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Written by Amarnath Simha, pursuing  Diploma in Companies Act, Corporate Governance and SEBI Regulations and Certificate Course in Real Estate Laws offered by  Lawsikho as part of his coursework.  Amarnath is a practicing lawyer in Bengaluru and working in the field of Civil Litigation for the past 17 years.

A company is an artificial legal person entitled to do business in its own name and seal and having all the relevant powers of a natural person while so conducting the business including owning and disposing of properties in its own name. For recognition of such an artificial legal person to do business as such, it has to be incorporated under Law. The word ‘company’ has been defined by Section 2 (20) of the Companies Act, 2013 (hereinafter referred to as the Act) to mean a company incorporated under the said Act or any previous company law. All the sections mentioned below are of the Act unless specified otherwise

Types Of Companies

The Act basically mentions two types of companies in respect of business-oriented companies: Private and Public. A Private company including one person company (Section 3(1)(c)), amongst other things, is basically different from a public company in as much it is prohibited under the Act for issuing an invitation to the public to subscribe to any of its securities (Section 2(68)). A Public Company is a company which is not a private company and has a minimum paid-up share capital as may be prescribed (Section 2(71)) i.e., those companies which are entitled to issue an invitation to the public to subscribe to its shares.

Types Of Public Companies

The Public Companies can be divided into a listed company and an unlisted company.

Meaning Of Listing/Listed Companies And Stages Of Listing

Listing basically means that the shares or other securities of a company are traded on a platform of a particular stock exchange. Any person wanting to buy or sell the shares of a listed company can engage in those transactions without having to go anywhere else in search of an individual willing to sell or buy.

Section 2(52) defines a listed company to mean a company which has any of its securities listed on any recognized stock exchange. Section 2 (73) defines a recognized stock exchange to be one defined under Section 2(f) of the Securities Contracts (Regulation) Act, 1956. Section 2(f) of the Securities Contracts (Regulation) Act, 1956 (SCRA for short)defines a recognized stock exchange to be a stock exchange which is for the time being recognized by the Central Government under Section 4 of SCRA. Section 2(j) of SCRA defines a stock exchange to means a body of individuals or body incorporate constituted or incorporated for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Securities is defined under Section 2(h) of SCRA to include shares, bonds, debentures, other marketable security of a like nature etc., amongst others.

Listing can be done at the stage of public offer or separately, at a later time, without any public offer. The stock exchanges can impose basic criteria to be met at both the times. Many public companies may not be interested or may not meet the criteria or sometimes the listed companies may fail in compliance leading to delisting. Hence many public companies are unlisted.

Can The Securities Of A Private Company Be Listed

Under the repealed Companies Act, 1956, a listed company was defined to mean a public company which has any of its securities listed in any recognized stock exchange under Section 2 (23A) of that Act. In the new Act, the word ‘public’ is missing.

Even though the word ‘public’ is missing in the definition of listed company under the new Act, it can be taken to be implied as listing can be done only for freely and publicly traded securities which is not possible in respect of the securities of a private company.

This inference can also be arrived at with the help of the decision rendered by the Division Bench of the Bombay High Court in the case of Dahiben Umedbhai Patel vs. Norman Jones Hamilton decided on 8.12.1982. This case was dealing with a question whether the agreement entered into between two private individuals with respect to shares of a private company can be held to be void as being in contravention of Section 13 of the SCRA. To answer this question, the court went into the provisions of the Companies Act, 1956, as well as SCRA and ultimately, reached a conclusion that the shares of a private company do not come within the marketable nature of the security as defined Section 2(h) of the SCRA and hence shares of the private company are not securities as defined under the SCRA.

Hence if the shares of a private company are not securities under the SCRA, they cannot be traded on the stock exchanges as defined under SCRA. Consequently, since the Act itself defines recognized stock exchanges to be one defined under the SCRA, the Act also prohibits listing of securities of a private company. Hence a private company can never be a listed company as its securities cannot be listed.

