The Ministry for Corporate Affairs (MCA) notified the commencement of the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018, on 10 September 2018 by inserting section 9A, which provides for the mandatory dematerialization of all securities of an unlisted public company (UPC). On 11 September 2018, the MCA issued a press release clarifying the rationale for issuing the amendment rules, namely to increase transparency in securities transactions, protect investors and provide governance in the corporate sector.
Rule 9A mandates that every UPC, commencing 2 October 2018 (the date on which the amendment rules come into effect), must issue securities only in dematerialized form and facilitate the dematerialization of existing securities in accordance with the Depositories Act, 1996. Key provisions of the new rule are as follows:
- The UPC must ensure that, prior to making any offer for issuance of new securities (including through bonus issue and rights issue) or for buyback of securities, the entire holding of securities of its promoters, directors and key managerial personnel has been dematerialized.
- Every UPC must facilitate dematerialization of its securities by registering itself with a depository and obtain an international security identification number (ISIN) for each type of security issued by it, and inform its existing security holders of such facility.
- The rule also imposes a restriction on existing holders of securities in a UPC from transferring such securities, which are not in dematerialized form, and from subscribing to new securities in a UPC, if the holder continues to hold existing securities in a UPC in physical form.
- Where a UPC has defaulted in its obligations to: (1) make timely payment of admission and annual fees to the depository and the registrar and transfer agent in relation to an issue; (2) maintain a minimum of two years’ fees as a security deposit with the depository and the registrar and transfer agent to an issue; and/or (iii) comply with the directions, guidelines, etc., issued by Securities and Exchange Board of India (SEBI) or the depository in relation to dematerialization of securities, it will be disallowed from making any offer of new securities or buy-back of its existing securities until such times where adequate payments in this regard have been made.
- The rule has extended the applicability of the SEBI (Depositories and Participants) Regulations, 1996, and the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993, mutatis mutandis to dematerialization of securities of unlisted companies. However, reporting requirements have been relaxed under the SEBI (Depositories and Participants) Regulations, 1996, in relation to UPC. While listed companies are required to submit an audit report on a quarterly basis detailing the changes in its share capital and updated status of the register of members and dematerialization of securities to the stock exchanges where the securities are listed, UPCs must submit the audit report on a half-yearly basis to the relevant registrar of companies.
- Grievances of UPC security holders in relation to the dematerialization of securities will be handled by the Investor Education and Protection Fund Authority constituted under the Companies Act, 2013.
The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.