New norms for unlisted public companies shares: Insisting for demat form is a big jolt for benami crooks, but implementation is key


A brand new rule has been notified by the Ministry of Company Affairs for all unlisted public firms. They’ll now difficulty new shares/securities or permit their switch after 2 October 2018 solely in demat form. In different phrases, difficulty or switch of shares within the conventional paper kind is not going to be allowed.

Additional, even in respect of current shares, all such firms are required to facilitate their demat/digitisation. If any new difficulty or buyback of securities is to be made, current holding of securities of the promoters, administrators and key administration personnel must be transformed into demat kind. Any safety holder who needs to subscribe to additional securities in such an organization must first be sure that his current holdings are additionally dematerialised.

The advantages are many. However as seen later herein, the first goal appears to be tackling benami holdings. This may be seen as part of a number of concerted steps and adjustments in legal guidelines. Nonetheless, first, allow us to evaluate the background and the broad particulars of the brand new necessities.

Representational picture. Reuters.

The brand new guidelines require all such firms to additionally register with a depository and supply facility to all current safety holders to dematerialise their securities. This may have an effect on unlisted public firms whose quantity is reported to be 60,000-75,000.

Public firms aren’t essentially giant in measurement. They might have been fashioned as such for varied causes. The brand new necessities, nonetheless, don’t make any distinction between giant and small firms or firms with giant or small share capital.

Listed firms have already got vital necessities mandating demat of shares for promoters and now for public shareholders too. Now related necessities have been prolonged to the following degree – viz., unlisted public firms. It’s attainable that within the close to future, even non-public firms could also be so required.

Holding shares in bodily kind has been the standard methodology because the inception of firm legislation. Paper certificates was once made in elaborate artistic fonts and varieties and thus had develop into an artwork type of kinds. Nonetheless, they confronted problem. Paper certificates will be misplaced or broken and even destroyed. This requires an costly and extended process to get duplicate ones. This course of typically resulted in litigation.

Frauds had been additionally attainable by way of cast signature and different devious tips. Switch of shares in paper kind additionally concerned vital delay.

In demat kind, the shares are bits of knowledge. Switch could be quick and even instantaneous. Typically, there is no such thing as a fear that the shares could be destroyed or broken.

The brand new guidelines additionally require firms to submit a half-yearly audit report with regard to compliance of sure necessities referring to dematerialisation.

Whereas these are clearly helpful advantages, the core goal appears to be to detect and management benami shareholding and thus typically deliver shareholding topic to regulatory necessities of tax, cash laundering, anti-corruption, and so on.

If the shares are in demat kind, their data are with the demat company, that’s an impartial third occasion. There’s a clear path for every holding, switch, and so on. Shareholders holding shares in demat kind would even be identifiable on account of KYC identification.

Thus, this new requirement will be seen in context of the broader scheme of motion being taken by the federal government. Corporations have already been topic to a current requirement underneath the Corporations Act that the final word useful homeowners be recognized. There have been amendments to the Benami Transactions Prohibition Act too.

Nonetheless, there are issues. The primary is the clearly quick discover of lower than three weeks to implement these provisions. This will not be sufficient for the brand new guidelines to even attain all the businesses properly in time. Even in any other case, the registration process will be time consuming.

Secondly, registration with demat company would lead to extra prices. The shareholders too must open a demat account and this course of might take a while too. The businesses are required to keep up a safety deposit of two years charges with the depository and the share switch agent. Nonetheless, there could be financial savings in stamp responsibility in case of switch.

Surprisingly, the implications of not complying or delayed compliance of those provisions are unclear.

Will the businesses who don’t adjust to these necessities be topic solely to a token wonderful? Will the brand new difficulty of shares or switch of shares be held to be invalid? Will there be any prosecution, notably if there was any fraudulent intent? Would such weak construction of the legislation would be the escape door for benami holders and thus defeating the target?

All in all, this can be a good requirement, even when cumbersome within the short-term. It’ll assist obtain a number of aims which might be useful within the public curiosity. It is not going to be stunning if within the close to future, even current shares in such firms are mandatorily required to be transformed into demat kind. Additional, the necessities might ultimately be prolonged to personal firms too, in a single go or in phases.

(The writer is a chartered accountant)



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