The Ministry of Corporate Affairs (MCA), vide its Notification dated 10th September 2018 has amended the Companies (Prospectus and Allotment of Securities) Rules 2014 by inserting Rule 9A therein, which mandates for issue of securities in demat form only unlisted public companies. As per the Amendment, with effect from 2nd October, 2018, issue of further shares and transfer of all shares by unlisted public companies shall be in dematerialized form only. This Notification has far-fetched implications. Following is a gist of the same:

1. Companies cannot make any offer for issue of any Securities or Buy Back of Securities, or issue by way of Private Placement/ Rights Issue/ Bonus Issue till the exiting securities held by the Promoters, Directors and KMP are held in Demat form.
2. Transfer of securities held by existing shareholders on or after 2nd October, 2018, shall be allowed only in dematerialized form.
3. Even the existing security holders cannot apply / subscribe / receive any securities by way of Bonus Issue / Private Placement / Rights Issues till they get their existing securities are dematerialized.

It may please be noted that the term used is “Securities”, which has a very wide coverage and includes within its ambit not just equity shares but debentures, preference shares, bonds etc as well. As an implication of the above, if the holdings of the Promoters/ Directors/ KMPs are in Physical, the Company will not be eligible to offer any Securities either by way of private placement/ bonus/rights issues etc. Furthermore, even the physical security holders become ineligible to apply for any of these issues.

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This Mailer is being sent for information purposes only and is based upon our analysis and understanding of the Provisions. It does not constitute any legal advice/ opinion. Should you need further details please feel free reach us.