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The Amendment to the Companies (Prospectus and Allotment of Securities) Rules, 2014

Introduction

Recently, the Ministry of Corporate Affairs issued a notification[i], amending the Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘the Rules’), through the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (‘the Amending Rules’) in accordance with the Companies Act, 2013 (‘the Act’). The Amending Rules have brought significant changes to the issuance and dematerialization of securities for both public and private companies.


Key Changes

The key points of the Amending Rules can be summarized as follows:

I)           Public Companies with Share Warrants:

  • Public companies that issued share warrants before the Act and have not converted them into shares must inform the Registrar using Form PAS-7 within three months of the commencement of the Amending Rules.

  • Within six months of this amendment, bearers of the share warrants must surrender their warrants to the company for the dematerialization of shares. The company should publish a notice in this regard in Form PAS-8 on its website and in newspapers. If share warrant holders fail to surrender them, the company should convert such warrants into dematerialized form and transfer them to the Investor Education and Protection Fund under s. 125 of the Act.

II)         Introduction of Rule 9B for Private Companies:


The Amending Rules have introduced r. 9B in the Rules specifically for private companies (excluding small companies) which mandates several actions, such as: -


  • Private companies are now required to issue securities exclusively in dematerialized form and facilitate the dematerialization of all their securities in accordance with the Depositories Act, 1996.

  • Compliance with r. 9B is mandatory within eighteen months of the financial year ending on or after 31.03.2023.

  • Promoters, directors, and key managerial personnel holding securities must dematerialize their holdings for offers, buybacks, bonus shares, and rights offers.

  • Holders of securities must ensure that their securities are dematerialized before transferring them, and new subscribers must hold securities in dematerialized form.

  • Provisions of r. 9A applies with necessary modifications to the dematerialization of shares under r. 9B.

  • Government companies are exempt from these rules.


Moreover, the Amending Rules have also introduced new forms such as PAS-8 to help companies comply with the revised regulations.


Analysis

The primary objective of the Amending Rules is to streamline and modernize the management of share warrants by mandating that companies inform the ROC within a specified timeframe. This step is commendable as it enhances transparency and ensures regulatory compliance. Furthermore, the requirement for private companies to issue securities exclusively in dematerialized form aligns with international best practices for securities trading. The generous compliance deadline of eighteen months provides these companies with ample time to adapt to the new requirements.


However, the Amending Rules do present certain challenges. For example, enforcing the surrender of share warrants may pose practical difficulties, and companies will need to establish mechanisms to address non-compliance. Additionally, the mandate for private companies to issue securities in dematerialized form can be daunting, as the dematerialization process can be intricate and may necessitate investments in technology and systems to facilitate the transition.


End Notes


[i] Notification No. G.S.R. 802(E) dated 27.10.2023


Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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