If asked what are the major driving forces of the Indian economy currently, digitalization and ease of doing business would definitely be among the top answers. India Inc. has made considerable improvement in the World Bank’s ranking for ‘Ease of Doing Business’, and still continues to take steady strides in this direction even after the last report was published. The latest in this could be the move towards dematerialisation of securities of its private companies. Listed companies and unlisted public companies were already under the ambit of dematerialisation, and as per the current legislation, the deadline for private companies to switch to dematerialised securities is 30th September, 2024.
A vast majority of the Indian corporates are privately held. Out of these, a significant number would fall under the ‘small company’ category, which are exempted from demat provisions along with Government companies. The companies outside the scope of exemption, that is, the companies which have a capital of more than four crore or turnover of more than forty crore, is mandated to dematerialize the securities issued by them before the due date. The intention of the new provisions is to make companies which have an impact on the economy, either in the form of capital raised or business with other entities or loans taken from banks and other financial institutions, to have accountability as well as transparency in its operations and existence. Dematerialisation would reduce many security-related frauds in the economy, and protect the interests of all the stakeholders in a company.
While the move is in the right direction, the applicability of the provisions could have been more consciously made, keeping in mind the nature of the Indian corporate world. A category of companies which bear the burden of the demat move is wholly-owned subsidiaries. Another category with a significant number will be closely-held companies, that is companies which have close family members as its securityholders. There would be minimal to almost nil changes to the issued securities and its holders in these cases. For these categories, the digitalization could pause as an unnecessary compliance forced on them. Companies formed for charity purposes, known as Section 8 companies, will also fall under the ambit of this section. It is also a route for involvement of newer agencies like depositories and SEBI in the affairs of these private companies.
The demat move could dissuade entrepreneurs with high business potential in opting business models other than companies for running their business, which opens another can of worms in the form of lesser disclosures etc. Another aspect is that, as compared to public companies, there is lesser scope for investors in a private company to have exposure to awareness programs on the risks, benefits and procedures involved in the process. The burden of getting the securities held by them dematerialised falls on the securityholders, who might find it cumbersome.
The step for dematerialisation of securities is procedural in nature, which involves time, cost and documentation. With the due date for completion of the process fast approaching, Ministry of Corporate Affairs (MCA) should intervene now to examine whether any exemptions or relaxations can be given to the above classes of companies so as to adhere to the ease in business spirit. Another action that may be taken by SEBI is to make the demat process cost effective for companies, considering that the admission and other fees involved in the process is higher than the cost incurred for audits and other compliance in most of these private companies. A simplified approach may be adopted towards digitization of large private companies and charitable companies, and relaxation from applicability may be considered for wholly owned companies. If the Regulators take a positive move in this direction, the Depositories would need to take rapid action to incorporate the changes in their regulations accordingly to enable the completion of processes within the stipulated time.
(Dr Ranjith Krishnan is a Sustainability Consultant in Thane; EP Madhusudhanan is a Practicing Company Secretary in Kochi; and Anju Panicker is the Director at SEP Learning and Corporate Solutions Private Limited, Kochi.)
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