On October 27, the Ministry of Corporate Affairs issued the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, requiring all private companies other than small companies, to dematerialise their shares before October 1, 2024.

The Ministry had earlier mandated public companies to transact shares only in demat form from October 2, 2018, but private companies were not covered by the ruling.

Now, the amendment rules do not apply to government companies.

“This amendment will ensure better transparency and mitigate fraud, risk of loss and theft. Further, the share transfer process will become more efficient and reduce the company’s expense of printing and distribution of physical certificates,” says Lalit Kumar of JSA Associates, a law firm. “For regulators, this will aid them in mitigating benami transactions, money laundering and other such activities,” Kumar observed, writing in Mondaq.

Under the amendment, every private company, which is not a small company, must within a period of 18 months of closure of such financial year (i.e., before October 1, 2024): (a) issue the securities only in dematerialised form; and (b) facilitate dematerialisation of all its securities.

Every such private company making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer, must ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised.

All holders of securities who intends to transfer such securities or subscribes to any securities of the private company, by the way of private placement or bonus shares or rights offer, must ensure that all the securities are held in dematerialised form before such transfer or subscription.