In a significant development, the MCA vide notification no. GSR 802(E) dated October 27, 2023, notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. As per the amended norms, every private company except a small company must issue the securities only in dematerialised form within 18 months from the closure of the financial year i.e., March 31, 2023. Further, the company must facilitate the dematerialisation of all its securities in accordance with the provisions of the Depositories Act. The amended rules are effective from 27th October 2023.

This move is aimed at enhancing transparency, governance, and reducing fraudulent activities within the private company sector. At Lawgical Startup, we understand the importance of staying up to date with legal developments that can impact your business. In this article, we’ll provide you with a summary of the key aspects of this directive.

 The MCA has issued a mandate for non-small private companies to dematerialize their securities. This means that private companies will be required to convert their physical share certificates into electronic form, much like publicly listed companies have been doing for years.

 Rationale: The reasons behind this mandate, emphasizing the government’s focus on transparency, efficiency, and reducing fraudulent activities in the private company sector. Dematerialization is expected to enhance governance and investor protection.

 Impact: The new requirement will have significant implications for private companies. They will need to go through a dematerialization process and register with a depository participant (DP). This will likely involve changes to their existing shareholding structures, record-keeping, and compliance procedures.

 Timeline: The MCA has set a timeline up till 30th September 2024 for private companies which are not small companies as on 31st March 2023, to comply with this directive.

 Challenges and Opportunities: The potential challenges that private companies may face during the dematerialization process, such as cost implications and operational adjustments. On the flip side, it is an opportunity for private companies to improve their corporate governance practices.

 Next Steps: Check whether your Company is a Small Company or not as per Companies Act, 2023 and if yes, start planning for dematerialization to ensure a smooth transition and compliance with the MCA’s mandate.

This directive is a significant development in the corporate landscape of India, and private companies should be proactive in understanding and addressing its implications.

What is Small Company?

The new amended definition of a small company is provided under Section 2(85) of the Companies Act, 2013. The Act defines a small company as a company that is not a public company and has:

• A paid-up share capital equal to or below Rs.4 crore, and
• A turnover equal to or below Rs.40 crore.

However, the concept of small companies does not apply to the following companies:

• A holding or a subsidiary company,
• A company registered under Section 8 of Companies Act (Not for Profit),
• A body corporate or company governed by any special act.

 If you have any questions or require further information or if you need any assistance in facilitation of dematerialisation for your Company, please contact us.