Dematerialization of Shares of Unlisted Public Company

The broad categories of the companies as registered with the Registrar of Companies, Ministry of Corporate Affairs are as below:

  1. Public company
  2. Private Company
  3. One Person Company (OPC)
  4. Section 8 Company (Charitable / Non Profit Company)

The first category i.e. Public Company is further divided into following two categories:

  1. Listed Public Company – Companies which are listed on the Recognized Stock Exchange
  2. Unlisted Public Company – Companies which are not listed on the Recognized Stock Exchange.

The securities of the listed public companies are in the dematerialized form and directly debited or credited to the demat account of the person.

However, for the other type of companies i.e. Unlisted Public Company, Private Company, OPC etc. the securities would be majorly in the form of physical shares and not the dematerialized shares.

In order to increase transparency and to track shell companies, Ministry of Corporate Affairs has issued a notification dated 10th September, 2018 notifying Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018.

As per the said rules, all the unlisted companies are mandatorily required to convert their securities into the dematerialized form.

It is to be noted that there is no threshold limit provided for the applicability of these rules and thereby every unlisted public company is required to be comply with these rules.

These rules are applicable from 2nd October, 2018 onwards.

The details of the notification are as under:

It is provided in the rules that every unlisted public company shall;

  1. Issue the securities only in the dematerialized form
  2. facilitate dematerialization of all its existing securities

The dematerialization should be as per Depositories Act, 1996 and regulations made there under.

It means from 2nd October 2018 onwards, an unlisted public company can issue the securities only in the dematerialized form.

For conversion of existing securities into dematerialized form, no specific time limit has been provided.

However, an indirect time limit has been provided in two ways which is as below:

1. It is provided that the entire holding of securities of promoters, directors and key managerial persons should be dematerialized before;

a) any offer for issue of any securities (i.e. right issue, private placement etc.)

b) buyback of securities

c) issue of bonus shares

2. It is further provided that every holder of securities of an unlisted company;

a) who wants to transfer the securities on or after 2nd October, 2018 shall get such securities dematerialized before such transfer; or

b) who subscribes to any of the securities of the unlisted public company (either by way of right offer, private placement, bonus issue etc.) should first convert his existing securities in the dematerialized form.