All companies to issue/transfer Securities in Demat Form
The Ministry of Corporate Affairs (“MCA”) has notified the amendment to Section 29 of the Companies Act, 2013 (“Act”). However, the Central Government is yet to notify the class of companies to which this amendment is applicable. Section 29 of the Act requires companies to issue, transfer and hold securities in dematerialized (“demat”) form. Dematerialization means conversion of physical shares/securities into an electronic form.
The term “securities” has been defined under the Securities Contract Regulation Act, 1956, it includes shares, bonds, debentures, derivatives, security receipts, units or instrument issued by any collective investment scheme, units or any other instrument issued to the investors under any mutual fund scheme and any other marketable security of like nature.
Earlier, only public companies and unlisted public companies were mandated to issue, transfer and hold securities in demat form. Now, the scope of Section 29(1) has been expanded to include any class of companies as may be prescribed by the Central Government, including private limited companies.
Additionally, Section 29(1A) has been incorporated vide the Companies (Amendment) Act, 2019 (“Amendment Act”). Pursuant to this all unlisted companies (as prescribed by the Central Government) shall be required to transfer and hold securities in demat form.
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Shares issued in the demat form are easier to track and monitor electronically. This amendment has been introduced to ensure that shares of companies, apart from public companies, are also issued, held and transferred in the demat form to increase transparency. However, the Central Government is yet to notify the class of companies to which this amendment is applicable.
It remains to be seen whether the prescribed companies as included in the Amendment Act would also include private limited companies. Requiring private limited companies to issue, transfer and hold shares in demat form, is likely to be an additional financial burden on them, and may not be in line with the policy of easing the process of doing business in India.
Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.