Over four months after the expiry of the deadline given under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules) for private companies (other than small companies and producer companies) to facilitate the dematerialisation of their securities, the Ministry of Corporate Affairs (MCA) has on 12 February 2025 issued an amendment to the PAS Rules, extending the timeline for compliance with Rule 9B until 30 June 2025.

BACKGROUND

Rule 9B was inserted in the PAS Rules on 27 October 2023, making it mandatory for private companies (other than small companies) to facilitate dematerialisation of their securities by 30 September 2024, though an extension was subsequently granted for producer companies.

Rule 9B also made it mandatory for all security issuances by a private company after 30 September 2024 to be in  dematerialised  form, and prohibited any security issuances (including rights and bonus issues) and buybacks after this date unless the entire security holding of the company’s promoters, directors and key managerial personnel had been  dematerialised. Further, existing security holders were required to dematerialise their securities in order to be able to transfer them or to acquire fresh securities, whether by way of private placement, bonus issue or rights issue.

A similar requirement had been introduced for unlisted public companies by way of Rule 9A of the PAS Rules, which was inserted on 10 September 2018 and made effective from 2 October 2018. While notifying Rule 9B, the MCA did not clarify the intent behind requiring private companies to compulsorily dematerialise their securities, or the rationale for not excluding wholly owned subsidiaries from the ambit of Rule 9B, even though such an exclusion had been made under Rule 9A.

CHALLENGES WITH DEMATERIALISATION

Though considerably more generous than the transition period available to unlisted public companies under Rule 9A, as 30 September 2024 approached it was evident that the transition period provided under Rule 9B would prove to be insufficient, as depositories struggled to cope with the volume of ISIN creation and dematerialisation requests.

As a consequence, even where requests were submitted in advance of 30 September 2024, private companies were restricted, on account of the timelines for processing of ISIN creation and dematerialisation requests getting extended and growing increasingly uncertain, from undertaking fresh issuances or permitted bona fide share transfers.

TAKEAWAYS

Given the difficulties being faced by private companies in achieving compliance with Rule 9B, the extension till 30 June 2025 is a welcome step by the MCA. In an unusual step, the MCA notification includes an explanatory memorandum which declares that by issuing the notification with retrospective effect, the interest of no person would be adversely affected. The amendment to the PAS Rules is stated to be effective from the date of publication in the Official Gazette (i.e., 12 February 2025), and so it is unclear why a reference has been made to an issuance with retrospective effect.

While it should be fair to assume that this amendment means that no action would be taken for contravention of Rule 9B by private companies that had not facilitated the dematerialisation of their securities by 30 September 2024, or which undertook share issuances or buybacks while the securities of their promoters, directors or key managerial personnel remained in physical form, or which permitted existing security holders to transfer existing securities or acquire new securities before dematerialising their existing securities, a specific clarification to this effect by the MCA would be welcome.