WHETHER PRIVATE LIMITED COMPANIES NEED TO CONVERT THEIR SHARES INTO DEMAT? - Series 498

WHETHER PRIVATE LIMITED COMPANIES NEED TO CONVERT THEIR SHARES INTO DEMAT?

MCA Vide Companies Amendment Act, 2019 dated 31^st July, 2019 has added Sub Section 1A after sub section 1 of Section 29 (Public Offer of Securities to be in Dematerialised Form).

New Sub-Section 29(1A) In case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialized form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder.

Old Sub-Section 29(1) Notwithstanding anything contained in any other provisions of this Act,—

(a) Every company making public offer; and

(b) Such other class or classes of Companies as may be prescribed (Rule 9 of the PAS Rules), shall issue the securities only in dematerialized form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.

Rule 9 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 ('PAS Rules') relates to 'Dematerialization of securities'. According to Rule 9 of the PAS Rules, the promoters of every public company making public offer of any convertible securities may hold such securities only in dematerialised form. Rule 9 further states that the entire holding of convertible securities of company by the promoters held in physical form up to the date of the initial public offer shall be converted into dematerialized form before such offer is made and thereafter such promoter shareholding shall be held in dematerialized form only.

NOTE:

Amendment Act, 2019 created confusion by ‘removing word PUBLIC from section 29(1)(b). Confusion is that after removal of word Public whether provision of section 29 applicable on private limited company also.

INTERPRETATION:

As the language of Section 29(1)(b) Such other class or classes of  Companies as may be prescribed. However, prescribed companies are mentioned in Rule 9 of PAS rules.  Rule 9 as mentioned above, covering only PUBLIC Limited Companies.

FIRST:

Therefore, one can opine that as on date even after Amendment Act, 2019 provision of Dematerialization of securities are applicable only on PUBLIC Limited Companies.

However, by amendment act power has been given Central Government under law to prescribe other type of companies for Dematerialization of securities in future.

  

SECOND:

Further according the provisions of Section 2(68) of the Act read with the Articles of Association of such private companies, there is a restriction on transfer of shares and shares of private company are not freely transferable. This is feature of Private Limited Company. Therefore, it is not that easy for CG also to make provision of Dematerialization of securities mandatory on Private Limited Companies.

Dematerialization of securities of Private Limited Comapny even shall not promote ease of doing business.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION. This is only a knowledge sharing initiative and author does not intend to solicit any business or profession.