[Opinion] Whether Provisions of Compulsory Demat Are Applicable to a Private Company Which is a Wholly-Owned Subsidiary of a Public Company?
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- Last Updated on 17 January, 2025
Gaurav Pingle – [2025] 170 taxmann.com 368 (Article)
Introduction: The provisions relating to compulsory demat of securities for not Small Companies was introduced by the Ministry of Corporate Affairs by Notification dated October 27, 2023. By the said notification, Companies (Prospectus and Allotment of Securities) Rules, 2014 were amended and Rule 9B was introduced. The said Rule relates to ‘Issue of securities in dematerialised form by private companies’.
According to the amendment, private companies which are not Small Companies (as on March 31, 2023 or after) are required to issue the securities only in dematerialised form and facilitate dematerialisation of all its securities. The facilitation of dematerialisation of all its securities requires company to make necessary application to a Depository (NSDL/CDSL) and secure International Security Identification Number (‘ISIN’) for each type of security. The company shall inform all its existing security holders about such facility.
In relation the compulsory demat of securities, there is an interesting question – whether the said provisions are applicable to:
- Private company which a subsidiary company of public company,
- Private company which a wholly-owned subsidiary (WOS) of public company.
Applicability of the provisions and definition of ‘Small Company’ with exceptions: According to section 2(85) of the Companies Act, 2013 and Rule 2(1)(t) of Companies (Specification of definitions details) Rules, 2014, a small company means a private company whose paid-up capital and turnover does not exceed Rs. 4 crores and Rs. 40 crores, respectively. According to the said provisions, following companies are not ‘Small Company’, therefore compulsory demat is applicable from the date of the notification:
- Holding company,
- Subsidiary company,
- Company registered under section 8 of the Companies Act,
- Company or body corporate governed by any special Act.
A holding company (which is a ‘private company’ in accordance with section 2(68) of the Companies Act) can have a subsidiary company which can be either a private company or a public company. Few possibilities are elaborated as under:
(a) Holding company is a private company and subsidiary company is also a private company: For both the companies, the provisions of compulsory demat will apply i.e. Rule 9B of Companies (Prospectus and Allotment of Securities) Rules, 2014 (both are not Small Companies as they are holding-subsidiary companies);
(b) Holding company is a private company and subsidiary company is a public company: In this case, the said private company is not a small company under section 2(85) of the Companies Act, hence the provisions of compulsory demat will apply. The subsidiary company is a public company and compulsory demat provisions will apply under Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014.
The question arises when a private company is a subsidiary company of a public company. For such subsidiary company – Whether the provisions of compulsory demat are applicable under Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘Rule 9A’) or Rule 9B of Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘Rule 9B’)?
Rule 9A is applicable to public companies, with an exception to Nidhi company, Government company and wholly-owned subsidiary company (i.e. a public company).
Rule 9B is applicable to Private Companies which are not small companies. Only exception is Government company.
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