Meaning Of Public Offer

Public offer is not defined in the Act but Section 42 states what is deemed to be a public offer. Explanation I to Sub-Section 2 of Section 42 states that when a company makes an offer to allot/invitation to subscribe any of its securities to more than prescribed number of persons (excluding QIB and employees under ESOP), the same shall be deemed to be a public offer. Sub-Section 2 of Section 42 states the number to be not more than 50 or such higher number as may be prescribed, in case of a private placement. Hence any invitation to 51 or more persons is deemed to a public offer under the Act.

Hence, a public company by issuing private placements to less than 50 persons can still escape all the requirement of compulsory listing as Section 40 provides for a mandatory listing in case of a public offer.

Meaning Of Unlisted Company

The term ‘unlisted company’ is not defined in the Act. However, it can be defined as follows: An Unlisted company means a public company whose shares are not listed on the stock exchange or which is not making a public offer or a delisted public company. Since delisting is possible, the definition can mean to include a public company which had previously made a public offer but later got delisted. An unlisted company, if raising investment, will always have to make a private placement to 49 or fewer persons at a time even though the number of shareholders may exceed 200.

Difference Between A Private Company And An Unlisted Company

Apart from the prohibition on issuing of an invitation to the public to subscribe to its shares, there are also other restrictions on the private company as prescribed by Section 2(68). A private company imposes restrictions on the transferability of the shares by its articles and restricts the number of members to 200.

In the case of an unlisted company, though the number of members may be less than 200, it is not a matter of prohibition. However, the shares of an unlisted company are freely transferable. Section 58(2) makes it clear the shares of a public company are freely transferable. Hence, there cannot be any restrictions on its transferability as in the case of a private company. Hence, an unlisted company, even though not listed, not issuing any public offers and the number of members may be, in certain cases, be less than 200, is still not equivalent to a private company as its share are freely transferable.

Section 24: Administrative Powers

Any company making public offer is to be administered by the SEBI in respect of provisions of Chapter III, IV and Section 127 of the Act by virtue of Section 24. If any references are made to SEBI Regulations, it is only for the purpose of bringing out the position in the case of listed companies. At the same time, Section 24 of the Act places the administrative powers of the other companies in respect of provisions of Chapters III, IV and Section 127 with the Central Government. The other companies include unlisted companies and hence, in respect of unlisted companies, the Central Government is the

Section 29: Dematerialisation

Dematerialization has not been statutorily defined but it can be taken to mean that the securities would no longer be in physical form but in the electronic form and the trading will take place in the electronic form and not over the counter. India moved to dematerialization in the year 1996 by virtue of the Depositories Act, 1996.

Section 29 starts with a non-obstante clause and states that every company making public offer and such other class/classes of the public companies as may be prescribed shall issue securities only in dematerialized form. The section also makes it clear that in case of companies not covered above, the shares may in physical or demat form. Hence, a private company may keep its securities in physical form. Every company making public offer, being necessarily a public company will have to issue securities only in demat form.

Section 68B of the repealed Companies Act, 1956 made it mandatory for every listed company making IPO of any security for a sum of Rs.10 crores or more to be compulsorily in dematerialized form. The said section was introduced by way of Companies (Amendment) Act, 2000. The SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009, which is still in force, allows the investors to get it rematerialized but it can be traded in demat form only.

Companies (Prospectus And Allotment Of Securities) Third Amendment Rules, 2018

For public companies not making public offer i.e., the unlisted companies, the Central Government has the power to issue directions both under Section 24 r/w clause (b) of Sub-section (1) of Section 29 r/w Section 469. The word ‘prescribed’ appearing in connection with the class or classes of public companies in clause (b) Sub-section (1) of Section 29 is also defined in the Act to mean prescribed by rules made under this Act (Section 2(66)). Section 469 enables the Central Government to make rules for all or any matters which by the Act are required to be or may be prescribed. Hence the Central Government has the powers to make rules in respect of unlisted companies.

