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The government has mandated all private companies, other than small companies, to dematerialise their shares by September 30, 2024. The move is expected to boost transparency and oversight of the financial system.
The Ministry of Corporate Affairs (MCA), in an amendment dated October 27, inserted a new clause in the Companies (Prospectus and Allotment of Securities) regulation, stating: “Issue of securities in dematerialised form by private companies: (1) every private company, other than a small company, shall within the period referred to in sub-rule (2) (a) issue the securities only in dematerialised form; and (b) facilitate dematerialisation of all its securities, in accordance with provisions of the Depositories Act, 1996 (22 of 1996) and regulations made there under.”
“A private company, which as on 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 18 months of closure of such financial year, comply with the provisions of this rule,” it reads.
If a company ceases to be ‘small’, it will have to dematerialise its shares within 18 months from the close of the financial year.
“The MCA’s move to facilitate the dematerialisation of shares for specific categories of private companies is a significant step towards ensuring the integrity of financial markets. Besides enhancing the ease of doing business in India, this will decrease fraudulent activities in dealings with physical shares,” said Makarand M Joshi, founder of MMJC & Associates, a corporate compliance firm.
Currently, listed companies, which are regulated by both the MCA and the Securities and Exchange Board of India (Sebi), are required to dematerialise their equity shares. While there is no bar on an investor holding shares in physical form, for any transfer of shares they are required to be converted from physical form to electronic. Similarly, ‘unlisted public companies’ are also required to demat their shares for undertaking any corporate action such as buyback, or issue of bonus or rights shares.
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Industry experts say ‘unlisted private companies’ constitute the largest number of registered companies.
As of January, about 1.4 million companies registered with the MCA, or 95 per cent of active registered companies, were private companies. Of these, only 50,000 are estimated to be ‘small companies’.
“With the mandatory dematerialisation for private companies coming into existence, a large number of firms will be forced to move towards dematerialisation of shares. Further, barely any security holder (particularly shareholders) will remain outside the purview of the same,” wrote Vinod Kothari Consultants in a note.
Industry players say having shares of most Indian companies in electronic format will yield a number of benefits for the regulators, companies as well as the investors. For investors, the dematerialisation of shares will minimise the risk of loss, theft, and fraud and will lead to instant transfer and crediting of new shares.
While it will reduce the companies’ expense of printing and distribution of physical certificates, it will help regulators curb mal-practices, such as benami transactions, money laundering, and other illicit activities. It will also make tax collections more efficient and help in formalisation of the economy.
The move to demat private company shares is seen boosting the business prospects of the country’s two depositories — Central Depository Services (CDSL) and National Securities Depository (NSDL). Shares of CDSL, which are exclusively listed on the National Stock Exchange, are seen gaining on Monday. NSDL has filed its prospectus with market regulator Sebi for an IPO, which is expected to hit the market before the end of the current calendar year.
