ISIN Creation for Private Limited Company and Demat of Shares

The Ministry of Corporate Affairs (MCA) introduced significant amendments to the Companies (Prospectus and Allotment of Securities) Rules in 2023, impacting the dematerialization of securities in India for Unlisted Private Companies as well which is other than small company by definition under the companies Act 2013, amendments, extend dematerialization requirements to private companies including WOS, Holding Company, Section-8 Company in India (other than small companies), marking a significant shift in regulatory filings, through this article, we will take you through an in-depth analysis of the amended rules, highlighting key provisions, implications, and challenges for stakeholders.

Under section 29(1A) of the Companies Act, 2013, the Ministry of Corporate Affairs (MCA) has the authority to specify classes of companies required to hold or transfer securities solely in dematerialized form. In line with this authority, the MCA introduced Rule 9A in the Companies (Prospectus and Allotment of Securities) Rules, 2014, through a notification dated September 10, 2018. This rule mandates every unlisted public company to hold and issue securities exclusively in dematerialized form.

But now Recently, through a notification dated October 27, 2023, the MCA expanded this requirement to include private companies, introduced Rule 9B in the Companies (Prospectus and Allotment of Securities) Rules, 2014, through this amendment, making it obligatory for private companies to dematerialize their securities.

What is dematerialization of securities?

The dematerialization of securities, once mandatory only for public listed companies, underwent a transformative journey in India. Established depositories like NSDL and CDSL facilitated this transition from physical to electronic securities, enhancing market efficiency and security.

Now after Amendement in by the Companies (Prospectus and Allotment of Securities) Rules in 2023 represent a key moment, extending dematerialization requirements to private companies, previously exempted.

What is called ISIN (International Securities Identification Number) ?

ISIN, or International Securities Identification Number, is a unique alphanumeric code consisting of 12 characters. It serves as a standardized identifier for securities, making them easily recognizable and traceable in the global financial markets. An example of an ISIN is INE383C01018.

Key points about ISIN:

• Unique Identification: Each security issued in the market, whether it's fully paid-up equity, partly paid-up equity, equity with differential voting or dividend rights, preference shares, or debentures, is assigned a distinct ISIN. This ensures that every security has its own unique identifier.
• Standardization: ISINs provide a standardized method for identifying securities across different markets and countries. This facilitates efficient trading, settlement, and tracking of securities on a global scale.
• Structure: ISINs are composed of 12 characters, typically a combination of letters and numbers. The first two characters represent the country code (e.g., IN for India), followed by a nine-character alphanumeric code unique to the security issuer, and a final digit serving as a check digit for validation.
• Regulatory Requirement: Many regulatory bodies require securities to have ISINs for trading and reporting purposes. This ensures transparency, integrity, and accountability in financial markets.

Timeline for dematerialization

The Ministry of Corporate Affairs by Companies (Prospectus and Allotment of Securities) Rules in 2023 come up with the dematerialization of shares for private limited companies, must convert physical shares to electronic form, except for certain exemptions like Nidhi Companies and Government Companies. Rule 9B mandates private companies (excluding small ones) to issue securities only in dematerialized form, within 18-month compliance window from the end of their financial year ending March 31, 2023.

Evolution of Dematerialization:

Prior to the Companies (Prospectus and Allotment of Securities) Rules in 2024, mandated dematerialization for unlisted public companies. However, exemptions were granted to certain entities, such as wholly owned subsidiaries (WoS) of unlisted public companies. Now, after the Amended Corporate Affairs by Companies (Prospectus and Allotment of Securities) Rules in 2023, align private companies with similar requirements for demat of shares, requiring them to issue and facilitate dematerialisation of securities.

Key Provisions and Implications:

The Amended Companies (Prospectus and Allotment of Securities) Rules in 2023 impose specific obligations on both public and private companies. For public companies, surrendering share warrants issued prior to the Companies Act, 2013, and facilitating dematerialization within stipulated timelines is mandatory. Private companies must comply with dematerialization requirements within 18 months of financial year closure. Non-compliance may lead to penalties under Section 450 of the Companies Act.

Challenges and Considerations:

The extension of dematerialization requirements to private companies presents operational and compliance challenges. Foreign-owned private company subsidiaries must navigate complexities associated with opening demat accounts and fulfilling KYC requirements. Moreover, restrictions on share transfer within the depository system and control over nominee shareholding pose practical and legal dilemmas for stakeholders.

