Extend Timeline for requirement of DEMAT for Private Companies: ICSI

The Institute of Company Secretaries of India (ICSI) has requested Ms. Deepti Gaur Mukerjee, Secretary of the Ministry of Corporate Affairs to extend the timeline for the requirement of DEMAT for Private Companies.

In a letter dated 9th Sep 2024 written to the MCA Secretary, ICSI requested to extend the timeline and shared the reason and concern to do so.

The Letter Read as follows:

In October 2023, the Ministry of Corporate Affairs (MCA) amended the Companies (Prospectus and Allotment of Securities) Rules 2014 by introducing Rule 9B. This Rule requires that, within eighteen months of the end of each financial year, every Private Company except small companies must (a) issue securities exclusively in dematerialised [onn, and (b) enable the dematerialisation of all its securities, in compliance with the Depositories Act, 1996 (22 of 1996) and related regulations.

Accordingly, private companies are required to facilitate the dematerialisation of their equity shares mandatorily by September 30, 2024.

We commend the MCA’s decision to mandate DEMAT for private companies. This move will improve the efficiency, transparency, and security of share management, align private companies with public company practices, and streamline the issuance and transfer of shares by eliminating the need for physical certificates. This will also resolve many of the management disputes that arise out of the wrong handling and or non-availability of the physical share certificates.

Based on the feedback we have received from the professionals and other stakeholders, sharing with your goodself few of the concerns shared with us ;

1. Allotment of [SIN by CDSL/NSDL: This ISIN can only be allotted by these wo agencies viz CDSL and NSDL. They are the custodian of the shares which are there in the demat form. As of now, both of these agencies are really struggling with the overflow of work as allotment of ISIN is taking almost 30-45 days after completion of all documents and payment of fees.

2. Cost Considerations: The process of dematerialisation in itself is very expensive, involving fees for depository services and potential costs for updating IT systems and processes. The total process for the dematerialisation of shares includes an Agreement between the Company and Register and Transfer Agent (RT A) and Tripartite Agreement between Company and Register and Transfer Agent (RTA) and CDSL/NSDL. The one-time registration cost for availing the services is around Rs.25,0001 to Rs.75,0001 and annual charges are also within the range of Rs.15,000 to Rs.50,0001  based on the structure of the company. Many such Companies may need time to plan and budget for these expenses.

3. Regulatory Compliance: These provisions of Rule 9B are applicable to every company other than Small Companies. Accordingly, it is applicable to all companies which are either Holding or Subsidiary Companies or Section 8 Companies. Many times these subsidiary companies are wholly owned subsidiaries and have only 2 shareholders and similarly Section 8 companies are being formed for charitable and social causes and to comply with these Regulatory requirements is a hurdle in the smooth functioning of these entities and goes against the principles of ease of doing business.

4. Operational Challenges: To complete the process the company has to obtain ISIN and keep the share in the Dematerilasied form with the help of RTA and all shareholders have to open a DEMAT account with the Stockbroker duly registered with SEBI/CDSL/NSDL and other agencies. Many times the shares of the Indian Companies are being held by foreign individuals or foreign corporates not having any valid PAN no. allotted by the Income Tax Authorities. It is really difficult to open a Demat account with any of the brokers without a PAN card.

Further, after the target date of September 30, 2024, these Companies can only allot the securities in the DEMAT form, which may discourage the FDI inflows in India.

Given the above challenges being faced by the Private Companies, we request you to please consider the following:

1. Exemption may be provided to companies falling into these categories:

a. Section 8 Companies

b. Wholly owned Subsidiary companies

c. Companies with only a few family shareholders.

2. CDSL 1NSDL may be asked to minimise the cost of allotment of {SIN and Annual Fees and to speed up allotment of numbers.

3. Extension of the last date i.e. September 30, 2024, which will certainly help stakeholders and provide private companies the necessary time to transition smoothly to the new system.

We shall be happy to provide any further information or clarification that may be desired in this regard.

For Official Letter Download PDF Given Below: