Mandatory requirement of Unlisted Companies to have shares in Demat Form

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Company Law
The Ministry of Corporate Affairs, has made it mandatory for private limited companies also to issue their securities in dematerialized form starting from 30 September 2024 and to facilitate conversion of all their existing securities in dematerialized form

Background:

Till now, only public limited companies were required to issue these securities in dematerialized form and private limited companies were exempted and hence could issue their securities in the form of a physical document.

Previously, the Ministry of Corporate Affairs (MCA) mandated that public companies must maintain and transact their shares in Demat form starting from October 2nd, 2018

Effective from October 27, 2023, the MCA has introduced significant changes in the regulations governing the dematerialization of securities for private limited companies.

The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 now apply to private limited companies, excluding small companies.

These rules come into effect on September 30th, 2024.

As per the new amendment every private company which has not been classified as small company shall mandatorily convert their existing physical securities into demat form within 18 months of end of F.Y. 2023. (i.e. 30/09/2024)

Small company, as per Section 2(85) of the Companies Act,2013, means a company, other than a public company,
  • having a paid-up share capital of which does not exceed 4 crore rupees or such higher amount as may be prescribed; and
  • Turnover of which as per profit and loss account for the immediately preceding financial year does not exceed 40 crore rupees or such higher amount as may be prescribed:
    Exceptions:
  • A holding company or a subsidiary company;
  • A company registered under section 8; or
  • A company or body corporate governed by any special Act.
Consequences of non-dematerialization of physical security into demat on or before 30/09/2024:
  1. After the due date, the company shall not be able to undertake a) Issue any securities b) buyback of securities c) issue bonus shares d) Offer for right issue of securities
  2.  After the due date, Security holders shall not be able to transfer the securities of the company or subscribe further issue of securities.
  3. Penalty would be levied on the Company under the provisions of section 450 of the Companies act, 2013 as no specific penalty has been provided for the said non­compliance under the act.

* The penalty to be levied under Section-450 of the Companies Act, 2013 is as mentioned hereunder: “Fine which may extend to Rs. 10,000 and in case of continuous contravention, a further fine of which may extend to Rs. 1,000 per day after the first during which the contravention continues.”

Summary: Failure to convert physical securities into demat form by the specified deadline carries significant repercussions for private companies. They risk being unable to issue securities, undertake buybacks, issue bonus shares, or offer right issues. Moreover, security holders may face restrictions on transferring securities or subscribing to further issues. Non-compliance also attracts penalties under Section 450 of the Companies Act, 2013, emphasizing the importance of adhering to the new mandate.