The Central Government has issued a gazette notification on 10th September 2018 publishing the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 by which Rule 9-A. was inserted and has to come into force on 02.10.2018. Rule 9-A deals with Issue of securities in dematerialized form by unlisted public companies

Sub-Rule 1 of Rule 9-A states that every unlisted public company shall issue securities only in dematerialized form and facilitate all the existing securities to be held in dematerialized form. Sub-Rule 2 mandates the unlisted public company making an offer for the issue of any securities or buyback of securities or issue of bonus shares or rights offer to ensure that all the securities of its promoters, directors, Key Managerial Personnel are dematerialized before taking the above actions.

The Sub-Rule 3 makes it mandatory that any trading in securities shall only be in dematerialized form. It goes further by stating that the intending purchaser of the securities of the unlisted public company shall get all his existing securities in the dematerialized form before purchase. Since the sub-rule talks only about the holder of securities of an unlisted public company, it means his existing securities in the unlisted public companies, whether of the same unlisted public company or a different unlisted public company.

Sub-rule 4 onwards speaks about the procedures and the steps to be taken. It speaks about filing applications by the unlisted public company to the depository and securing ISIN and informing about the same to the security holders. Sub-rule 5 states about timely payment of fees failing which it shall not be entitled to issue securities as provided under sub-rule 6. Sub-rule 5 also speaks about maintaining security deposit of not less than two years fees.

However, Sub-rule 5(c) and sub-rule 7 require further clarification.

5. Every unlisted public company shall ensure that-

(a)…
(b)…
(c) it complies with the regulations or directions or guidelines or circulars, if any, issued by the Securities and Exchange Board or Depository from time to time with respect to dematerialization of shares of unlisted public companies and matters incidental or related thereto.

(7) Except as provided in sub-rule (s), the provisions of the Depositories Act 1996, the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 and the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 shall apply mutatis mutandis to dematerialisation of securities of unlisted public companies.

On the first glance, this seems to be in direct conflict with Section 24. The administrative powers in respect of unlisted public companies lie with the Central Government. Hence, by virtue of these rules, the Central Government has given the administrative powers to SEBI which is statutorily impermissible. Even though section 469, Central Government has the power to make rules, it can be urged that it cannot make any rules contrary to the statute. Since dematerialization is dealt in section 29 which is part of Chapter III which administrative powers lie with Central Government statutorily, the central government by rules cannot delegate the same to any other authority including SEBI. However, the delegation of powers is allowed under Section 458 which states that the Central Government may by notification delegate any of its powers or functions under this Act to such authority or officer as may be specified in the notification. Hence, the Central Government is authorized to delegate its power under the Act to SEBI, though the relevant section i.e., Section 24 says otherwise.

Sub-rule 8 provides submission of an audit report as provided under regulation 55A of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 to the Registrar. Sub-rule 9 provides for grievance redressal forum in the form of Investor Education and Protection Fund Authority for the grievances of the security holders. The authority has been given an authority to initiate action against the depository, participant, share transfer agent or the registrar to an issue in consultation with the SEBI.

The Advantages Of Dematerialisation

The advantages of Dematerialisation of shares in cases of unlisted companies are in fact more than what is available to demat shares in the cases of listed companies. The listed companies have mandatory compliances under various regulations of the SEBI, which are not yet made applicable to unlisted companies. The advantages which were envisaged under the objects while enacting the Depositories Act, 1996 are also applicable to amendment by inserting rule 9-A.

The objectives of the Depositories Act were faster transaction/settlements/transfers and also safer transactions removing theft, loss, forgery etc., The central government is also perceived to have inserted this rule 9-A to detect black money, though there are no official communications regarding that.

Apart from the same, this increases the ease of maintenance of records while at the same time decreasing the cost, monetarily and space wise, of the same as also removal of any unforeseen mishaps or mistakes. It increases the trading efficiency and has removed unnecessary paperwork.

In any event, the advantages which are envisaged under the Depositories Act, 1996 would be applicable here and increases the trust of the investors and thereby helping the economy in the long run.


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