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Mandatory conversion of Physical Shares into Demat - Private Company, WOS and Subsidiary Company
Mandatory conversion of Physical Shares into Demat - Private Company, WOS and Subsidiary Company
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Mandatory conversion of Physical Shares into Demat - Private Company, WOS and Subsidiary Company. The Ministry of Corporate Affairs on October 27, 2023 notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. Through this amendment, a new rule - Rule 9B has been inserted in the existing Companies (Prospectus and Allotment of Securities) Rules, 2014, (PAS rules) making dematerialization of securities mandatory for unlisted private companies. In this post, Compliance Calendar highlights the process and compliance requirements associated with dematerialization of securities of unlisted private companies and answers a common query on whether the notification also applies to wholly-owned subsidiaries and subsidiary companies in India. Understanding private unlisted wholly-owned subsidiaries and private unlisted subsidiary companies in India A subsidiary company as the name suggests is a company that is subordinate to a parent company that exercises control over it. This control may be partial or full. As per Section 2(1)(zm) of the LODR as well as Section 2(87) of the Companies Act, 2023, subsidiary refers to a company in which the holding company controls the composition of the Board of Directors, or exercises control over more than half of the total voting power (under LODR) and total share capital (under Companies Act), either on its own or together with one or more of its subsidiary companies. A wholly-owned subsidiary possesses 100% ownership of the subsidiary company’s shares. In the case of a subsidiary company, the parent company owns more than 50% of the subsidiary’s shares, but less than 100%. Dematerialization of securities - The process and its advantages Dematerialization is a process by which an investor can get his physical security/(ies) certificate/(s) converted into electronic balances, and hold the same in their account with a Depository Participant in the depository system. Dematerialization does not result in change in ownership but results only in change in the method of holding shares. There are distinct advantages of dematerialized forms of securities for both the holder as well as law enforcement agencies. It brings greater transparency due to electronic records of shareholding available to the company, ministry as well as market regulators Litigation concerning common issues of taxation, transfer, gift and inheritance of share certificates can be minimized Securities can be more conveniently pledged, or used as collateral due to digitized ownership Risk of loss, theft and tampering that was a perpetual concern with physical certificates is minimized When the securities held in dematerialized form with the depositories are fungible i.e. they become identical and interchangeable and cease to have any unique characteristic such as certificate number. The holdings of particular shares are identical to each other and thus they are interchangeable. Dematerialization of shares for private unlisted subsidiary companies in India Under the Rule 9B of the amended Allotment Rules, every private company, which is not a small company, has to mandatorily ensure that all its shares are in dematerialized form by September 30, 2024. All private companies that qualify as small companies as per the provisions of the Companies Act, 2013 are required to dematerialize their shares within 18 months from the end of such financial year in which the company no longer retains its status as a small company. All new issues of securities must only be in demat form. The rules provide that new issuance of securities by private companies has to be solely undertaken in dematerialized form. Moreover, private companies that plan to buyback shares or issue bonus shares or rights issues have to ensure that holdings of securities by promoters, directors and key managerial personnel are also dematerialized. Thus, based on the reading of the notification, all unlisted private companies, including wholly owned subsidiaries and subsidiary companies must mandatorily comply with the requirement of dematerialization of securities. Dematerialization requirement also applies to Private Indian subsidiaries of foreign companies Unlike the 2018 amendment that exempted wholly-owned subsidiaries of unlisted public companies from complying with the requirement of dematerialization, the 2023 amendment makes no such exemption. Hence, even private companies, whether they are subsidiaries of Indian or foreign companies that are wholly owned subsidiaries, would be required to comply with dematerialization of existing and new securities. Amended PAS Rules clarify that the conditions contemplated under sub-rules (4) to (10) of 2018 Amendment Rules (applicable to unlisted public companies) shall equally apply to a private company as well. These are as follows - (4) Every company must make an application to a depository as defined in section 2 of the Depositories Act, 1996 and shall secure International Security Identification Number (ISIN) for each type of security and shall inform all its existing security holders about such a facility. (5) Every 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 dematerialization of shares of unlisted public companies and matters incidental or related thereto. (6) No company which has defaulted in sub-rule (5) shall make an offer of any securities or buyback its securities or issue any bonus or right shares till the payments to depositories or registrar to an issue and share transfer agent are made. (8) 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. (8A) The company shall immediately bring to the notice of the depositories any difference observed in its issued capital and the capital held in dematerialized form.] (9) The grievances, if any, of security holders of unlisted public companies under this rule shall be filed before the Investor Education and protection Fund Authority. (10) 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. Compliance requirements for Wholly-owned subsidiary and Subsidiary Companies for dematerialization The following aspects of compliance must be adhered to by all private companies undertaking dematerialization of securities: Amending of Articles of Association of the company to authorize shareholders to hold securities in dematerialized form Appointment of a Securities and Exchange Board of India registered Registrar and Transfer Agent Obtaining an International Securities Identification Number from NSDL or CDSL by following the required procedure and documentation. A Separate ISIN needs to be procured for all the existing different types of securities issued by such private companies. Penalty for non-compliance with notification on compulsory dematerialization In case of any non-compliance of requirements under the PAS Rules, including the amendment in 2023, there are no specific penal provisions stipulated under Section 29 of the Companies Act, 2013. However, as a general rule, the penalties under Section 450 of the Companies Act would apply. This includes a penalty of 1000 per day for a continuing offense, subject to a maximum of 2 lakhs and 50,000 for officers in default.
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Fast Track
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Change Services
Change Company Name
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Increase Authorised Capital
Increase Paid-up Capital
Increase LLP Capital
Transfer of Shares
Alteration in MoA & AoA
Resignation of Auditor
Appointment of Director
Resignation of Director
Change in Designation of Director
Shifting Registered Office of Company
Shifting Registered Office of LLP
Dormant Status of Company
Mandatory Compliances
Appoinment of Auditor
Annual Filings of Company
Annual Filings of LLP
Annual DIN/DPIN KYC
Annual Return of Deposits
Half Yearly MSME Return
Statutory Registers & Minutes
XBRL Filing of Companies
eStamping of Share Certificates
Dematerialisation of Shares
RBI FEMA Compliance
GST Returns Filing
ESI-EPF Returns Filing
TDS Returns Filing
Change in Structure
Proprietorship to OPC
OPC to Private Limited
Private Limited to OPC
LLP to Private Limited
Private Limited to LLP
Partnership Firm to LLP
Private Limited to Public Company
Public Company to Private Limited
Trust/Society to Section 8 Company
Existing Company to Section 8
Existing Section 8 to Company
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