Compliance requirements for the dematerialisation of securities and its issuance by Private Companies and Public Companies under the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023

INTRODUCTION

The Central Government through the Ministry of Corporate Affairs and in exercise of its powers conferred under section 29 read with section 469 of the Companies Act, 2013 (“Act”) has issued certain rules further to amend the Companies (Prospectus and Allotment of Securities) Rules, 2014ⁱ (“PAS Rules”) vide notification no. G.S.R. 802(E) dated October 27, 2023, and released the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (“Second Amendment Rules”)ⁱⁱ , with an aim to increase transparency and ensure efficiency within the securities market, while reducing the possibility of frauds within the securities market.

The following are the key highlights of the Second Amendment Rules:

1. Compliances by public companies that have issued share warrants prior to commencement of the Act and have not converted them into shares.
   
   Sub-rule 2 has been inserted vide the Second Amendment Rules, thereby amending Rule 9 of the PAS Rules (Dematerialisation of securities) and mandating every public company which has issued share warrants prior to the commencement of the Act, and has not converted the said share warrants into shares, to comply with the following requirements:
   
   
   1. inform the Registrar about the details of share warrants in form PAS-7 (Details of pending share warrants) within a period of 3 (three) months from the commencement of the Second Amendment Rules;
   
   
   2. facilitate the bearers of share warrants to surrender their share warrants to the issuing company to get the shares dematerialised within a period of 6 (six) months of the commencement of the Second Amendment Rules;
   
   
   3. the company shall, for giving effect to (b) above, publish notice in form PAS-8 (Notice for bearers of pending share warrants) on their website and in a newspaper in the vernacular language which is in circulation in the district and in English language in an English newspaper, widely circulated in the state in which the registered office of the company is situated; and
   
   

   Upon failure by the bearers of share warrants to surrender their share warrants, the company shall convert such share warrants into dematerialised form and transfer them to the Investor Education and Protection Fund established by the Central Government under Section 125 Insertion of format of Form PAS-7 (Investor Education and Protection Fund) of the Act, which shall be credited to the fund in the manner provided therein.



2. Compliances by private companies (which is not a small company) for issuance of securities in dematerialised form.
   
   Rule 9B has been inserted vide the Second Amendment Rules, to place certain compliance requirements on private companies to issue securities in the dematerialised form. Every private company (which is not a small company as per the audited financial statements for such financial year) shall be required to issue the securities only in dematerialised form and shall facilitate the dematerialisation of all securities, in accordance with provisions of the Depositories Act, 1996 and the regulations made thereunder; within 18 (eighteen) months from the closure of the financial year.
   
   The Second Amendment Rules further provides that every such private company shall ensure that entire holding of securities of its promoters, directors and key managerial personnel has been dematerialised in accordance with the provisions of the Depositories Act, 1996 and regulations made thereunder before making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer. Further, every holder of securities of such private company shall get the securities dematerialised before making a transfer to any person, in the event that the holder intends to transfer the securities on or after the date when the private company is required to comply with the Second Amendment Rules. Also, every holder of securities of such private company who subscribes to securities through private placement/ bonus shares/ rights offer, on or after the date when the private company is required to comply with the Second Amendment Rules, shall ensure that such securities are held in dematerialised form prior to such subscription.
   
   It is pertinent to note that the Second Amendment Rules clarifies that the provisions of this Rule 9B of the PAS Rules does not apply to a government company.


3. Insertion of format of Form PAS-7 (Details of pending share warrants)and PAS-8 (Notice for bearers of pending share warrants)
   
   The Second Amendment Rules has further inserted the format for Form PAS-7 (Details of pending share warrants) and PAS-8 (Notice for bearers of pending share warrants), for ease of public companies in complying with the compliance requirements introduced vide the Second Amendment Rules.
   

The key changes brought about by the Second Amendment Rules include the introduction of compliance requirements by public companies for dematerialisation of share warrants and by private companies for mandatory dematerialisation of securities. The provisions added to the PAS Rules vide the Second Amendment Rules cater to the requirement of regulating the issuance of securities by the public and private companies. Additionally, it aims at streamlining the process of allotment of securities.