Introduction of Rule 9B: Issue of Securities in Dematerialized Form by Private Companies

Background:

There was a recent introduction of Rule 9B: Issue of securities in dematerialized form by private companies by MCA on October 27, 2023. As per the said rule, a company has to issue and hold shares in dematerialized (digital) form.

A private company, which, as of the last day of a financial year ending on or after March 31, 2023, is not a small company as per audited financial statements for such financial year, shall, within eighteen months of the closure of such financial year, comply with the provisions of this rule.

Therefore, any private company other than a small Company as on March 31 2023, is required to get its shares and other securities, if any, converted into dematerialized form before September 30, 2024.

Exemption:

1. A private company, which is a small company are exempted from above-mentioned rule.
2. The provisions of this rule shall not be applicable for Government company.

Way Forward:

Step 1: Obtain ISIN from NSDL or any other depositary: The company has to get a unique ISIN (International Securities Identification Number) assigned for their securities i.e., Shares. NSDL will assign the ISIN code to your securities.

Step 2: Appointment of registrar to issue: Under this rule, company has to appoint the Registrar to an issue/ Share transfer agent who maintains the records of holders of securities issued by a body corporate and deals with all matters connected with the transfer and redemption of its securities.

Step 3: Avail depositary services: The company has to avail of service from the depositary, who is allowed to buy or sell shares by SEBI on behalf of the client. It means the company’s shareholders have to get a demat account opened with them. Please note that PAN Card would be basic requirement for opening the demat account with depositary. Therefore, the shareholder must hold the PAN card for this process.

Penalty for non-compliance:

Any shareholder who has not dematerialized their holdings will be unable to sell their shares or subscribe to additional shares. Also, there is no specific penalty specified for contravention of above-mentioned provision. It’s important to note that the general penalties outlined in Section 450 of the Companies Act could potentially be applicable in this scenario:

1. Company will face monetary penalties of INR 10,000 plus INR 1,000 for each day the violation continues, with a maximum of INR 200,000.
2. Every officer of the company in default also faces the same penalties, with a maximum of INR 50,000.

Rohit Mohar, Audit Associate, SW