ROC penalizes Company & Directors for failing to issue securities in dematerialized form

In the matter of

M/s BCL Homes Limited

M/s BCL Homes Limited (“The Company”) is an unlisted public company. As per Section 29(1)(b) of Companies Act, 2013 read with Rule 9A of Companies Provision of Balance Sheet and Solvency Certificate) Rules, the Company is required to facilitate dematerialisation of its existing securities. However, as per report of CS in practice in the attachment to Form No. MGT-7, the Company failed to comply with provisions of Section 29(1)(b) read with Rule 9A. Accordingly, the Hon’ble RoC imposed penalty of INR 2 Lakhs on the Company and INR 50,000 on each of the directors for such non-compliance.

1. Brief facts of the case:

M/s BCL Homes Limited (“The Company”) is registered in Chandigarh and has paid up share capital of INR 8,49,87,400/-.
The Central Government directed to inspect the books and papers of the company.
As per inspection report, as per remark made by the CS in practice in the attachment to Form No. MGT-7 for Financial year ended on 31.03.2019, the company has not complied with provisions of Section 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (Companies PAS Rules);
Therefore, the Company and its directors violated the provisions of Section 29(1)(b) of the Companies Act, 2013 read with Rule 9A of Companies PAS Rules.

2. Relevant Legal Extracts:

Relevant legal extract of the Companies Act, 2013 is reiterated below:

Section 29(1)(b) of Companies Act, 2013:

“29. Public Offer of Securities to be in dematerialised form.

(1) Notwithstanding anything contained in any other provisions of this Act,-

(a) Every Company making public offer; and

(b) such other class or classes of companies as may be prescribed,

shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.

…”

Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014:

“Rule 9A- Issue of securities in dematerialised form by unlisted public companies:

(1) Every unlisted public company shall –

(a) Issue the securities only in dematerialised form; and

(b) Facilitate dematerialisation of all its existing securities

by the provisions of the Depositories Act, 1996, and regulations made thereunder

(3) Every holder of securities of an unlisted public company,_

(a) who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialised before the transfer; or

(b) who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure that all his existing securities are held in dematerialized form before such subscription.

…

(4) Every unlisted public company shall facilitate dematerialisation of all its existing securities by making necessary application to a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996 and shall secure International security Identification Number (ISIN) for each type of security and shall in-form all its existing security holders about such facility.

…”

Penalty provisions

“450. Punishment where no specific penalty or punishment is provided.

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption about any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.”

3. Legal Provisions

As per Companies Act, 2013, following are the requirements of dematerialisation of securities by an unlisted public company:

As per Section 29(1)(b) of Companies Act, 2013 read with Rule 9A of Companies Provision of Accounts) Rules, every unlisted public company is required to get its existing securities dematerialised.
For this purpose, every unlisted public company is required to obtain an ISIN number for each type of security and shall intimate the existing shareholders about the same
Further, every shareholder of an unlisted public company is required to get its existing securities dematerialised on or before 2nd October, 2018.
For non-compliance with provisions of section 29 of the Companies Act, no specific penalty is provided. Accordingly, penalty shall be imposed under “Section 450-Punishment where no specific penalty or punishment is provided” of Companies Act, 2013.

4. Adjudication of Penalty by Hon’ble RoC

The Hon’ble Registrar of Companies imposed the following penalty on the company and its directors for non-compliance of provisions of Section 29 of the Companies Act:

Penalty imposed on Company/ Promoters/ Directors	No. of days of default	Calculation of penalty amount	Final Penalty under Section 450 of Companies Act
Company	1966 Days	INR 19,76,000 (10000+1966*100) or INR 2,00,000, whichever is less	INR 2,00,000
Director-1	1966 Days	INR 19,76,000 (10000+1966*100) or INR 50,000, whichever is less	INR 50,000
Director-2	1966 Days	INR 19,76,000 (10000+1966*100) or INR 50,000, whichever is less	INR 50,000
Director-3	1966 Days	INR 19,76,000 (10000+1966*100) or INR 50,000, whichever is less	INR 50,000
	Total		INR 3,50,000

5. Conclusion

The regulations regarding dematerialisation of securities were initially applied to unlisted public companies in 2018. Recently, the scope of these regulations has been extended to include unlisted private companies, contingent upon specific conditions. All companies falling under this category must secure an ISIN number by the designated deadline and communicate this information to their shareholders. After the deadline, companies will be permitted to issue or allot new shares exclusively in dematerialised form. Additionally, all current shareholders are mandated to return their physical certificates to the Depository Participants for conversion into dematerialised form. Non-compliance with dematerialisation provisions shall lead to penalty consequences on the company and its directors.

Given the rigorous measures implemented by the RoC and the substantial penalties enforced daily, companies must adhere to the dematerialization provisions to prevent punitive actions.