Unlisted public companies have to compulsorily issue new shares in demat form beginning October 2, the government said Tuesday, amid continuing efforts to curb illicit fund flows. Besides, transfer of shares by these companies has to be done only in the demat or electronic form. This step has been taken for “further enhancing transparency, investor protection and governance in the corporate sector,” the Corporate Affairs Ministry said in a release. The decision also comes at a time when the ministry is clamping down on shell companies that are suspected of being conduits for illicit fund flows.
From October 2, issue of further shares and transfer of all shares by unlisted public companies shall be in dematerialised form only, the ministry said. Under the Companies Act, 2013, there are public as well as private companies. Generally, those having more than 200 members are classified as public companies and they have to follow stricter corporate governance norms. Generally, shareholders are referred as members. There are more than 70,000 public companies, as per official data.
According to the ministry, elimination of risks associated with physical certificates such as loss, theft, mutilation and fraud, would be a key benefit from the decision on having shares in demat form. Further, the move would help improve the corporate governance system by increasing transparency and preventing malpractices such as benami shareholding and back-dated issuance of shares, it said. The ministry noted that “exemption from payment of stamp duty on transfer” as well as ease in transfer and pledging of securities, are among the other benefits.
The Companies (Prospectus and Allotment of Securities) Rules, 2014, have been amended by the ministry. Every unlisted company making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer are required to comply with certain requirements, as per the rules. Now, such entities have to ensure that “before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised,” according to the rules.
“Unlisted public companies are expected to facilitate the dematerialisation of their securities in coordination with depositories and share transfer agents,” the release said. Grievances of any security holder of unlisted public companies would be handled by the Investor Education and Protection Fund (IEPF) Authority. The authority can initiate “any action against a depository or participant or registrar to an issue and share transfer agent after prior consultation with the Securities and Exchange Board of India (Sebi),” as per the rules.
Last month, senior officials told PTI that the government would soon make it mandatory for unlisted companies to issue new shares only in the demat form and also ensure that shares are transferred only in the demat form. The proposed move would help in enhancing transparency in ownership at corporates, curb benami transactions and bolster the efforts to weed out shell companies that are allegedly used for illicit activities, they had said.
At the end of June, there were more than 11.89 lakh active companies. Out of them, 71,506 were public companies and over 11.10 lakh companies were private ones, as per data compiled by the ministry. Section 29 of the Act pertains to public offer of securities to be in the demat form. Every company making a public offer and such other class or classes of public companies as may be prescribed shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996.
Further, certain class of companies “may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 and the regulations made there under,” as per Section 29.