Navigating the New Era of Dematerialization: Key Amendments and Implications

In the fast-evolving world of corporate governance, staying updated with regulatory changes is essential. One such significant development is the recent notification on the dematerialization of private company shares issued on October 27 by the Ministry of Corporate Affairs. We, at Qapita, invited Mr. CS Jigar Shah, Founder Partner at JMJA & Associates LLP for a virtual conversation to shed light on these amendments termed as 'Companies Allotment Security, 2nd Amendment Rule 2023’.

In this blog, we will break down the key points from the discussion which revolved around the immediate implications specifically on private companies. 

Understanding the Amendments:

The recent notification introduces crucial changes, encompassing two main aspects:

• Conversion of Warrants: This primarily applies to older warrants issued before the implementation of the Companies Act 2013. While it may not be highly relevant for startups, it is an important step for established companies to align with the latest regulations.
• Dematerialization of Shares: The heart of the matter is the mandatory dematerialization of shares for all private small companies. However, there's some confusion about the timeline. Companies are required to have their securities in dematerialized form within 18 months from the closure of the financial year, but a specific deadline remains unspecified. The key benefits of this change include streamlining the use and process of private company shares, enhancing transparency, and digitization. Importantly, small companies with a paid-up capital of less than 4 crore and a turnover of less than 40 crore are exempt from this circular.

Steps for Compliance:

 To adhere to these amendments, companies will need to follow a sequence of steps:

• ISIN Application: The process begins with applying for an International Securities Identification Number (ISIN) for all securities.
• Amending the Articles of Association (AoA): Companies must make necessary amendments to their AoA regarding the dematerialization of shares.
• Demat Accounts for Directors and Promoters: While normal employees can continue to hold physical shares, directors and promoters are required to open a demat account by September 30 of the following year. Failure to do so may lead to default.

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The next amendment revolves around the Share Warrants Conversion for public companies that issued warrants prior to the Companies Act 2013, it is mandatory to convert these warrants into dematerialized forms. The process involves applying for ISIN forms by January 26, 2024, and completing the conversion within six months. Failure to comply may result in transferring these warrants to the Investor Education Protection Fund (IEPF) account.

Another significant amendment concerns the designation of a responsible person within the company who will ensure the proper recording of beneficial ownership declarations. Typically, a director takes on this role. These amendments extend to LLPs, encompassing the maintenance of partner registers and replicating the requirement for beneficial ownership declarations within LLPs as well.

How to file the Beneficial Owner with ROC? 

While the notification remains silent about the initial filing process, it is currently interpreted that a board resolution should designate someone responsible for the first filing. Subsequent changes should be filed using Form GNL-2.

Is DEMAT required for holding subsidiaries?  

Companies holding subsidiary firms become non-small companies, subjecting them to the dematerialization rule. The same rules apply to non-profit companies, making dematerialization the default requirement.

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As India's corporate landscape evolves, regulatory changes are inevitable. The laws are adapting to technological advancements, and while there may be ups and downs during the transition, the long-term goal is a streamlined and efficient corporate ecosystem that benefits all stakeholders.

In conclusion, the amendments signify the government's commitment to modernizing corporate governance, enhancing transparency, and streamlining shareholding processes. For companies, it is crucial to work closely with legal and financial advisors to ensure they navigate these changes effectively and meet the compliance requirements within the stipulated time frames. The ultimate objective is to create a more secure and efficient environment for private company shares in India.

 As the regulatory landscape continues to evolve, staying informed and proactive in compliance will be the key to success in this dynamic environment.

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