Government plans to dematerialise shares of unlisted companies to crack down on black money




Sebi rules require all listed companies to dematerialise shares. MUMBAI: The government is planning to make it mandatory for unlisted companies to dematerialise their shares as part of the broader crack down on black money.

“It’s a large exercise. Initially, the plan is to cover public limited companies,” said an official with knowledge of the development. “Today it is optional — if an unlisted company wants to dematerialise, they can do it.” The Ministry of Corporate Affairs (MCA) is in talks with the Securities and Exchange Board of India (Sebi) and depositories on the matter.

“Ministry of Corporate Affairs has informally held discussions with depositories on this plan and will be having its first formal meeting next week to discuss the time frame and other issues,” said another person close to the development.

Sebi rules require all listed companies to dematerialise shares. About 70,000 public limited companies are unlisted and more than 1million private limited companies are registered with the corporate affairs ministry.

“In the wake of government’s crackdown on inoperative companies, misuse of tax provisions and action on black money, compulsory demat policy would create an audit trail in securities transactions and enhance credibility of institutional investment in unlisted companies,” said Sumit Agrawal, partner, Suvan Law Advisors. Dematerialisation will help ensure that companies don’t get caught up in wrongdoing such as money laundering.

“There are cases where valuation of unlisted shares is priced unreasonably high and finance is raised to keep these securities as collateral as a conduit to convert black money,” Agrawal said. “Then there are cases of duplicate shares existing and the company also finds it difficult to weed them out. Many FIRs exist on these issues in the criminal justice system.”

Dematerialisation, or demat, involves the conversion of physical stocks into electronic form and is aimed at eliminating fraud and theft while making trades trackable. India embarked on the process in 1996 and almost all shares of listed companies are held in the demat form. India has about 6,000 listed companies.

The government has frozen the bank accounts of more than 200,000 suspected shell companies. It has also asked Sebi to initiate necessary action against 331 suspected shell companies.

The market regulator found that the companies identified as shell companies by the Serious Fraud Investigation Office (SFIO) and MCA were potentially involved in violations of listing regulations. Sebi was of the view that they were possibly misusing funds and the books of accounts, including the creation of entries that were to the detriment of minority shareholders.

“It will create a better audit trail for public limited companies. However, it will have to be seen whether the larger cause justifies implementing it for either the largest or all public limited companies,” said Sandeep Parekh, founder, Finsec Law Advisors.




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