Private Companies to Dematerialise Securities by Sep 2024

The government has asked private companies to dematerialise their securities by September 2024, a move that will help enhance transparency and will have a broad impact. The requirement will be applicable to private companies, excluding small companies and government companies. There are about 1.4 million private companies registered under the companies law with the Ministry of Corporate Affairs (MCA). Private companies can issue securities only in dematerialised form and should facilitate the dematerialisation of all securities by September 2024, according to an MCA notification.

Dematerialisation refers to the conversion of securities held in physical form to dematerialised or digitised form. In this regard, amendments have been made to the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. A private company, which as on the last day of a financial year, ending on or after 31st March 2023, is not a small company as per audited financial statements for such financial year, shall, within eighteen months of the closure of such financial year, comply with the provisions of this rule, the notification dated October 27 said.

With about 1.4 million private companies registered with the MCA, this change is far-reaching and will have a broad impact. Share transfers in several private companies are subject to contractual or other restrictions. It is, therefore, important that depository participants follow through on this regulatory change and ensure mechanisms are in place to effectively implement contractual provisions. The move is also expected to enhance transparency and help curb possible unscrupulous activities with shares in the physical form.

Under the Companies Act, 2013, private companies have restrictions on the transfer of shares, and the number of its members cannot be more than 200. Generally, a small company is one that has a paid-up share capital of not more than Rs 4 crore and a turnover of up to Rs 40 crore, subject to certain conditions. Post September 2024, the private companies should also ensure that offers for issue of any securities, buyback of securities, issue of bonus shares or rights offer, the securities held by promoters, directors and key managerial personnel are dematerialised, as per the amended rules. Among others, shares can be transferred by private companies only in the dematerialised form after the specific date.

Meanwhile, the ministry has made amendments to rules pertaining to Limited Liability Partnerships (LLPs). From the date of incorporation, every LLP should maintain a register of its partners in a particular form that should be kept at its registered office. The register should contain various details of the partner, including address, e-mail address, Permanent Account Number or Corporate Identification Number, Unique Identification Number, if any, father or mother or spouse’s name and occupation.