Discuss the impacts of availability of Form PAS-6 filing as E-Form

The author in this article discusses the impacts of availability of form PAS-6 filing as E-form. It further discusses that the online PAS-6 Form Filling has allowed for the electronic transfer of shares. It is a state-of-the-art technology whereby paper trading has become obsolete.
Estimated Reading Time: 8 minutes

Introduction

A company is a legal entity that is separate from the people who make it. This independent identity allows a company to live beyond its founders and in the hands of a successor. The need for regulating and providing safety guidelines for the functioning of a company made the legislators enact the Companies Act, 1956. The said Act helped in regulating the basic aspects of company law, from its incorporation to its dissolution. An Act or a law provides a proper legal framework for the said functions. The companies Act, 2013 provides for all these. Let us discuss the requirement of form PAS-6 filing.

Section 2(20) of the companies Act, 2013 gives a definition of a company as “a company incorporated under this Act or any previous company law”. Hence, the law recognizes only those companies that have been authorised to function under the Companies Act,2013. It won’t recognise any other entity claiming to be a company.Ministry of Corporate Affairs has mandated the Dematerialization of shares for all Unlisted Public Companies through its notification dated 10th September, 2018, in which Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014 was introduced. According to the said rule every Unlisted Public Company was required to dematerialize its shares on or before 02nd October, 2018 as well as, transfer of physical shares was also restricted after the said date.”

Share, Capital & Prospectus

An important feature of company law is that it provides a structured way for both public and private companies to make offers and trade in securities. Section 23 explains how both a public company and a private company may issue securities. These issuing and other security-related functions of a company are regulated by SEBI.

A document that helps in issuing securities and attracting potential investors is the prospectus. A Prospectus is like a document that contains the information of all securities & related issues; and other details of a company. Prospectus are of different kinds and company law through Sections 31 & 32 defines these variations as Self-prospectus- a prospectus in which securities and shares are issued over some time in one or more issues, without the need for issuing further prospectus; Red-herring prospectus is issued without any particular specifics of prices of the securities that are included in it. The Prospectus is an important document and hence any sort of misappropriation or mischief leading to wrong information and untrue assumptions is penalized by company law under section 34, 35, 36,37,38& 447 of the companies Act, 2013.

The prospectus is an important document and hence any sort of misappropriation or mischief leading to wrong information and untrue assumptions is penalized by company law under section 34, 35, 36,37,38& 447 of the companies Act, 2013.

Dematerialisation & Unlisted Company

Dematerialization is a process through which an investor or a person holding physical securities such as certificates of shares & other such Documents are converted into an electronic format that is further held in a Demat Account of the person. It is pertinent for an Investor who is looking to dematerialize securities, to open a Demat Account. Usually, such accounts are opened with a depository participant. The responsibility to hold electronic forms of securities such as bonds, government securities, certificates of shares, Mutual Funds, etc, is with a depository. Such depositories have to be usually registered as a “Depository participant”. In Indian there exist two such Depository participants registered with the SEBI and have licenses to operate in India:

  1. National Securities Depository Ltd. (NSDL); And
  2. Central Depository Services (India) Ltd (CDSL)

Under the Companies Act, 2013 it is necessary to form a public company that there must be 7 persons or more while to form a private company, there must be 2 or more persons involved. Once formed, if these companies do not trade in the stock exchange, they will be called unlisted companies. Dematerialization helps in improving the transparency in a corporation, it also helps in protecting the interest of the investors and improving the general corporate governance. The decision is helping in improving the legitimacy of corporate companies while the government is shutting down shell companies and fraudulent companies who are functioning illegally and helping in the illicit flow of funds across the corporate sector.

The Companies Act, 2013 provides for certain guidelines that the government must enforce. This means the government overseas that public companies that are listed in the stock exchange, dematerialize their securities, hence other such forms of public companies should also issue securities that are in a dematerialized electronic form. In compliance with this, the MCA carries out consultation sessions with the SEBI, depository participants, and other stakeholders. The idea behind it is to in a controlled manner to allow greater transparency among the shareholders and transactions of shares. This way the unlisted public companies are mandated to issue securities in electronic dematerialized forms. In comparison to the risk that is associated with issuing paper securities, there is much greater accountability and dissolution of disputes and risks that accompany securities issued in paper form.

When Securities are dematerialized, the risk that is generally associated with paper issued securities is eliminated. Incidents such as loss, theft, or fraud with the electronic form are considerably lesser than the paper form. This serves as a principal benefit of having securities in electronic form stored in Demat accounts. Dematerialization allows in ease of transfer, pledge, etc. of securities also an exemption from paying the stamp duty on the paper form. 

Key Points of Rule 9 of the Companies Act, 2013

Rule 9A of the companies Act, 2013, is supremely important in terms of stock market and exchange. It dictates the conditions and procedures for an unlisted company to dematerialize its securities to be listed in the stock markets of India. The rule ensures that there is no malpractice in terms of dematerialization and ensure no defaulters of fee payment exist.

