Navigating ISIN and Demat Accounts for Foreign Corporate Subsidiaries: Key Considerations for New Companies
In the ever-evolving landscape of corporate governance, the introduction of Rule 9B by the Ministry of Corporate Affairs (MCA) in its notification dated 27th October 2023 brings significant changes. Rule 9B, which mandates private companies (excluding small companies) to issue and facilitate the holding of their shares in a dematerialised form, has far-reaching implications for businesses, particularly when it comes to foreign corporate subsidiaries.
The Rule 9B Timeline: What It Means for New Companies
Under the amended Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, Rule 9B is applicable to all private companies, except small companies, requiring them to facilitate dematerialisation of their shares. While the rule’s applicability was relatively straightforward for existing companies, the scenario becomes a bit more nuanced for new companies incorporated after the initial deadline of 30th September 2024.
For example, let’s consider ABC Private Limited, which was incorporated on 1st December 2024. Since the company is a wholly-owned subsidiary of a foreign private company and is not classified as a small company under Section 2(85) of the Companies Act, 2013, it falls under the purview of Rule 9B. However, Rule 9B(2) specifies that compliance is required within 18 months after the end of the financial year in which a company ceases to be a small company. In ABC Private Limited’s case, since its financial year ends on 31st March 2025, the company must facilitate dematerialisation (i.e., obtain an ISIN) by 30th September 2026.
For a company incorporated later, like on 1st February 2025, with a financial year ending on 31st March 2026, the due date for compliance would extend further, to 30th September 2027.
Practical Recommendations for New Companies
Given the backlog at depositories, with a large number of companies applying for ISINs, there can be a considerable wait time. As such, it’s advisable for new companies, especially those incorporated after the deadline of 30th September 2024, to initially issue physical share certificates (in line with Section 56(4) of the Companies Act, 2013) within two months of incorporation. After issuing these certificates, the company can then immediately apply to the Registrar and Transfer Agent (RTA) for an ISIN to facilitate dematerialisation.
Foreign Corporate Shareholders: The Need for Demat Accounts
A key consideration for foreign corporate shareholders is whether they need a Demat account. At the time of incorporation, since Rule 9B does not yet apply to the company, shares can be issued in physical form. However, as the company progresses toward compliance with Rule 9B, obtaining an ISIN becomes mandatory, but foreign shareholders may continue holding shares in physical form.
It’s important to note, though, that once the dematerialisation requirement under Rule 9B becomes applicable, foreign corporate shareholders will be unable to transfer or receive further issues of shares unless they open a Demat account with a depository. Therefore, when applying for an ISIN, it is strongly recommended that companies also apply for the opening of Demat accounts for their foreign corporate shareholders to ensure smooth operations once Rule 9B takes effect.
Conclusion
In summary, Rule 9B introduces an important requirement for private companies to facilitate the dematerialisation of shares. For new companies, especially foreign corporate subsidiaries, understanding the timeline for compliance is crucial. While physical share certificates can be issued initially, companies must ensure that they take proactive steps toward obtaining an ISIN and opening Demat accounts for foreign shareholders to avoid disruptions as the deadline approaches.
By planning ahead and understanding the regulatory requirements, new companies can navigate the complexities of Rule 9B effectively, ensuring compliance without delays or complications.
