The Ministry of Corporate Affairs (“MCA”) on the 27th of October 2023 notified two major amendments to rules under the Companies Act, 2013. These include the Companies (Management and Administration) Second Amendment Rules, 2013 (“MA Rules 2023 ”) and the Companies (Prospectus and Allotment of Securities) Second Amendment Rules. 2023.( “PAS Rules 2023”). These amendments have been introduced to ensure greater transparency in the administration of corporate affairs and come into effect on the date of their publication in the Official Gazette, ensuring prompt implementation.
We are sharing with you an initial brief summary of the changes being implemented under these rules which will be followed up with impact analysis pieces later in the week.
Designated person to be responsible for reporting the Significant Beneficial Owner:
The amendments under the MA Rules 2023 have introduced the concept of a “designated person” with respect to beneficial ownership in the shares in of a company (where the beneficial owner of the share is different from the registered owner of the share). Via the amendments under the MA Rules, 2023, Rule 9 of the Companies (Management and Administration) Rules, 2014 has been expanded to include sub-rules (4) to (8). Sub-rule (4) mandates that every company must designate a person responsible for providing information to the Registrar or any authorized officer regarding beneficial interests in the company’s shares. Sub-rule (5) outlines the choices for designating a responsible person, which may include a company secretary, key managerial personnel (other than the company secretary), or every director (where there is no company secretary or key managerial personnel).
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Mandatory dematerialization for private companies:
The amendments under the PAS Rules 2023 introduce mandatory dematerialsation on all securities of every private company, excluding small companies and government companies. This provision was only applicable to public companies until now. The provisions are applicable with immediate effect, and a timeline of 18 months is provided from the closure of the financial year during in which such companies shall comply with the mandatory dematerialisation requirements. To elucidate further, for example, a private company (other than a company that is a small company as on 31st March, 2023) is required to comply with mandatory dematerialisation of securities within a period of 18 months from the end of FY 22-23, i.e., on or before 30th September 2024.
Furthermore, Private companies falling under these rules must ensure that the entire holding of securities of their promoters, directors, and Key Managerial Personnel has been dematerialized before any offer for the issuance of securities, buyback of securities, or the issuance of bonus shares or rights offers.
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A private company, covered under this Amendment will be required to:
Shareholders of private companies covered under this Amendment will be required to:
While the shareholders of a private company can continue holding their shares in physical form even after September 30, 2023, from October 1, 2024, the shares of a Company can only be issued to a shareholder, if such shareholder has a demat account. Further, any transfer of shares from October 1, 2024, can only be done in demat mode.
Bearer share warrants under the erstwhile Companies Act, 1956:
The amendments under the PAS Rules 2023 introduce changes for public companies that had previously issued share warrants before the commencement of the Companies Act, 2013 (i.e., under the erstwhile Companies Act, 1956). These companies are required to take specific actions within specified timelines. The Amendment Rules seek to eliminate bearer share warrants due to the difficulty in tracing ownership. However, the concept of share warrants issued to identified individuals and following legal transfer procedures remains intact.
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