Compliance Applicable with MCA

Under Rule 9A (8), Filing eForm PAS-6 with the ROC is mandatory, all Companies covered, under Rule 9A (8) are required to file eForm PAS-6 with the Registrar of Companies (ROC)/MCA within 60 days from the conclusion of each half-year period, form must be duly certified by either a company secretary in practice or a chartered accountant in practice.

The provisions of the Present Amendment become applicable eighteen months after the closure of the financial year 2022-2023, starting from October 01, 2024. Consequently, companies affected by these provisions will need to file Form PAS-6 for the half-year period beginning in October 2024. Therefore, the initial PAS-6 filing will cover the half-year period ending in March 2025.

FAQ : Mandatory Dematerializationof Securities for Private Companies

1. Which companies are covered by the Present Amendment?

- The amendment is applicable to all private companies, excluding small companies, OPC and government companies.

How to Register a Private Limited Company in India ?

2. Is the Present Amendment applicable to small companies?

- No, small companies, as defined under Section 2(85) of the Companies Act, 2013, are specifically excluded. However, certain categories of companies, such as holding companies, subsidiary companies (WOS), those registered under section 8, or governed by special acts, will not be considered small companies and must comply with the mandatory demat norms.

3. Is a Section 8 company with share capital covered under the Present Amendment?

- Yes, Section 8 companies are covered under the Present Amendment regardless of the quantum of share capital.

4. Is a Section 8 company limited by guarantee covered under the Present Amendment?

- No, the Present Amendment does not apply to Section 8 companies limited by guarantee as they do not have share capital.

5. Is a private company that is a holding or subsidiary company of another private company covered under the Present Amendment?

- Yes, even if such a private company meets the criteria for being a small company, it will not be considered as one and must comply with the Present Amendment.

6. What if a company ceases to be a small company after April 1, 2023?

- If a company ceases to be a small company after April 1, 2023, it must comply with the provisions within 18 months from the closure of the financial year, i.e., by September 30, 2025.

7. Is the Present Amendment applicable to wholly owned subsidiaries?

- Yes, the Present Amendment is applicable to wholly owned subsidiaries, and the exemptions available under Rule 9A (11) do not apply to private companies under Rule 9B.

How to Register a Foreign Subsidiary Company in India ?

8. Will the Present Amendment be applicable to Nidhi Companies?

- No, Nidhi companies are mandatorily incorporated as public companies and are exempted from the Present Amendment as per Rule 9A (11) of PAS Rules.

9. Will the Present Amendment apply to a private company deemed to be a public company? What if it's a wholly owned subsidiary?

- Yes, a private company deemed to be a public company will be required to comply with Rule 9B. The exemption under Rule 9A ceases to apply even if it is a wholly owned subsidiary.

10. Will private companies covered under Rule 9B need to maintain a register of members?

- No, as per Section 88(3) of the Companies Act, the register and index of beneficial owners maintained by a depository under section 11 of the Depositories Act, 1996, will serve as the corresponding register and index for the Act's purposes.

11. What are the consequences of non-compliance with the Present Amendment?

- Failure to comply may result in penalties as per Section 450 of the Companies Act, including fines up to Rs. 10,000 for the company and every defaulting officer, with additional penalties for continuing contraventions.

12. Can a private company issue securities in physical form before September 30, 2024?

- Yes, but the company must ensure that these securities are dematerialized on or before September 30, 2024.

13. Can a private company issue securities after September 30, 2024 if not all securities are dematerialized by shareholders/investors?

- Yes, under Rule 9B, if promoters, directors, and key managerial personnel have dematerialized their holdings, the company can offer securities in dematerialized form, with subscribers required to apply for dematerialized securities.

14. Can a holder of securities of a private company transfer them in physical form before September 30, 2024?

- Yes, physical transfers are permissible until September 30, 2024, after which only dematerialized transfers are allowed.

15. Can a shareholder continue to hold shares in physical form after September 30, 2024?

- Shareholders, except promoters, directors, or key managerial personnel, may continue to hold shares in physical form after September 30, 2024. However, transfers will only be possible after dematerialization.

16. Does dematerialization of shares violate the free transferability principle under the Companies Act?

- No, dematerialization does not contravene the Act's provisions on the right to restrict share transfers. Private companies retain the power to refuse share transfer registrations under Section 58(1). Further, depositories offer the option to freeze the ISIN to prevent unauthorized transfers, ensuring compliance.

Lear here Process of Compulsory Dematerialisation (Demat) of Shares