Unlisted Public Company to Issue Shares in Demat Form - From 2nd October 2018

Share Transfer and Allotment in Unlisted Public companies in physical form is always a difficult and non-transparent process for the shareholders and because of this many of these companies does not complied with the complete set of rules with transparency related to issuance or transfer of share certificates.

Mandatory Digitalisation in this process is the only solution left with the government to make this process more transparent and easy and with the view of this, the Central Government by way of notification, issued rules called Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 where they inserted Rule 9(A) on 10th September, 2018 making dematerialization of securities (Shares) mandatory for Unlisted Public Companies.

The above said rules shall come into force on 2nd October, 2018 i.e. from 2nd October 2018, every Public company issue or transfer shares in demat or electronic form only.

What is Shares Dematerialisation?

Dematerialisation is process of converting physical securities/shares into electronic form.
For conversion of shares into dematerialised form, a shareholder needs to open a Demat account with a Depository Participant where he surrenders his physical shares and gets them converted into electronic shares which is to be held in his Demat Account.

What are Unlisted Public Companies?

Public Companies are those which are having minimum 3 directors and total 7 members and having only Limited word at the end in their name. And unlisted public companies are those public companies which are not listed or whose shares not traded on any recognised stock exchange.

What are the benefits of dematerialisation of securities/shares to unlisted public companies?

• Increasing transparency and preventing malpractices like benami shareholding, back dated issue of shares etc which ultimately helps in improving corporate governance system.
• Removes the risk associated with physical certificates such as loss, theft, mutilation, fraud etc.
• No Stamp Duty on Transfer of Shares.
• Ease in transfer, pledge etc. of shares.

What Rule 9(A) In new law says?

Rule 9(A) - Issue of securities in dematerialised form by unlisted public companies

This rule is inserted by Government for unlisted public companies for compulsorily converting their securities in dematerialised form. Now let’s discuss in detail what Rule 9(A) says:

(1) Unlisted public companies shall:-

• Issue the shares only in Demat or Electronic form.
• Also, convert all existing shareholdings into electronic form.

(2) Securities which are held by Promoters, Directors and Key managerial personnel needs to be dematerialised in accordance with provisions of the Depositories Act, 1996 before issuance of shares or buyback of shares or Issue of bonus shares/ right offers.

(3) Transfer of shares on or after 2nd October, 2018, can only be done after converting such shares into dematerialised form before the transfer.

Further, if existing shareholder subscribes to any securities (can be through private placement or bonus shares or right offer) of unlisted public company on or after 2nd October, 2018 shall ensure that all his existing securities are held in dematerialised form before such subscription.

(4) It is the Duty of unlisted public company for dematerialisation of all its existing securities / Shares by making necessary application to a depository and shall secure ISIN (International Security Identification Number) for each type of security and shall further inform all its shareholders about this facility.

(5) Unlisted public company shall ensure:

• Timely payment of fees to the depository and RTA (Registrar to an issue and Share Transfer Agent).
• Maintains security deposit of not less than 2 years’ fees with the depository and registrar to an issue and share transfer agent.
• Compliances with regulations of SEBI with respect to dematerialisation.

(6) If company makes default in payment of fees as stated in above point, then company cannot make offer of shares or buyback its shares or issue any bonus or right shares till the payments has been made to depositories or registrar to an issue and share transfer agent.

(7) Except Sub rule- 8, the provisions of Depository Act, 1996, SEBI (DP) Regulations, 1996 and SEBI (RTA) Regulations, 1993 shall apply as it is to dematerialisation of shares of unlisted public companies.

(8) Half Yearly Audit Report shall be submitted by unlisted public company to ROC as provided under Regulation 55A of SEBI (DP) Regulations, 1996.

(9) If shareholders are having any grievances or complaints under this rule, then shall file such grievances before Investor Education and Protection Fund (IEPF) Authority.

(10) IEPF Authority shall initiate any action against depository or participant or registrar to an issue and share transfer agent after prior consultation with SEBI.

We have tried to cover in entirety regarding dematerialisation of securities here, but still if your queries are unanswered then kindly drop your query on info@hubco.in or put your comments on our contact us page.

Hubco.in can help you in getting your shares issued in dematerialised form, for any such query do write us on agam@hubco.in.