In October 2023, the Ministry of Corporate Affairs (MCA) in India introduced an important change to how private companies handle their shares. This new rule requires private companies that are no longer categorized as ‘Small companies’ to convert their physical share certificates into electronic form, known as dematerialization. Here’s a friendly guide to help you understand what this means and what you need to do.
What is Dematerialisation?
Dematerialisation is the process of turning physical share certificates into electronic records. This means your shares will be stored digitally in a demat account, managed by trusted entities like the National Securities Depository Ltd. (NSDL) or Central Depository Services (India) Ltd. (CDSL). This digital shift helps make managing shares safer, more efficient, and fraud-proof.
Who Needs to Dematerialise?:
If your private company isn’t classified as a "small company, " you must dematerialize your shares.
According to section 2(85) of the Companies Act, 2013, a small company means a company that meets the following criteria:
Condition 1: Paid-up capital of the company should not exceed INR 4 Crores; AND
Condition 2: Turnover of the company should not exceed INR 40 Crores.
Note: The paid up capital can be calculated by multiplying the face value of your shares with the total shares issued by the company.
However, it is essential to note here that the following companies, even though they meet both of the above conditions, are not eligible to qualify as a small company-
· A public company
· A holding company
· A subsidiary company
· Company registered under section 8
· A company that is governed by any particular act
What does this mean if a company is no longer a small company?
If your company wasn’t a small company as of March 31, 2023, you have until September 30, 2024, to comply.
If your company stops being a small company after March 31, 2023, you’ll have 18 months from the end of that financial year to switch to demat shares.
Any new shares issued by such a company that does not fit the above must be in electronic form. Before you issue new shares, buy back shares, or issue bonus shares, make sure all shares held by promoters, directors, and key managers are dematerialised.
What This Means for Your Company
Switching to dematerialised shares will make managing your company’s shares easier and more secure, but it also means some new steps and costs. Here’s what you’ll need to do:
Foreign investors will need to open demat accounts with Indian depositories. This involves getting a Permanent Account Number (PAN), completing Know Your Customer (KYC) requirements, and other formalities. While this might take some time, it will eventually make investing in Indian private companies easier and more secure.
Benefits of Going Digital
Switching to dematerialised shares offers many advantages:
Conclusion
The move to dematerialised shares is a positive step towards a safer, more efficient system. While there are new compliance steps to follow, the benefits of easier share management, reduced fraud, and better business practices make it worthwhile.
By planning ahead and following the new rules, your company can smoothly transition to the dematerialised system and enjoy its many benefits.
Other essential reading/ links for reference:
· MCA cicular
https://www.indiafilings.com/learn/revised-definition-of-a-small-company-2022/
· https://www.equitylist.co/blog-post/dematerialisation-of-shares-by-private-companies-mcas-rule-9b
· https://drive.google.com/file/d/1wx-Sak5g2rS6qC4vwT7DtjVELG2lM28M/view
Note: This blog is for informational purposes only, and may not be construed as legal advice. Please seek an expert’s opinion before actioning the above.