COMPLIANCE EXTENSION FOR PRODUCER COMPANIES: MCA GRANTS RELIEF ON SHARE DEMATERIALISATION

In a significant move, the Ministry of Corporate Affairs (MCA) has granted relief to producer companies by extending the compliance window for the mandatory dematerialisation of their existing shares. Producer companies, who were earlier required to complete the dematerialisation process by September 30, 2024, now have an extended deadline until March 31, 2028, to achieve full compliance.

Background and Legal Framework

The compliance mandate arises from Rule 9B of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. This amendment impacts private companies that do not fall under the category of small companies, as defined under Section 2(85) of the Companies Act, 2013.

Key Provisions of the Amendment

1. Applicability of Rule 9B:

   • Every private company that has not been classified as a small company must mandatorily convert its existing physical securities into demat form within 18 months from the end of the Financial Year 2023 (i.e., by September 30, 2024).

2. Definition of Small Company (Section 2(85) of the Companies Act, 2013):
   A small company is defined as a company, other than a public company, which satisfies the following criteria:

   • Paid-up Share Capital: Does not exceed ?4 crore or a higher amount, which may be prescribed up to ?10 crore.
   • Turnover: Does not exceed ?40 crore or a higher amount, which may be prescribed up to ?100 crore as per the Profit and Loss Account of the immediately preceding financial year.

3. Exceptions:

   • The following companies are not classified as small companies:
     • Holding companies or subsidiary companies.
     • Companies registered under Section 8.
     • Companies or bodies corporate governed by any special Act.

Consequences of Non-Dematerialisation by September 30, 2024

Failure to dematerialize physical securities into demat form within the stipulated period will result in the following restrictions for the company:

1. Company-Level Restrictions:

   • The company shall be barred from undertaking the following actions:
     • Issuance of any new securities.
     • Buyback of securities.
     • Issuance of bonus shares.
     • Offering rights issues of securities.

2. Shareholder-Level Restrictions:

   • Security holders shall not be able to:
     • Transfer the securities of the company.
     • Subscribe to further issuances of securities.

Companies Affected by this Compliance Mandate

This amendment applies to the following categories of companies:

1. Private companies (not classified as small companies).
2. Section 8 companies (Non-profit entities).
3. Holding or Subsidiary Companies of any other company.
4. Companies or Bodies Corporate governed by a special Act.

Implication for Producer Companies

With this extension, producer companies have a longer timeframe, up to March 31, 2028, to comply with the dematerialisation requirements, ensuring smoother transition and alignment with regulatory expectations.

This relief measure reflects the MCA’s recognition of the challenges faced by producer companies in implementing share dematerialisation processes and provides them with adequate time to achieve compliance.

Producer companies are advised to initiate dematerialisation at the earliest to avoid any last-minute rush and ensure seamless operations.

"Unlock the Potential of Legal Expertise with LegalMantra.net - Your Trusted Legal Consultancy Partner”

Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.