Mandatory Demat of Shares of Section 8 Company and Form PAS 6

Introduction

In a world where regulations are becoming ever more stringent, corporate governance and transparency are no longer an option; they're a requirement. After noticing tighter monitoring from the Ministry of Corporate Affairs (MCA), it is expected that even non-profit entities registered as Section 8 companies under the Companies Act 2013 will have norms to include accountability and compliance.

The MCA has directed that certain Section 8 companies dematerialise their shares, bringing them into conformity with other unlisted public companies. This implies that corporations must now comply with the filing requirements for Form PAS-6, a half-yearly share capital reconciliation.

This blog aims to demystify these recent compliance requirements for Section 8 companies, explain dematerialisation, and provide a clear guide to complying with Form PAS-6 filing requirements.

What is a Section 8 Company?

A Section 8 company is defined under Section 8 of the Companies Act 2013 as a company formed with charitable objectives such as:

• Promotion of commerce, art, science, sports, education, research, social welfare, religion, or environmental protection.

Key Characteristics:

• Non-profit nature: The income or profits are used solely for promoting its objects.
• Prohibition on dividend distribution: Members are not entitled to receive dividends from the company.
• Limited liability: Members' liability is limited to the amount of their capital contribution.
• No suffix requirement: These companies are not required to use ‘Private Limited’ or ‘Limited’ in their names.

Regulatory Advantages:

• Tax benefits under the Income Tax Act.
• Compliance relaxations for small Section 8 companies
• Simpler companies incorporation process compared to profit organisations.

However, these benefits come with expectations of high corporate governance and transparency, especially given the public interest involved.

What is Dematerialisation (Demat) of Shares?

Dematerialisation, or the demat of shares procedure, refers to the process of converting physical share certificates into electronic form. This transition is done through depositories such as NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).

Physical Shares vs. Demat Shares:

Benefits of Dematerialisation:

• Greater corporate governance and transparency
• Reduced risks of loss, forgery, or theft
• Quicker transfers, improving investor confidence
• Required for buying and selling shares through a demat account

Key Players:

• Depositories (NSDL/CDSL): Maintain electronic records.
• Depository Participants (DPs): Act as intermediaries for shareholders (e.g., banks, brokers).

Applicability of Mandatory Demat for Section 8 Companies

Earlier, Section 8 companies registered as unlisted public companies were exempt from mandatory demat requirements.

Key Change:

On 27 October 2023, MCA amended the Companies (Prospectus and Allotment of Securities) Rules, 2014, removing exemptions for unlisted Section 8 companies.

Applicability Criteria:

• Is it an Unlisted Public Company? If yes, it falls within the scope of the amendment.
• Does it have outstanding securities (equity/preference shares)? The demat of shares procedure is mandatory if shares exist in physical form.
• Does it meet the threshold for paid-up capital or turnover? Now applicable irrespective of size.

Hence, Section 8 companies with any physical shares must dematerialise and comply with Form PAS-6 filing norms.

Timeline and Compliance Requirements

Once applicable, a Section 8 company must:

• Facilitate the dematerialisation of existing shares
• Issue all new securities in demat form only.
• File Form PAS-6 every six months.

Key Timelines

• For Existing Shares: Companies must provide necessary help to shareholders to convert their physical shares into demat form.
• Ongoing Compliance: File Form PAS-6 within 60 days from the end of each half-year (i.e., by 30th May and 29th November).

It is advisable to check your ROC communications or consult a company law expert to determine the exact timeline applicable to your company.

Example:

XYZ Foundation, a Section 8 company with 15 shareholders holding physical shares, must:

• Obtain the ISIN for shares
• Facilitate the demat of shares procedure.
• Ensure new shares are issued only in electronic format.
• File Form PAS-6 biannually

What is Form PAS-6?

Form PAS-6 is the Reconciliation of Share Capital Audit Report, mandatory for unlisted public companies, including applicable Section 8 companies.

Purpose:

• Reconcile the total share capital between the physical and demat form.
• Ensure consistency between the records of the depositories and those of the company.
• Report whether the company has appointed a Registrar and Transfer Agent (RTA) and whether the shares are entirely dematerialised.

Importance of ISIN for Shares:

Each class of shares requires a unique International Securities Identification Number (ISIN). It’s essential for dematerialisation and Form PAS-6 filing.

Filing Process:

• File electronically on the MCA portal
• Attach CA/CS/CMA certificate.
• Confirm ISIN and shareholder details.

Filing of Form PAS-6 by Section 8 Companies

Since the demat mandate is now applicable to Section 8 companies, they too must file Form PAS-6 starting from the relevant half-year after demat.

Filing Timeline:

• For the period April to September → File by 30 November
• For the period October to March → File by 30 May

Details Required in PAS-6

• ISIN (International Securities Identification Number)
• Period of reporting
• Details of capital held in demat vs physical form
• Number of shareholders in both formats
• Reasons for differences (if any)
• Certificate from a practising professional

Consequences of Delay or Non-Filing:

• Penalties under Section 450 of the Companies Act.
• Possible restrictions on future share issuance or transfers.
• Directors/officers may also face fines.

Compliance Checklist for Section 8 Companies

Penalties and Non-Compliance Risks

Legal Provisions: Non-compliance attracts penalties under Section 450.

Possible Penalties:

• For Non-Demat of Shares: Fine up to ₹10,000 + ₹1,000 per day of continued default
• For Non-Filing of PAS-6: Late filing fees, ROC disqualification, restrictions on share issuance

Conclusion

The MCA’s mandate for mandatory demat for unlisted companies, including Section 8 companies, marks a shift toward greater transparency and digitisation.

To stay compliant:

• Start early with steps for dematerialisation
• Guide shareholders in opening demat accounts.
• Submit Form PAS-6 filing on time.

Professional experts like Mind Your Tax can support your journey through the procedure for transfer of shares in demat form and ensure your non-profit is future-ready and compliant.