ISSUE OF SECURITIES IN DEMATERIALISED FORM BY UNLISTED PUBLIC COMPANIES


Ministry of Corporate Affairs earlier brought into existence a new rule with effect from 10th September 2019 which mandates the issue of new securities by unlisted public companies in dematerialised form. These rules also placed restrictions on the transfer of existing securities in dematerialised form only. Judicially it is a welcome to step to reduce the burden of courts and partially it is an additional cost. The rule was amended twice since its inception. Let us discuss.

The government inserted a new Rule 9A to the Companies (Prospectus and Allotment of Securities) Rules, 2014 vides notification G.S.R. 853(E) dated 10th September 2019. The Rule came into effect with effect from 2nd October 2018. With recent amendment vide Notification G.S.R. 376(E) dated 22nd May 2019 introduced a half yearly return called Reconciliation of Share Capital Audit Report (Half-yearly).

Applicability

These rules are applicable to every unlisted public company. However, an amendment vide Notification G.S.R. (E) dated 22nd January 2019 excluded the following companies by inserting a new sub-Rule 9A(11):

  1. a Nidhi;
  2. a Government company; or
  3. a wholly owned subsidiary.

New Issue

According to Rule 9A(1), every unlisted public company shall –

(a) Issue the securities only in dematerialized form; and

(b) Facilitate dematerialization of all its existing securities.

This dematerialization shall be in accordance with provisions of the Depositories Act, 1996 and regulations made thereunder.

Precondition for fresh issue by companies

According to Rule 9A(2), every unlisted public company making any of the following offers shall ensure the satisfaction of a precondition:

  • any offer for issue of any securities; or
  • buyback of securities or
  • issue of bonus shares or
  • rights offer shall ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been demateriarised in accordance with provisions of the Depositories Act 1996 and regulations made thereunder.

The precondition is that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been demateriarised in accordance with provisions of the Depositories Act 1996 and regulations made thereunder.

Precondition for transfer or subscription of securities

According to sub-rule 9A(3), every holder of securities of an unlisted public company:

(a) who intends to transfer such securities on or after 2nd  October 2018, shall get such securities dematerialised before the transfer; or

(b) who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October 2018 shall ensure that all his existing securities are held in dematerialized form before such subscription.

In compliance of Rule 9A(3)(a), only the securities intended to be transferred need to be dematerialized. The security holder may retain all other securities in existing materialized form. However, in compliance of Rule 9A(3)(b) the subscriber shall ensure securities holding should be dematerialized. I presume this rule shall be applicable only with reference to the company concern. Such a person may have securities of other companies in materialized form.

Application for Dematerialization

According to rule 9A(4), every unlisted public company shall facilitate dematerialisation of all its existing securities by making necessary application to a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996 and shall secure International Security Identification Number (ISIN) for each type of security and shall in-form all its existing security holders about such facility.

Application by the company is always a precondition for dematerialization without which no security shall be dematerialized. Dematerialization of securities held by security holder shall always subject to an application of dematerialization by the company.

Duty of Issuer Company

According to Rule 9A(5), every unlisted public company shall ensure that –

(a) it makes timely payment of fees (admission as well as annual) to the depository and registrar to an issue and share transfer agent in accordance with the agreement executed between the parties;

(b) it maintains security deposit at all times, of not less than two years, fees with the depository and registrar to an issue and share transfer agent  in such form as may be agreed between the parties; and

(c) it complies with the regulations or directions or guidelines or circulars, if any, issued by the Securities and Exchange Board or Depository from time to time with respect to the dematerialisation of shares of unlisted public companies and matters incidental or related thereto.

Restriction on offer, issue or buyback

According to Rule 9A(6), no unlisted public company which has defaulted in sub-rule (5) till the payments to depositories or registrar to an issue and share transfer agent are made shall make:

  1. offer of any securities or
  2. buyback its securities or
  3. issue any bonus or
  4. right shares.

Applicable laws

According to sub-Rule 9A(7), except as provided in Rule 9A the provisions of following laws shall apply mutatis mutandis to the dematerialisation of securities of unlisted public companies:

  1. the Depositories Act 1996;
  2. the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018; and
  3. the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993.

 Reconciliation of Share Capital Audit Report

According to sub-rule 9A(8), with effect from 30th day of September 2019, every unlisted public company governed by this rule shall submit Form PAS-6 to the Registrar with such fee as provided in Companies (Registration Offices and Fees) Rules, 2014 within sixty days from the conclusion of each half year duly certified by a company secretary in practice or chartered accountant in practice.

The last date of filing of the form PAS – 6 shall be the 28th day of November and 29th day of May respectively. The form shall be called a Reconciliation of Share Capital Audit Report (Half-yearly). The purpose of the form PAS – 6 is to check any difference between number shown in the issued capital of the company and actual circulation of its issued capital and to check other discrepancies. The company secretary in practice or the chartered accountants certifying these forms shall be duly engaged for the purpose of the certification by the company. A general engagement shall be sufficient to certify this form.

Reporting of differences

According to sub-rule 9A(8A), the company shall immediately bring to the notice of the depositories any difference observed in its issued capital and the capital held in dematerialised form.

Authority for grievances

According to sub-rule 9A(9) and 9A(10) the grievances of security holders of unlisted public companies under this rule shall be filed before the Investor Education and Protection Fund Authority. The Investor Education and Protection Fund Authority shall initiate any action against a depository or participant or registrar to an issue and share transfer agent after prior consultation with the Securities and Exchange Board of India.

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