To promote transparency and governance in the corporate sector, the government said that unlisted public companies will have to compulsorily issue new shares in demat form starting October 2. Any transfer of shares by these companies will also have to be done only in demat or electronic form, the Ministry of Corporate Affairs said in a statement on Tuesday.
This step has been taken for “further enhancing transparency, investor protection and governance in the corporate sector,” it said. The decision also comes at a time when the ministry is clamping down on shell companies that are suspected of being conduits for illicit fund flows. According to the ministry, elimination of risks associated with physical certificates such as loss, theft, mutilation, and fraud, would be a key benefit from the decision on having shares in demat form.
Further, the move would help improve the corporate governance system by increasing transparency and preventing malpractices such as benami shareholding and back-dated issuance of shares, it said. The ministry noted that “exemption from payment of stamp duty on transfer” as well as ease in transfer and pledging of securities, are among the other benefits. “The measure is expected to significantly enhance the corporate governance standards in the country,” the government said. The Companies (Prospectus and Allotment of Securities) Rules, 2014, have been amended by the ministry. Every unlisted company making an offer for the issue of any securities or buyback of securities or issue of bonus shares or rights offer are required to comply with certain requirements, as per the rules. Now, such entities have to ensure that “before making such an offer, the entire holding of securities of its promoters, directors, key managerial personnel have been dematerialized,” according to the rules.
“Unlisted public companies are expected to facilitate the dematerialization of their securities in coordination with depositories and share transfer agents,” the statement said. Grievances of any security holder of unlisted public companies would be handled by the Investor Education and Protection Fund Authority. The authority can initiate any action against a depository or participant or registrar to an issue and share transfer agent after prior consultation with Sebi,” as per the rules.
At the end of June, there were more than 11.89 lakh active companies. Out of them, 71,506 were public companies and over 11.10 lakh companies were private ones, as per data government data. Under the Companies Act, 2013, there are public as well as private companies. Generally, those having more than 200 members are classified as public companies and they have to follow stricter corporate governance norms.
Section 29 of the Act pertains to a public offer of securities to be in the demat form. Every company making a public offer and such other class or classes of public companies as may be prescribed shall issue the securities only in dematerialized form by complying with the provisions of the Depositories Act, 1996.