• By ADMIN
• Posted 06 Aug, 2024
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The Mandate for Dematerialisation of Securities by Private Companies in India

Introduction

The issuance and management of securities in India have undergone significant transformations in recent years. One of the critical regulatory changes has been the mandatory dematerialisation of securities for private companies, as outlined in the Companies (Prospectus and Allotment of Securities) Rules, 2014. Rule 9B specifically addresses this requirement, detailing the obligations and timelines for compliance. This article will explore the intricacies of Rule 9B and provide a practical example to illustrate its application.

Key Provisions of Rule 9B

Mandatory Dematerialisation

9B(1): Every private company, except small companies, must:

1. Issue securities only in dematerialised form.

2. Facilitate the dematerialisation of all its existing securities.

These requirements must be followed according to the Depositories Act, 1996, and the related regulations.

Compliance Timeline

9B(2): A private company that is not classified as a small company by the end of a financial year, starting from March 31, 2023, must comply with the dematerialisation rules within 18 months from the end of that financial year.

Preconditions for Issuing New Securities

9B(3): Before issuing any new securities (through offers, buybacks, bonus shares, or rights offers), such companies must ensure that all securities held by promoters, directors, and key managerial personnel are dematerialised.

Transfer and Subscription Requirements

9B(4):

1. Security holders intending to transfer their securities after the compliance date must have their securities dematerialised.

2. Any new subscription (through private placement, bonus shares, or rights offers) must be made only if all securities held by the subscriber are in dematerialised form.

Applicability of Rule 9A Provisions

9B(5): The provisions from sub-rules (4) to (10) of Rule 9A are applicable to the dematerialisation process under Rule 9B.

Exemption for Government Companies

9B(6): Government companies are exempt from the provisions of this rule.

Practical Example

Let's consider a hypothetical private company, "Tech Innovators Pvt. Ltd."

Scenario

Tech Innovators Pvt. Ltd. is a mid-sized technology firm with a turnover and balance sheet that categorises it as a private company but not a small company. As of March 31, 2023, the company must comply with the dematerialisation rules by September 30, 2024 (18 months from the financial year-end).

Steps to Compliance

1. Assessment and Planning:

1. The company reviews its audited financial statements and confirms it is not a small company.

2. A compliance team is formed to oversee the dematerialisation process.

2. Engagement with Depositories:

1. The company liaises with depositories like NSDL and CDSL to facilitate the dematerialisation process.

2. An agreement is signed with a Registrar and Transfer Agent (RTA) to handle the dematerialisation of existing securities.

3. Dematerialisation of Existing Securities:

1. Notices are sent to all current shareholders, informing them of the mandatory dematerialisation.

2. Shareholders submit their physical share certificates to the RTA, who then converts these into electronic form.

4. Internal Compliance:

1. Before any new issue or buyback, the company ensures that the securities of all promoters, directors, and key managerial personnel are dematerialised.

2. An internal audit is conducted to verify compliance with the Depositories Act, 1996.

5. Future Security Issuance:

1. Any new shares offered through private placement, bonus issues, or rights offers are issued only in dematerialised form.

2. Potential investors are informed that all subscriptions must be in dematerialised form.

Outcome

By September 30, 2024, Tech Innovators Pvt. Ltd. successfully completes the dematerialisation of all its securities. This ensures seamless, secure, and efficient management of its securities, aligning with modern regulatory standards.

Conclusion

The mandate for dematerialisation of securities by private companies represents a significant step towards streamlining securities management in India. By understanding and adhering to the provisions of Rule 9B, companies can ensure compliance and benefit from the enhanced security and efficiency that dematerialised securities offer. Tech Innovators Pvt. Ltd.'s example underscores the importance of early planning and meticulous execution in achieving successful compliance.