Legal Requirement for Dematerialization of Securities

Adjudication order by the Registrar of Companies, Telangana on non-compliance of dematerialization of shares by an unlisted Public Company dated 01.04.2024

Section 29(1A) of the Companies Act 2013 states provides that in case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialized form in the manner laid down in the Depositories Act,1996 and the regulations made thereunder.

Sub Rule 2 of Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014 provides that “Every unlisted Public Company making an offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer shall ensure that before making such offer, entire holding of securities of its promoters, Directors, key Managerial personnel has been dematerialized in accordance with the provisions of the Depositories Act,1996 and regulations made thereunder.

Facts of the case: The Company, Premier Energies Limited has made a suo moto application with the Registrar of Companies stating that they have allotted and transferred securities in the form of Equity and Convertible Securities for raising funds for General Corporate Purpose before dematerializing the shares required as per law. However, the company has made the offence good completely on 19th March 2024 by converting the Physical shares into demat as one time offense.

After considering the facts and circumstances of the case, The ROC Officer has imposed penalty of INR 90,000 on Company and its Managing Director each, INR 70,000 on executive Director, INR 50,000 and INR 40000 on erstwhile company secretaries.

The due date of dematerialization of shares was on 2nd October 2018 in case of unlisted public company. The Adjudication order issued by ROC officer was silent on the section or provision which was used to determine the quantum of penalty. This order gives a stern reminder for us to comply with provisions of Dematerialization for the companies under the Company Law.

Ministry of Corporate Affairs have already issued notification vide dated 27.10.2023 to extend the applicability to Companies other than small companies to convert the physical shares into demat form. The due date for the same is 30.09.2024.

Since share and securities of private companies are transferable in accordance with the provisions of the Articles of Association of the company, in my view, the Articles of Association of the company shall be amended before making an application for dematerialization of securities.

PAS-6 filing is mandatory for Private Limited Companies since the sub rule 5 of Rule 9B of the Companies( Prospectus and Allotment of Securities) Rules, 2014 mandates the same. However, the form PAS-6 has not been updated till now for Private Limited Companies. Whether filing required for PAS-6 for those companies who has voluntarily adopted for demat of shares even though it is not applicable or adopted the dematerialization just before this notification. There are lot more queries which is still to be resolved.

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