Call to Action: Dematerializing Private Companies

Advancing the Indian Economy: Embracing Digitalization and Business Facilitation

Digitalization and ease of doing business stand as prominent drivers of the Indian economy today. India Inc. has notably enhanced its standing in the World Bank’s ‘Ease of Doing Business’ ranking, and continues its momentum even post the latest report. A recent development in this trajectory is the shift towards dematerialization of securities for private companies.

While listed and unlisted public companies were already within the dematerialization ambit, private companies are now mandated to switch to dematerialized securities by September 30, 2024. A vast majority of Indian corporates, notably privately held ones, fall under this provision. However, exemptions are provided for small companies and government entities. The move aims to enhance accountability and transparency, particularly for companies significantly impacting the economy.

Despite the positive direction, the application of these provisions warrants careful consideration. Certain categories, like wholly-owned subsidiaries and closely-held companies, may find the shift burdensome, with minimal changes to their securities and holders. Additionally, Section 8 companies, formed for charitable purposes, are also encompassed, necessitating involvement from agencies like depositories and SEBI.

This move could potentially deter entrepreneurs from exploring business models beyond companies, impacting disclosures and investor awareness. Moreover, compared to public companies, private companies offer limited exposure to awareness programs on risks and benefits, making dematerialization efforts cumbersome for security holders.

The dematerialization process involves time, cost, and documentation. As the deadline approaches, intervention from the Ministry of Corporate Affairs (MCA) is imperative to assess exemptions or relaxations for affected companies, aligning with the ease of business ethos. SEBI could also play a pivotal role in making the demat process cost-effective, particularly for private companies facing higher admission and other fees.

A simplified approach towards digitization, especially for large private and charitable companies, alongside potential relaxations for wholly-owned entities, could foster smoother transitions. Positive regulatory action would necessitate swift adjustments from depositories to ensure timely compliance.