The Ministry of Corporate Affairs recently notified new rules mandating dematerialization of securities in public and larger private companies to enhance governance and transparency.
MCA Notification dated 27/10/2023: New Rules for Dematerialization of Securities – Companies PAS Second Amendment Rules, 2023
As per the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, public companies which had issued share warrants prior to the Companies Act, 2013 need to provide details of such pending share warrants to the Registrar within 3 months. The share warrant holders must convert these to dematerialized shares within 6 months, failing which the company will transfer the shares to the Investor Education and Protection Fund.
Additionally, private companies, other than small companies, need to issue and dematerialize their securities within 18 months from the end of the financial year when they cease to be a small company as per the latest audited financial statements. Promoters, directors and key managerial personnel of such private companies must dematerialize their holdings before the company makes any new offer of securities, including bonus issue or rights issue.
Securities holders who want to transfer or subscribe new securities in such private companies need to first dematerialize their existing physical securities. The rules aim to ensure substantial admission of securities into the depository system and address issues like fraud with physical certificates. However, these rules are not applicable to government companies.
Two new forms have been introduced – Form PAS-7 for public companies to provide details of pending share warrants, and Form PAS-8 to issue notice to share warrant holders to surrender warrants.
Overall, these amendments will significantly improve corporate governance and transparency standards in public companies as well as larger private companies that are on a growth path. Dematerialization of securities will facilitate ease of transfer/subscription of securities, reduce frauds, and improve compliance levels in line with the objectives of the Companies Act, 2013.