On Oct 27, 2023, Ministry of Corporate Affairs notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 and introduced two important rules 9(2) and 9B for public and private companies, as applicable. These two provisions will form part of 2014 Companies (Prospectus and Allotment of Securities) Rules. It is important to note the deadlines and implement well in advance.
Share Warrants: Where a public company has unconverted share warrants issued before April 1, 2014, they need to notify ROC in the prescribed form by Jan 27, 2024. Additionally, the company is obligated to publish a notice by April 27, 2024 in two newspapers (local and state) requiring warrant holders to surrender them for conversion to demat. If the holders do not adhere to the timeline and fail to surrender, the company must convert the warrants into demat and transfer to the Investor Education & Protection Fund.
Securities in Demat: From Oct 1, 2024, private companies, must (a) issue demat securities only, (b) file bi-annual returns for demat shares in the prescribed form, (c) pay fees, and maintain security deposit of 2 years, with a depository and registrar and transfer agent. After Oct 1, no future issue, buy-back, rights offer, transfer or subscription of securities by a holder will occur unless shares are in demat form. Small companies are exempt, and these are those who have a paid-up share capital and turnover of up to INR 40 and 400 million respectively. However, if such “small” company is a group holding entity, or subsidiary or not-for-profit company, then the financial thresholds and exemption will not apply, and they must have its stock in demat form. To ensure compliance, companies must complete all steps by Sep 30, 2024, including conversion of existing physical securities to demat, amending charter documents to authorize holding demat securities. It will also be prudent for entities contemplating formation in India to issue shares in demat form now itself.
Demat Process: A very high-level overview of the process is as follows. A company and proposed transferee must have demat accounts with a depository participant. To initiate, company must (a) obtain ISIN which is a 12-digit alpha-numeric code issued by the depository; (b) create an account on the depository’s website. For this, submit application electronically along with certified true copy of required documents, applicable joining fees and annual custody fees. The Depository assigns ISIN, and the company can issue demat securities.
Conversion to Demat: Companies must inform holders about the facility of conversion to demat. The holder will have to submit demat application with physical certificates inscribed with “surrendered for dematerialization” to the depository participant who will verify the request, and after its own diligence and scrutiny, issue demat securities which will be credited to the holder’s account.
It is very common for closely held private companies to issue stock in physical form. Given the short deadlines, there will be a rush towards the end and, therefore, it is imperative for entities that come within the ambit of the foregoing changes to start preparing ahead and comply soonest.
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