In a significant move, the Ministry of Corporate Affairs (MCA) issued a notification on October 27, 2023, mandating the dematerialization of shares for all private limited companies (except small companies) in India. This policy change marks a crucial step towards enhanced transparency, efficiency, and investor protection within the private company landscape.
What is dematerialization?
Dematerialization refers to the conversion of physical share certificates into electronic form, held in an investor’s demat account. This process eliminates the need for paper certificates, simplifying share transfer, dividend payments, and other corporate actions.
Impact of the notification:
- Increased Transparency and Efficiency: Dematerialization simplifies recordkeeping and reduces the risk of fraud associated with physical certificates. It also streamlines share transfers, settlements, and dividend payments, fostering greater efficiency in corporate transactions.
- Improved Investor Protection: Dematerialization safeguards investors from losses due to theft or damage of physical certificates. It also facilitates easier tracking of shareholding patterns, promoting transparency and investor confidence.
- Enhanced Corporate Governance: This move aligns India with global best practices in corporate governance, making the private company sector more attractive for domestic and foreign investors.
Timeline and Implementation:
The notification provides a phased timeline for compliance. Private companies to dematerialise their existing securities within a period of 18 months from closure of FY ending on 31 March 2023, i.e. till 30th Sep. 2024 and issue new securities only in dematerialised form. The MCA has also set up a dedicated framework to support companies and investors through this transition.
The above private companies ensure that, entire holding of securities of its promoters, directors, key managerial personnel have been dematerialized before making the following offers:
- Fresh issue of any securities
- Buyback of securities
- Bonus shares
- Rights offer
Exemption:
Small companies and Government companies are exempted to comply with the requirement of mandatory dematerialisation.
Small company means a company, other than a public company, whose paid-up share capital is less than or equal to (<=) ₹ 4 crores and turnover as per the last financial year is less than or equal to (<=) ₹ 40 crores. Following are not considered as small company:
- Holding company or a subsidiary company
- Section 8 company
- Company/ Body Corporate governed by any Special Act
Challenges and Considerations:
While the benefits of dematerialization are undeniable, challenges exist. Some companies may face initial hurdles in understanding and adapting to the new system. Additionally, ensuring access to demat facilities for investors in rural areas and remote locations requires careful attention.
Conclusion:
The MCA’s notification mandating dematerialization of shares for private companies is a welcome step forward. It paves the way for a more efficient, transparent, and investor-friendly environment within the sector. While challenges remain, the potential benefits for both companies and investors are significant. By providing adequate support and guidance, the MCA can ensure a smooth transition and unlock the full potential of this policy shift.
©CS SHIKHA PUBBI
Practicing Company Secretary
Shikha Pubbi & Associates (SPCS)
Disclaimer: While the information presented in this article is based on factual sources, the interpretation and opinions expressed are solely those of the author.
Sources:
- News Papers – The Economic Times, The Hindu, Times of India, and Hindustan Times
- Govt Website – Ministry of Corporate Affairs
