On October 27, 2023, the Ministry of Corporate Affairs, notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (“Amended Prospectus Rules“) to amend the Companies (Prospectus and Allotment of Securities) Rules, 2014 (“Prospectus Rules“). The provisions came into force on October 27, 2023. The Amended Prospectus Rules make the following significant changes to the extant Prospectus Rules:

  1. Dematerialisation of Securities: The Amended Prospectus Rules mandate all private companies, save and except Small Companies (as defined hereinafter), to within the prescribed timeline: (i) issue securities only in a dematerialised form; and (ii) facilitate dematerialisation of all its securities. Private companies to which the Amended Prospectus Rules apply will have to comply with the provisions of this rule within 18 (eighteen months) from 31st March 2023; i.e. by and before September 30, 2024. Additionally, any company to which the Amended Prospectus Rules apply, making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer, on or after September 30, 2024, needs to ensure that the entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised.
  1. Obligations of Security Holders: Every holder of securities of the private company to which the Amended Prospectus Rules apply: (i) who intends to transfer such securities on or after September 30, 2024, is required to, as a prerequisite, get such securities dematerialised before the transfer; or (ii) who subscribes to any securities of the concerned private company whether by way of private placement or bonus shares or rights offer on or after September 30, 2024 is required to ensure that all his securities are held in dematerialised form before such subscription.
  1. Exclusion of Small Companies: Under the Companies Act, 2013, small companies are defined as a company other than a public company, having a: (i) paid-up share capital which does not exceed rupees 4 (four) crores; and (ii) turnover of which as per the profit and loss account for the immediately preceding financial year does not exceed rupees 40 (forty) crores. It is important to note that holding companies, subsidiary companies and Section 8 companies cannot be considered as small companies irrespective of their turnover and/or paid-up capital and will accordingly need to comply with the Amended Prospectus Rules within the prescribed timelines.

Industry experts are of the opinion that this move to facilitate dematerialisation of shares by certain category of private companies is a significant step towards ensuring the integrity of financial markets and will bring about greater transparency. It also aligns India’s corporate sector more closely with international practices and improves overall investor protection by curbing risks of fake physical certificates and fraudulent share transfers.