Guidelines for Private Companies on Demat Mandate Compliance

The Ministry of Corporate Affairs (MCA) has issued an important notification on October 27, 2023, affecting the shareholding structure of private companies. According to Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, all private companies, excluding small companies, are now required to dematerialize their securities. Small companies, defined by Section 2(85) of the Act, with paid-up share capital and turnover below specified limits, are exempt from this rule. Small companies are those with paid-up share capital not exceeding Rs. 4 crores and turnover not exceeding Rs. 40 crores.

Key Points:

1. Applicability of Rule 9B:

• This rule applies to all private companies, except small companies and government companies.
• Small companies, meeting specific financial criteria, are exempt.
• Holding companies, subsidiaries, Section 8 registered companies, and those governed by special Acts are not considered small companies and must comply.

2. Timeline for Compliance:

• Private companies must convert existing physical shares into demat form by September 30, 2024.
• Non-small private companies, based on audited financial statements, must comply within 18 months of the closure of the financial year ending on or after March 31, 2023.

3. Consequences of Non-Compliance:

• Failure to dematerialize shares by the deadline will result in restrictions:
  • Private companies cannot issue securities after September 30, 2024.
  • Shareholders cannot transfer shares in physical form after the same date.

4. ROC Compliances:

• Private companies must file Form PAS-6 with the Registrar of Companies (ROC) within sixty days from the conclusion of each half-year.
• Filing deadlines are November 29 for April to September and May 30 for October to March.

5. Penalties:

• While Section 450 of the Act doesn’t specify penalties for this non-compliance, the general penalty is applicable.
• Companies and defaulting officers may face a penalty of Rs. 10,000, with an additional Rs. 1,000 per day (after the first day) for continuing contravention, capped at Rs. 2,50,000 for a company and Rs. 50,000 for an officer.

It’s crucial for private companies to adhere to these rules to avoid penalties and ensure compliance with the dematerialization requirements outlined by the MCA.