Government Directs Private Companies To Dematerialise Securities By Sep 2024 To Enhance Transparency

This mandate has been issued to boost transparency and create a broad impact, and will be applicable to private companies, with the exception of small companies and government companies. 

Dematerialisation means converting securities held in physical form to dematerialised or digitised form.

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The Indian government has directed private companies to dematerialise their securities by September 2024 in order to boost transparency and create a broad impact, an official notification revealed. This mandate will be applicable to private companies, with the exception of small companies and government companies. 

There are about 1.4 million private companies registered under the companies law with the Ministry of Corporate Affairs (MCA). In a notification issued on October 27, the ministry has mandated that all private companies can issue securities only in dematerialised form and the firms should facilitate the dematerialisation of all securities by September ’24, reported PTI.

Dematerialisation means converting securities held in physical form to dematerialised or digitised form. Changes have been made regarding this to the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023.

The notification further stated that a private company which isn’t a small company according to it’s audited financial statements for the fiscal year, ending on or after March 31, 2023, should comply with the provisions of this rule within eighteen months of the closure of the said financial year. 

The report quoted Anand Jayachandran, partner at Cyril Amarchand Mangaldas, a law firm, who noted that this change will have far-reaching consequences. He said, “With about 1.4 million private companies registered with the MCA, this change is far-reaching and will have a broad impact. Share transfers in several private companies are subject to contractual or other restrictions. It is, therefore, important that depository participants follow through on this regulatory change and ensure mechanisms are in place to effectively implement contractual provisions.”

This decision is also estimated to increase transparency and help control possible unscrupulous activities with shares in the physical form. According to the Companies Act, 2013, private firms have limits on share transfers and the number of the firm’s members cannot exceed 200. 

Typically, a small company is classified as one that has a paid-up share capital of not exceeding Rs 4 crore and a turnover of up to Rs 40 crore, subject to certain conditions. After September 2024, the new rules require private companies to make sure that offers for the issue of any securities, buyback of securities, issue of bonus shares, or rights offer, promoters/directors/managerial personnel held securities are all dematerialised. 

Additionally, the new rules state that private companies can transfer shares only in the dematerialised form after the specified date. At the same time, the ministry has issued changes in rules regarding Limited Liability Partnerships (LLPs). 

In a separate notification issued on October 27, the ministry stated that from the date of incorporation, every LLP is required to maintain a register of it’s partners in a particular form that has to be kept at the entity’s registered office. 

According to the new rules, the register should include various details about the partner, including address, e-mail address, PAN or Corporate Identification Number, Unique Identification Number, along with father/mother/spouse’s name and occupation, if applicable.