Demat securities made must for big unlisted private companies

Mumbai | New Delhi: India has ordered all large unlisted private companies, including unicorn startups, to dematerialise their shares, a move experts believe will help establish genuine beneficial ownership of high-growth stock and clamp down on shell companies that are often used to launder unlawful cash.

“It is a matter of common knowledge that in the case of private companies, it is not rare that the shares of the company are registered in the name of persons who are not traceable, do not have valid PAN or similar identification numbers, or remain unidentified,” said Payal Agarwal of Vinod Kothari Consultants. “Historically, dematerialisation of shares is looked upon by the government as a means to curb black money.”

As of January 30, 2023, more than 1.3 million private companies are registered with the Ministry of Corporate Affairs (MCA), which has given time to the unlisted large companies to convert stock into electronic form by September next year.

Legal experts believe share dematerialisation is necessary to combat malpractices, including benami transactions and back-dated issuance of shares. Dematerialisation would enhance the monitoring of securities and reduce collateral fraud within the banking system. Furthermore, it would make it easier for the government to identify beneficial ownership in cases of fraudulent market activities, potentially leading to more efficient tax collection.

“Every private company… (that isn’t small) making any offer for issue of any securities or buyback or issue of bonus shares or rights offer, after the date when it is required to comply with this rule, shall ensure that before making such offer, the entire holding of securities of its promoters, directors and key managerial personnel has been dematerialised,” the MCA said.

The changes are part of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, which became effective October 28.

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