  1. Unlisted Public Companies and all other classes of public companies shall issue their securities in electronic dematerialized form on or after October 02, 2018. Such companies should also facilitate the dematerialization of all the securities that exist in forms other than dematerialized. This conversion is mandated by the law and should be following The Depositories Act, 1996.
  2. In certain cases, a private company is formed as a subsidiary to the public company, such a subsidiary private company would be considered as public and will be deemed to be the same. This would mean that such private companies would have to comply with the provisions of the Act. Such companies and their existing securities and any new securities that would be issued would also come under the ambit of the Act.
  3. These companies must ensure that before making an offer for securities/buyback/bonus issue/rights issue that the entirety of the securities held by a company through its promoters, directors, and the board, etc. has been converted or dematerialized.
  4. Every security holders of these companies must ensure that before transferring his shares on or after October 2, 2018, must convert its securities into dematerialized form
  5. All the existing shares of the company and the investors are held in a dematerialized form PAS-6 filing.
  6. It is the burden of the company to ensure there is proper dematerialization of all the existing securities. This is done through an application made to the respective depository and get a secure international security identification number. This is done for all the securities. The company should ideally inform every shareholder of such an arrangement. The importance is that companies must do it before the due date of Form PAS-6 filing.
  7. These companies must ensure:
  • To timely deposit the fees and other payments to the depository and the RTA as per the agreement.
  • These companies must maintain a security deposit with Depository and RTA at all times as agreed by parties.
  • These Companies must comply with Regulations/Directions/Guidelines/Circulars issued by SEBI or Depository in respect of the dematerialized securities and matters incidental or related thereto. 
  • A company cannot make an offer for its securities if there is a default on the part of the company in complying with Rule 9A(5).
  • The provisions of “The Depositories Act 1996”;“securities and Exchange Board of India (Depositories and participants) [Regulations, 2018]”; and “The securities and Exchange Board of India (Registrars to an Issue and share Transfer Agents) Regulations, 1993” shall apply mutatis mutandis to the dematerialization of securities of unlisted public companies except Sub-Rule 8.
  • The existing holder is prohibited from trading or transferring any of the already existing security unless it is dematerialized. In case of the purchase of new securities, the existing securities must be in a dematerialized electronic form.
  • As provided in the “Companies (Registration Offices and Fees) Rules, 2014” all and every public company that is not listed on the stock exchange must submit the Form PAS-6 filing to the ROC with the stipulated fee. This should be done under 60 days from the conclusion of half year. It needs to be certified duly by a company secretary or chartered accountant in practice.

Form PAS-6 filing importance

Form PAS-6 is required to be filed according to Section 42 of the Companies Act, 2013, and rule 14(3) of “The Companies (Prospectus and Allotment of Securities) Rules, 2014” which are reproduced for your reference. A company issuing a private placement offer letter as per the provisions of Section 42, shall file with the Registrar such an offer letter within thirty days from the date of its circulation. It is also in also compliance with Rule 9 (8) of the Companies Act, 2013.

The highlights of the form are:

  1. All and every public company that is not listed on the stock exchange must submit the Form PAS-6 filing to the ROC with the stipulated fee. This should be done under 60 days from the conclusion of half year. It needs to be certified duly by a company secretary or chartered accountant in practice.
  2. The information sought should be furnished by 30th September and 31st march every financial year for each international security identification number separately.
  3. Because of COVID-19 pandemic, Companies have faced difficulties to send notices through postal or courier services.
  4. It does not apply to:
    1.  a Nidhi;
    1.  Government company; or
    1. a wholly-owned subsidiary

Conclusion

The online form PAS-6 Filing has allowed for the electronic transfer of shares. It is a state-of-the-art technology whereby paper trading has become obsolete. Now the transactions can be completed without the involvement of share certificates or any other physical paper form documents. The conversion of paper to electronic form reduces the times required in processing such transactions and makes the process much simpler. Incidents of bad delivery or fraud or theft are greatly reduced. In times of such a pandemic outbreak, it has become difficult for companies to resume and carry out their normal duties and obligations. This was already evident with the government announcing a state of lockdown and shutting down of many businesses for a temporary period. However, certain companies, which were already in the process of incorporation or listing its shares on the stock market, were not hindered because of such a lockdown. Availability of forms in an electronic format has helped companies to fulfil their obligations and avoid any kind of penalty.

While this process is optional on the part of the shareholder, they will have to dematerialize their share if they wish to sell it on the stock exchange market. Physically held securities cannot be sold through this method. Even on the purchase of such shares or securities sold, the purchaser will get them in an electronic dematerialized form only. Such ease of access begs the question why a majority of work of the registrar is not online, the circumstances of the current lockdown due to the pandemic has led us to believe that it is possible to work without having to be physically present in a workspace and it is possible to avoid the usage of physical sheets of paper for fulfilling the duties of a company.

Also read Section 33: Issue of Application Forms for Securities

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