The Ministry of Corporate Affairs (MCA) on 27 October 2023 notified an amendment to the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (Amendment Rules 2023), which affects all companies, but majorly the private companies. The Amendment Rules 2023 introduces two significant changes: (i) concerning the bearer of share warrants under the erstwhile Companies Act, 1956, and (ii) mandatory dematerialisation of securities for all private companies excluding small companies.

The Amendment Rules 2023 mark a significant milestone in India's corporate regulatory landscape. These rules introduce crucial changes aimed at enhancing transparency, efficiency, and accountability in the issuance and management of securities for both public and private companies.

Rule 9 Amendment for Public Companies: Enhancing Share Warrants

The Amendment Rules 2023 focuses on public companies that had previously issued share warrants under the erstwhile Companies Act, 1956. Here are the key provisions:

1. Within 3 months of the Amendment Rules 2023's implementation, public companies must inform the Registrar about the details of these share warrants in Form PAS-7;

2. Within 6 months, these public companies must request share warrant holders to surrender them for dematerialization. For this, the company has to place a notice for the bearers of share warrants in Form PAS-8 on their website. The company also has to publish the notice in a newspaper in the vernacular language which is in circulation in the district and in an English Newspaper widely circulated in the state in which the company’s registered office is situated. Non-compliance results in conversion and transfer to the Investor Education and Protection Fund established under Section 125 of the Companies Act, 2013.

Rule 9B: Private Companies’ Mandatory Dematerialization

Rule 9B, a new addition, significantly impacts private companies that do not qualify as small companies:

1. The rules apply to private companies, excluding small companies, and extend to various categories, including foreign subsidiaries, domestic subsidiaries, Section 8 companies (non-profit companies), domestic holding companies, and companies governed by special acts. The Private companies not qualifying as small companies, according to their audited financial statements for the financial year ending after 31 March 2023, must comply within 18 months of that financial year's closure (i.e., by 30 September 2024).

2. The private companies subject to these rules must ensure the dematerialization of securities held by promoters, directors, and Key Managerial Personnel before any securities-related transactions i.e., buyback, issue of bonus shares, and/or rights offer.

3. It's important to note that government companies are exempt from these Amendment Rules 2023.

4. It is important to note that a small company is a company that is not a public company and has a paid-up share capital equal to or below Rs 4 crore or such a higher amount specified not exceedingly more than Rs.10 crores.

MHCO Comment:

The Amendment Rules 2023 signify a pivotal development in India's corporate regulatory landscape. They seek to promote transparency, efficiency, and accountability in the issuance and management of securities. Timely compliance with the specified timelines and requirements is essential for companies to effectively adapt to these changes, avoid penalties, and secure their operations in the evolving regulatory environment. Historically, private companies often saw shares registered under untraceable or unidentified names, which raised concerns about black money. With the mandatory dematerialization of shares, the government aims to address this issue.

Authors: Bhushan Shah - Partner | Shreya Dalal - Associate Partner | Daksha Kasekar - Associate

This update was released on 29 Nov 2023.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

Legal Update Team
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