A recent notification issued by MCA on the requirement for private companies to maintain and issue shares only in dematerialised form with exception to small companies.

Key takeaways from the notification

• Applicability: Every private company, other than a small company, shall issue the securities only in dematerialised form and facilitate dematerialisation of all its securities;
• Timeline: A private company, which as on last day of a financial year ending on or after 31st March, 2023, is not a small company as per the audited financial statements for such financial year, shall, within eighteen months of closure of such financial year (i.e. September 30, 2024) to comply with these provisions;
• Small Company: Company, the paid-up share capital of which does not exceed four Crore rupees or such higher amount as may be prescribed and turnover of which as per profit and loss account for the immediately preceding financial year does not exceed forty crore rupees or such higher amount as may be prescribed. It is pertinent to note that the small company definition does not include a holding company or a subsidiary company. (OR) a company registered under section 8;
• This broadly involves the following steps – (a) amendment of articles of association (“AoA”) of the company to authorise shareholders to hold securities in dematerialised form; (b) appointment of a Securities and Exchange Board of India (“SEBI”) registered Registrar and Transfer Agent (“RTA”); and (c) obtaining an International Securities Identification Number (“ISIN”) from NSDL or CDSL by following the required procedure and documentation;
• Practical Implications: It is pertinent to note that the restriction on transfer of shares as applicable to a private company will continue to exist even in these cases. Further, opening a demat account entails providing significant Know Your Customer (“KYC”) information and obtaining a permanent account number (“PAN”) with Indian tax authorities. There is also a fee component involved for opening and annual maintenance of demat accounts;
• Non-Compliance:  There are no specific penal provisions stipulated under Section 29 of the Act read with Amended PAS Rules. As a general rule, the penalties under Section 450 of the Act would apply, i.e., the Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.