9B. Issue of securities in dematerialized form by private companies

Rule 9B: The Central Government has exercised the powers conferred by section 29, read with section 469 of the Companies Act, 2013 (18 of 2013) and amended the Companies (Prospectus and Allotment of Securities) Rules, 2014.

The Central Government has inserted Rule 9B in the Companies (Prospectus and Allotment of Securities) Rules, 2014 which is effective from the 27th October, 2023. As per this rule, private companies are required to dematerialize their securities. The said rule is a similar one that was imposed in the past for public companies via Rule 9A in the Companies (Prospectus and Allotment of Securities) Rules, 2014.

The mandatory dematerialization of securities holdings for private companies is a positive step towards a more transparent, secure, and efficient securities market. This move will benefit investors, companies, and regulators alike.

Basic Concept of this rule:

Private Companies need to :

• Issue of securities only in dematerialized form and 
• Facilitate the dematerialization of the existing holding of all its securities.

Applicability

This rule applies to private companies which are not small companies at the end of the financial year 31-03-2023.

The applicability is checked based on the last audited financial statements for such financial year.

The period allowed for complying with the section:

As per the rule, the company needs to check the applicability based on the latest audited financial statements for such financial year and comply with the section within 18 months from the close of such financial year 

For example;

The status of the company as per the financial statement ending on 31.03.2023 is a private company but not a small company, the company needs to dematerialize its securities within 18 months from 31.03.2023. It means before 30.09.2024, the company needs to comply with the said rule.

Restrictions

Private companies making offers for the issuance or buyback of securities, or the issuance of bonus shares or rights offers, must ensure that their 

• promoters, 
• directors, and 
• key managerial personnel

 have dematerialized their entire holdings of securities before making such offers. 

Actions required from the Holder of securities :

Every security holder of such private companies who wants to transfer such securities on or after the date when the company is required to comply with this rule needs to get the securities dematerialized before transfer.

Actions required from the securities holder:

Any person who wants to hold securities of such private companies by private placement or bonus shares or rights offer on or after the date when the company is required to comply with this rule shall ensure that all his securities are held in dematerialized form before such subscription.

Not applicable

The said RULE 9b  is not applicable on 

• Small Company 
• Government Company

Further compliance:

Dematerialization Requirements:

Dematerialization Application:

Submit a dematerialization application to a designated depository as per the Depositories Act, 1996.

ISIN Acquisition:

Obtain an International Security Identification Number (ISIN) for each security type to facilitate global identification.

Security Holder Notification:

Inform all security holders about the dematerialization process and its benefits.

Fee Payment Obligations:

Depository and Registrar Fees:

Make timely payments of admission and annual fees to the depository and registrar.

Agreement Compliance:

Adhere to the fee payment schedule outlined in the agreement with the depository/registrar.

Authorized Payment Channels:

Utilize authorized payment channels, such as online banking or electronic fund transfers, for fee payments.

Payment Records Maintenance:

Maintain accurate records of all fee payments for future reference and compliance audits.

Regulatory Compliance:

Security Deposit:

Maintain a security deposit, equivalent to two years of fees, with the depository and registrar.

Regulatory Directives:

Comply with all applicable regulations, directions, guidelines, or circulars issued by SEBI or the depository.

Default Consequences:

Refrain from making securities offers, buybacks, or issuing bonus or right shares until outstanding payments are made.

Form PAS-6 Filing:

Filing Deadline:

File Form PAS-6 with the registrar within 60 days of each half-year, duly certified by a qualified professional.

Capital Discrepancies:

Immediately notify the depositories of any discrepancies between issued and dematerialized capital.

Grievance Redressal:

Investor Education and Protection Fund Authority (IEPFA):

File grievances with the IEPFA regarding any issues faced as a security holder.

SEBI Consultation:

The IEPFA may initiate action against depositories, participants, or registrars after consulting with SEBI.

Key Benefits of Dematerialization:

• Enhanced Transparency: Dematerialized securities holdings provide a clear and auditable trail of transactions, fostering greater transparency in the securities market.
• Reduced Fraudulent Activities: The elimination of physical certificates reduces the risk of forgery, duplication, and other fraudulent activities associated with paper-based securities.
• Mitigated Loss and Theft: Dematerialized securities are stored electronically, eliminating the risk of loss or theft associated with physical certificates.
• Streamlined Share Transfers: Dematerialization enables faster and more efficient share transfers, reducing transaction times and paperwork.
• Reduced Company Expenses: Companies will save on the printing, distribution, and storage costs associated with physical certificates.
• Enhanced Regulatory Oversight: Regulators will gain better visibility into securities transactions, enabling more effective monitoring and prevention of benami transactions, money laundering, and other illicit activities.