Soon, Government to make it compulsory for unlisted companies to issue shares in demat form

The government will soon make it mandatory for unlisted companies to issue new shares only in the dematerialised form, senior officials said, amid intensified efforts to fight the black money menace.

Besides, the unlisted corporates would have to ensure that shares are transferred only in dematerialised (demat) or electronic form.

Initially, these regulatory requirements, expected to be effective from the first week of October, would cover more than 70,000 public companies, two senior government officials told PTI.

Officials said that to begin with, issuance of new shares and transfer of shares by unlisted companies would have to compulsorily be in the demat form and that the decision has been taken after extensive discussions with stakeholders. With respect to issuance of bonus shares and stock split also, the entities would have to issue them in the demat form, they added.

The proposed move would help in enhancing transparency in ownership at corporates, curb benami transactions and bolster the efforts to weed out shell companies that are allegedly used for illicit activities, they said.

According to the officials, having shares in the dematerialised form would also bolster the Know Your Client (KYC) framework for unlisted companies and prevent instances such as pledging of duplicate shares.

The ministry also held extensive deliberations with market regulator Sebi on the matter of unlisted companies having their shares in the dematerialised form, the officials said.

One of the officials said the corporate affairs ministry held discussions with depositories as well as registrars to an issue and transfer agents. They have been asked to keep costs at minimum for conversion of shares in physical form to dematerialised form by the unlisted companies, the official added.

At present, listed companies need to have shares in electronic form but is not compulsory.

The corporate affairs ministry would soon be issuing rules under the Companies Act, 2013, for unlisted firms with respect to having shares in the demat form.

A decision about making it mandatory for all unlisted companies to convert their existing shares into demat form would be taken in due course. Till that time, it would be voluntary for them, the officials said.

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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.

In the case of private companies, the number of members cannot be more than 200 and there are various restrictions on these entities.

There were more than 11.89 lakh active companies at the end of June. Out of them, 71,506 were public companies and over 11.10 lakh companies were private ones, as per data compiled by the ministry.

Clamping down on the black money menace and illegal assets, the ministry has already struck off the names of more than 2.26 lakh companies that have not been carrying out business activities for long and more such entities would face action in the coming weeks. Many of these companies are suspected to have been used as a conduit for illicit fund flows.

Section 29 of the Companies Act, 2013 pertains to public offer of securities to be in dematerialised 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 dematerialised form by complying with the provisions of the Depositories Act, 1996.

Further, certain class of companies "may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 and the regulations made there under," as per Section 29.