Rule 9B of the Companies Act, 2013, specifies that after September 30, 2024, securities of Section 8 companies can only be transferred in dematerialized form.
Dematerialization of Shares by Section 8 Companies: The Ministry of Corporate Affairs (MCA) issued a critical notification on October 27, 2023, under the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. This mandates that all Section 8 companies must dematerialize their securities by September 30, 2024. Section 8 companies, being non-profit organizations, must ensure that any new issuance or transfer of securities occurs in dematerialized form. However, the amendment does not apply to Section 8 companies limited by guarantee since they do not have share capital.
Key Requirements:
- Mandatory Dematerialization of Shares: All physical shares held by Section 8 companies must be converted into electronic form.
- Obligation to Obtain ISIN: Companies must secure an International Securities Identification Number (ISIN) for each type of security they issue. This is essential for facilitating the conversion of physical shares to demat form.
- Informing Security Holders: Section 8 companies must notify all existing security holders about the dematerialization process and provide opportunities for conversion to electronic securities.
- Filing of Form PAS-6: Companies are required to submit Form PAS-6 biannually to report their share capital structure and dematerialization status.
Also Read: ISIN & DEMAT Process for Section 8 Companies
Compliance Guidelines under Rule 9B:
Rule 9B of the Companies Act, 2013, specifies that after September 30, 2024, securities of Section 8 companies can only be transferred in dematerialized form. To comply, companies must:
- Apply for ISIN: Ensure an application for ISIN is submitted to a depository by the compliance deadline.
- Facilitate Dematerialization: Partner with a depository to dematerialize all existing securities and update security holders about the process.
Steps for Dematerialization:
- Submit Physical Share Certificates: Shareholders must surrender their certificates to a depository participant (DP).
- DP Intimates the Depository: The depository participant forwards the dematerialization request.
- Registrar Processes the Request: The company’s registrar verifies and confirms the request.
- Shares Dematerialized: The registrar converts physical shares into electronic form.
- Account Updates: The registrar updates the demat account, completing the process.
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Penalties for Non-Compliance:
Non-compliance can result in fines under Section 450 of the Companies Act, 2013:
- A penalty of up to ₹10,000 for the company and every responsible officer.
- An additional ₹1,000 per day for each day the default continues.
Companies Exempt from Dematerialization Rules:
- Section 8 Companies limited by guarantee.
- Nidhi Companies.
- Government Companies.
- Wholly Owned Subsidiaries of Public Companies.
- Small Private Limited Companies (Note: Section 8 companies do not qualify as small companies regardless of their capital size).
Conclusion:
Section 8 companies must act promptly to ensure full compliance with the new dematerialization mandate. Early application for ISIN and proactive communication with shareholders will streamline the transition to electronic securities, safeguarding against penalties and enhancing corporate governance.
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