India has taken another giant stride in enhancing the integrity of its financial markets with the Corporate Affairs Ministry (MCA) now mandating private companies to go in for dematerialisation of their securities.
All private companies, except small and government companies, can henceforth issue new securities only in dematerialised form, the MCA has said in its latest amendment to a Rule concerning issuance of securities.
Private companies have to facilitate dematerialisation of existing securities and the time period allowed to conform to the latest directives is until the end of September 2024.
MCA has also specifically said that no private company can issue securities or buyback its securities after September 30, 2024, until the entire holding of securities of its promoters, directors, and key managerial personnel has been dematerialised.
Also, every holder of securities in a private company who intends to transfer such securities on or after September 30, 2024 shall get them dematerialised before the transfer.
All subscription to any securities of a private company, whether by way of private placement or bonus shares or rights offer on or after September 30, 2024, can be done only in respect of securities held in dematerialised form before such subscription, MCA has said.
- Also read: MCA to frame policy on pre-legislative public consultations on rules and regulations making
Commenting on the MCA move, Makarand M Joshi, Founder, MMJC & Associates, a corporate compliance firm, said that the move to facilitate dematerialisation of shares by certain category of private companies is a significant step towards ensuring the integrity of financial markets. “Apart from enhancing ease of doing business in India, this move will reduce unscrupulous activities while dealing in physical shares”, Joshi said.
Small private companies with a capital of less than ₹4 crore and turnover of less than ₹40 crore, and those that are neither holding nor subsidiary companies will be spared from the burden of dematerialisation.
The dematerialisation of shares of public companies (listed in bourses) took off in 1996 with the establishment of National Securities Depository Limited (NSDL).
The dematerialisation of shares in Indian equity markets revolutionised the way shares were held and traded, leading to increased efficiency, transparency, and investor participation while reducing the risks and costs associated with physical certificates. It was a pivotal development in the evolution of India’s capital markets.
This dematerialisation move, which was seen as a game-changer, brought in several benefits including elimination of physical certificates, improved transparency, faster and cheaper transactions, reduction in paperwork, integration with electronic trading, financial inclusion, better retail investor access, and reduced frauds and forgeries besides easier ownership transfer.
Varun Vaish, Partner, Luthra and Luthra Law Offices India, said this amendment is a landmark move aimed at bringing about a transformative change in the corporate governance landscape of India.
The dematerialisation of securities, while exempting small companies and government companies, signifies a progressive shift towards transparency and efficiency, aligning India’s corporate sector more closely with international practices., he said.
This amendment is expected to reduce the risks associated with physical certificates, such as loss, theft, and forgery, and improve the overall governance in private sector companies by facilitating better tracking and trading of securities, he added.
Abhishek Guha, Partner, Shardul Amarchand Mangaldas & Co., said this amendment will bring about further transparency and improve overall investor protection. It will curb risks like fake certificates and fraudulent share transfers resulting in unwarranted disputes and litigation.
“There will be operational and compliance costs associated with maintaining demat accounts but the associated costs should be acceptable given the substantial benefits”, Guha added.