Process of ISIN and Dematerialization as per Rule 9B for Private Companies Including Section 8 Companies (Excluding Smal

In India, the securities market has witnessed a significant shift towards the electronic holding of shares and securities. With the rise of digital infrastructure, the Ministry of Corporate Affairs (MCA) has mandated that companies, including private entities, comply with specific rules for dematerialization of shares. One such critical regulation is Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, which governs the issuance of International Securities Identification Number (ISIN) and the dematerialization of shares for private companies, other than small companies and Section 8 companies. Through this article we at Compliance Calendar LLP aims to provide an in-depth understanding of ISIN and the dematerialization process as per Rule 9B for all private limited company registration (excluding small companies) and Section 8 company (Mandatory for having share Capital Section 8)

What is ISIN?

The International Securities Identification Number (ISIN) is a unique code that identifies specific securities, such as shares, bonds, or mutual funds. It acts as a globally recognized identifier for securities traded in dematerialized form. In India, ISIN is issued by the National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) through an authorized Registrar & Transfer Agent (RTA).

ISIN plays an important role in the electronic trading of securities, as it ensures that securities can be easily recognized and transacted without the complexities of physical certificates.

Dematerialization of Shares

Dematerialization (Demat) is the process of converting physical share certificates into electronic format. This electronic form of shares is held in a Demat account with a depository participant (DP), either NSDL or CDSL. Dematerialization brings several benefits, including increased transparency, ease of transfer, enhanced liquidity, and reduced risk of loss or forgery of physical certificates.

Applicability of Rule 9B of the Companies Act 2013

As per Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, every unlisted public company, including private companies (other than small companies) and Section 8 companies, is required to issue securities only in dematerialized form and ensure the transfer of securities in dematerialized form from their shareholders.

While small companies are exempt from this mandate, private companies with a significant capital base and Section 8 companies (which operate as non-profit organizations) must comply with the dematerialization requirements under Rule 9B.

Key Requirements of Rule 9B

Mandatory Dematerialization:

Private companies, excluding small companies and including Section 8 companies, must ensure that all new securities issued, whether through allotment or transfer, are in dematerialized form. Physical share certificates are no longer allowed for new issuances or transfers.

ISIN for Each Security:

Every security issued by the company, whether equity shares, preference shares, or debentures, must have an ISIN. The ISIN uniquely identifies the security and facilitates its electronic trading and transfer.

Appointment of Registrar & Transfer Agent (RTA):

Companies must appoint a Registrar & Transfer Agent (RTA) to manage the issuance and transfer of securities in electronic form. The RTA acts as an intermediary between the company, shareholders, and the depository (NSDL/CDSL).

Filing with Depositories:

Companies are required to submit the necessary documents to NSDL or CDSL through their appointed RTA to obtain ISIN and initiate the dematerialization process.

Maintenance of a Demat Account:

The company must open a Demat account with a depository participant (DP) to hold its securities electronically. This account will be used for issuing and transferring securities.

Tripartite Agreement:

A tripartite agreement must be signed between the company, its RTA, and the depository (NSDL/CDSL). This agreement governs the electronic handling of securities, ensuring smooth dematerialization and transfer processes.

Steps for ISIN Allotment and Dematerialization

The following is the step-by-step process for obtaining an ISIN and dematerializing shares under Rule 9B for private companies and Section 8 companies:

Step 1: Appointment of Registrar & Transfer Agent (RTA)

The company must first appoint an RTA, who will act as a liaison between the company, its shareholders, and the depositories (NSDL/CDSL). The RTA is responsible for handling the issuance, transfer, and maintenance of securities in electronic form.

Step 2: Submission of Required Documents to the Depositories

The company, through its RTA, must submit certain documents to NSDL or CDSL to obtain an ISIN. These documents include:

Copies of the Certificate of Incorporation
Memorandum and Articles of Association (MoA and AoA)
Board Resolution authorizing the issuance of ISIN
Shareholders’ details (for existing shareholders)
Share capital structure with PAS-3 if any & challan

Step 3: Signing the Tripartite Agreement

The company, its appointed RTA, and the depository (NSDL/CDSL) must sign a tripartite agreement. This agreement allows the company’s securities to be admitted for dematerialization and governs the electronic transfer of securities.

Step 4: Issuance of ISIN

Once the documents are verified, the depository will issue an ISIN for each class of security (e.g., equity shares, preference shares, debentures). The ISIN is a unique identifier for the company’s securities and facilitates their trading in electronic form.

Step 5: Conversion of Physical Shares to Demat

If the company’s shareholders hold physical share certificates, they need to submit a request to their depository participant (DP) to convert their physical shares into electronic form. This process is facilitated by the RTA, and once completed, the physical certificates are canceled.

Step 6: Maintenance of Demat Accounts

The company must maintain a Demat account for its securities, and each shareholder is required to hold their shares in a Demat account with their DP. All future share transactions, including transfers, issues, or buybacks, will occur electronically.

Step 7: Corporate Actions and Post-ISIN Compliance

After obtaining the ISIN and completing the dematerialization process, companies must adhere to ongoing compliance requirements, such as:

Half-yearly filing of PAS-6, which reconciles the share capital held in electronic form with the total issued capital. Regular corporate actions, such as bonus issues, stock splits, or buybacks, must be reported to the depository through the RTA. Timely updates to shareholders about corporate actions and changes in the shareholding structure.

Benefits of Dematerialization and ISIN Compliance

Improved Transparency:

Holding shares in electronic form enhances transparency in shareholding patterns and ensures accurate tracking of ownership.

Elimination of Physical Certificates:

Dematerialization eliminates the need for physical share certificates, reducing the risk of forgery, loss, or damage.

Simplified Share Transfer Process:

Electronic shareholding makes the transfer of shares easier and quicker, improving liquidity and reducing the paperwork involved in transactions.

Regulatory Compliance:

Compliance with Rule 9B ensures that the company adheres to MCA and SEBI regulations, preventing legal and financial penalties for non-compliance.

Access to Corporate Actions:

Shareholders holding Demat shares are automatically eligible for corporate actions like dividends, rights issues, and bonus shares, with easy access to their entitlements.

Therefore, the introduction of Rule 9B under the Companies (Prospectus and Allotment of Securities) Rules, 2014, has significantly impacted the way private companies (excluding small companies) and Section 8 companies manage their securities. By mandating dematerialization of shares and ISIN issuance, the MCA has ensured greater transparency, accountability, and ease of share transactions. While small companies remain exempt, larger private companies and Section 8 companies must adhere to these rules to maintain compliance and ensure the smooth handling of their securities.

By following the steps outlined above with the help of Compliance Calendar LLP, companies can ensure they meet their obligations under Rule 9B and take full advantage of the benefits that electronic shareholding offers.