolution of India’s capital markets.

Understanding the Mandate

Dematerialisation, often referred to as “Demat,” involves the conversion of physical securities, such as share certificates, into electronic or digital form. This transition from tangible paper to a digital format streamlines the management and trading of securities, offering several key advantages:

• Reduced Risk
• Efficiency
• Transparency
• Accessibility

MCA’s Dematerialisation Mandate

Under this groundbreaking rule, private companies in India, with the exception of small and government-owned entities, are now mandated to issue new securities exclusively in dematerialisation form. This signals the end of an era where physical share certificates were the norm for these companies. Private companies have until the end of September 2024 to fully comply with this transformative directive. The MCA has explicitly stated that no private company will be allowed to issue new securities or buy back its existing securities after September 30, 2024, unless the securities held by its promoters, directors, and key managerial personnel have been successfully dematerialized. Additionally, anyone holding securities in a private company who intends to transfer them on or after September 30, 2024, must ensure that the securities are dematerialized before the transfer can take place. This shift to dematerialisation extends to all subscriptions to securities of a private company, whether through private placement, bonus shares, or rights offers, after the same critical date in 2024. The move is not merely a procedural change; it is a strategic endeavor to enhance the ease of doing business in India while curbing unscrupulous activities associated with physical shares.

Exemptions for Small Private Companies

It’s worth noting that small private companies with a capital of less than ₹4 crore and a turnover of less than ₹40 crore, along with those that are neither holding nor subsidiary companies, will be exempt from this dematerialization requirement.

Connection to Statutory Penalties

The MCA’s dematerialization mandate is not just a regulatory requirement; it carries significant consequences for non-compliance. This is where we connect it with our previous blog on “Penalties levied by Statutory Authorities.” Failure to adhere to the MCA’s mandate can result in severe financial penalties, legal actions, and damage to a company’s reputation. Statutory authorities have the power to levy fines and legal repercussions on businesses that do not comply with these new regulations. The financial impact alone can be substantial and can significantly affect a company’s financial health. Moreover, the move to dematerialization is expected to substantially reduce risks associated with physical certificates, such as loss, theft, and forgery. This, in turn, enhances corporate governance and the overall integrity of private sector companies. While there may be operational and compliance costs involved in maintaining dematerialized accounts, experts argue that the substantial benefits, including increased transparency, improved investor protection, and a reduction in disputes and litigation due to fake certificates and fraudulent share transfers, make these costs acceptable. In essence, India’s shift towards mandating the dematerialization of securities for private companies represents a momentous leap towards enhancing the integrity of the financial markets, promoting transparency, and mitigating risks associated with physical share certificates. This progressive transformation aligns India’s corporate sector with international best practices, and it is expected to have profound and far-reaching benefits for the country’s capital markets and the broader business environment. In a regulatory landscape where penalties for non-compliance are significant, embracing this change is not just about meeting requirements but also about safeguarding the future of businesses in India.