In July 2018, the Ministry of Corporate Affairs (“MCA”) had set up a committee to review offences under the Companies Act, 2013 (“Committee”) which was asked to make an objective assessment of the existing regulatory framework under the Companies Act, 2013 (“Act”) and to make recommendations to ensure improvement in corporate compliance. The Committee submitted its report in August 2018 and included recommendations to reduce the burden of the National Company Law Tribunal (“NCLT”), by sparing the NCLT from dealing with offences which are in the nature of procedural and technical lapses. The report also aimed at strengthening the enforcement of law against serious offences.

In order to give effect to the recommendations made by the Committee, the Government passed several ordinances for amendment of the Companies Act, 2013 on November 2, 2018; on January 12, 2019; and on February 21 (collectively, the “Ordinances”).

On July 31, 2019, the Companies (Amendment) Act, 2019 (“Amendment”) was passed, which incorporates all the amendments mentioned in the above stated Ordinances, and also introduces certain fresh amendments to the Act.

In this 5-part series, we discuss some of the key highlights of the Amendment and their impact on the present regulatory framework, and operations of companies.

Section 29: Public offer of securities to be in dematerialised form

Section 29 of the Act required public companies or classes of public companies, prescribed by the Central Government, to compulsorily issue its securities in dematerialised form. The new amendment removes the word “public” from Section 29(1)(b), and the section is now applicable to all “other class or classes of companies as may be prescribed” by the Central Government.

Further, a new Section 29(1A) has been added, which states: “In case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder”.

As such, those classes of unlisted companies, public or otherwise, prescribed by the Government shall be mandatorily required to hold as well as transfer the shares in the dematerialised format and will have to comply with the provisions of the Depositories Act, 1996 and its regulations.

However, the Central Government is yet to notify the class of companies prescribed under the Act which would be affected by this Amendment, as well as the relevant rules thereto. Having said that, it remains to be seen whether private unlisted companies would form part of the prescribed list of companies, and if yes, would the Government only cover larger sized private companies or prescribe other criteria for applicability. Small private companies, especially early stage start-ups, which are not asset/cash rich may get impacted in the absence of any eligibility criteria, as the costs of dematerialization and compliance may be significant in proportion to their operations, if they are required to register with the relevant depositories to dematerialise their securities.