Dematerialisation of Securities of Unlisted Public Companies Under Companies Act, 2013 By CS Rahul Harsh

Dear Professional Colleagues,

The MCA vide its notification dated 10th September 2018 has notified the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018. The notification provides that Every Unlisted Public Company shall have to issue the SECURITIES only in dematerialized form and facilitate dematerialization of all its existing securities.

The Changes have been made by the MCA in its mission to foster Corporate Governance in the Country and may be described as a part of its “Swachh Corporate Abhiyan.”

This article is an attempt to simplify the rules notified by the MCA and facilitate the readers in compliance.

Q. What is the Change?


Q. What is covered under the Term Securities?

A. The term SECURITIES has been defined under The Companies Act, 2013 as well as under the Securities Contracts (Regulation) Act, 1956.
Section 2 (81) of the Companies Act, 2013 defines the term as "securities" means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

As we understand that the complete definition has been provided in the Securities Contracts (Regulation) Act, 1956, therefore, it is pertinent to note the same here for getting a complete overview of the term.

Clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) which provides that (h) “securities” include

(i)   shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other bodies corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;] 14

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation   and   Reconstruction   of   Financial   Assets     and Enforcement of Security Interest Act, 2002;]

(id) units or any other such instrument issued to the investors under any mutual fund scheme;]


For the removal of doubts, it is hereby declared that "securities" shall not include any unit-linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a combined benefit-risk on the life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938)

(ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;]
(ii) Government securities;

(ii) such other instruments as may be declared. 19 by the Central Government to be securities; and]

(iii) rights or interest in securities;
By the above definition, we can now get a clear idea of both the INCLUSIONS & EXCLUSIONS of the TERM SECURITIES. The Amendment shall be applicable only on those securities which have been included in the above definition.

Q. When is the Amendment effective from?

A. As provided by the MCA in its notification dated 10th September 2018 the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 is Effective from the 2nd day of October 2018.

  1. Is the Amendment Applicable on Both PUBLIC & PRIVATE COMPANIES?
  2. The amendment is Applicable on ALL Unlisted Public Companies.
As far as the term Public Company is concerned we should refer to the Companies Act, 2013 here which under section 2 (71) provides that "public company" means a company which—

(a) is not a private company and 

(b) has a minimum paid-up share capital as may be prescribed.

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be a public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.
Q. What is the Requirement?

A new rule i.e. Rule 9A is proposed to be inserted into the existing Companies (Prospectus and Allotment of Securities) Rules, 2014 and the same shall provide the following:

(1) Every unlisted public company shall

       (A) Issue the securities only in dematerialized form
       (B) Facilitate dematerialization of all its existing securities
Q. What is the Compliance requirement in case the Unlisted Public Companies is making ANY OFFER for the issue of securities?

A. W.e.f 2nd October, 2018 onwards the Unlisted Public Companies making ANY OFFER for issue of ANY SECURITIES or BUY BACK OF SECURITIES or ISSUE OF BONUS SHARES or RIGHTS OFFER shall ensure that before making such an offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialized in accordance with provisions of the Depositories Act 1996 and regulations made thereunder.

Q. What is the responsibility of the Security holder?

A. The rule 9A provides that Every holder of securities of an unlisted public company.
(a) who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialized before the transfer; or

who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October 2018 shall ensure that all his existing securities are held in dematerialized form before such subscription.
Q. What are the duties of the Unlisted Public Company under this Rule?

A. The following are the Duties of the Unlisted Public Companies under the Rule 9A:

  1. Every unlisted public company shall facilitate dematerialization of all its existing securities by making necessary application to a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996.
  2. It shall secure International Security Identification Number (ISIN) for each type of security
  3. It shall in-form all its existing security holders about such facility.
  4. It shall make timely payment of fees (admission as well as annual) to the depository and registrar to an issue and share transfer agent in accordance with the agreement executed between the parties.
  5. It shall maintain SECURITY DEPOSIT at all times, of not less than two years, fees with the depository and registrar to an issue and share transfer agent in such form as may be agreed between the parties;
  6. It shall comply with the regulations or directions or guidelines or circulars, if any, issued by the Securities and Exchange Board or Depository from time to time with respect to dematerialization of shares of unlisted public companies and matters incidental or related thereto.
  7. Unlisted public company which has defaulted in making payment of fees to the Share transfer Agent or In maintain the Security deposit SHALL NOT make an offer of any securities or buyback its securities or issue any bonus or right shares till the payments to depositories or registrar to an issue and share transfer agent are made.
Q. What are the Compliances which are to be done by the Companies with ROC in this regards?

A. The Unlisted Public Company shall be required to SUBMIT AN AUDIT REPORT WITH ROC OF ITS JURISDICTION ON A HALF YEARLY BASIS. The Report shall be in compliance with Regulation 55A of the SEBI (Depositories and Participants) Regulations, 1996.

Q. What does the Regulation 55A of the SEBI (Depositories and Participants) Regulations, 1996 provides?

A. The Regulation 55A of the SEBI (Depositories and Participants) Regulations, 1996 provides that

  1. Every issuer shall submit an audit report audited BY A QUALIFIED CHARTERED ACCOUNTANT OR A PRACTICING COMPANY SECRETARY.
  2. The Audit shall be for the purposes of reconciliation of the total issued capital and capital held by depositories in dematerialized form,
  3. The details of changes in share capital during the HALF YEAR.
  4. The audit report shall also give the updated status of the register of members of the issuer and confirm that security has been dematerialized as per requests within 21 days from the date of receipt of the request by the issuer
  5. The report shall give reasons where the dematerialization has not been effected within the said stipulated period, the report shall disclose the reasons for such delay.
Q. To whom does the Security Holder approach in case of any grievance?

A. The security holders of unlisted public companies under this rule shall file their grievances before the Investor Education and Protection Fund Authority. The Investor Education and Protection Fund Authority shall initiate any action against a depository or participant or registrar to an issue and share transfer agent after prior consultation with the Securities and Exchange Board of India.

Q. What is Dematerialization?

A. Dematerialization is the process of converting physical share certificates into an electronic form.

Q. What is the 
Process of Dematerialization?

A. The process of Dematerialization may be described as follows.

1. Shortlisting of a Depository Participant

  • A Depository Participant (DP) is an intermediary between a depository and the investors.
  • The list of DPs is made available on the websites of Central Depository Services (India) Limited (CDSL) and National Securities Depository Limited (NSDL).
  • The first step in dematerializing shares is to open an account with a DP offering DEMAT SERVICES.
  • Upon opening of such an account, investors need not open separate accounts for trading in debt, bonds, or any other financial instrument.
2. Filling the Dematerialization Request Form
  • A Dematerialization Request Form (DRF), available with the DP, has to be filled and submitted by the investor as shown in the image below. Along with the duly filled DRF form, investors have to surrender their physical share certificates.
  • It is important to make sure that on every share certificate, ‘Surrendered for Dematerialization is mentioned. 
3. Processing of the request
  • Upon submission of the DRF and physical certificates, the application is processed by the DP.
  • The physical share certificates are submitted to the registrar of the issuer company.
  • The registrar confirms the dematerialization request.
4. Receiving an approval of the request
  • Once the request has been approved, the registrar informs the DP of the completion of the process.
  • All the share certificates held in the physical form are then destroyed. 
  • The investor’s account will then show a credit of the shares.
  • After submission of the dematerialization request, it generally takes around 15 to 30 days for the shares to get transferred electronically.

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