Indian Subsidiaries Incorporated After September 30 2024 Must Issue Dematerialized Shares

Indian Subsidiaries Incorporated After September 30 2024 Must Issue Dematerialized Shares

In a significant move to streamline and modernize the corporate landscape, the Ministry of Corporate Affairs (MCA) has mandated that all private companies (other than those classified as small companies), including Indian subsidiaries incorporated as private limited companies (Indian Subsidiary(ies)), must issue equity shares exclusively in dematerialized form on or after September 30, 2024. This requirement applies not only to existing private companies issuing fresh equity shares post this date but also to newly incorporated private companies, including Indian Subsidiaries. As such, it becomes a fundamental compliance requirement from the outset for companies incorporated after this date.

According to the MCA notification dated October 27, 2023, and in alignment with Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, all equity shares, including those allotted to the initial subscribers at the time of incorporation, must be held in dematerialized form. To comply with this, newly incorporated private companies, including Indian Subsidiaries, must apply for an International Securities Identification Number (ISIN) through a registered Registrar and Transfer Agent (RTA) and ensure that all subscribers have demat accounts to facilitate electronic shareholding.

For Indian Subsidiaries, this regulatory change is particularly significant, as it requires foreign subscribers to the Memorandum and Articles of Association to obtain a Permanent Account Number (PAN) in India and open a demat account to receive their allotted shares.

This move aims to enhance transparency, strengthen corporate governance, and mitigate the risks associated with physical share certificates, aligning private companies, including Indian Subsidiaries, with modern securities regulations from the very beginning.

Key Compliance Requirements for Newly Incorporated Companies

  1. Mandatory Dematerialization of Equity Shares

All equity shares, including those allotted to the initial subscribers to the Memorandum and Articles of Association, must be held in dematerialized form. This measure aims to ensure transparency, prevent fraudulent transactions, and bring corporate shareholding in line with modern regulatory practices.

  1. Obligation to Obtain ISIN and File e-Form PAS 6

Immediately upon incorporation, Indian subsidiaries must apply for an ISIN through a registered RTA. The ISIN serves as a unique identifier for dematerialized securities, including shares, enabling seamless electronic transactions. Additionally, as part of ongoing statutory compliance, the Indian subsidiary is required to file e-Form PAS 6 on the MCA portal on a half-yearly basis. Since ISIN is a mandatory prerequisite for filing e-Form PAS 6, obtaining it at the earliest is essential to ensure timely regulatory compliance.

  1. Shareholder Requirements – PAN and Demat Account

Each subscriber to the Indian Subsidiary's Memorandum and Articles of Association, as well as any subsequent shareholders, must open a demat account in India with a Depository Participant to receive and hold their allotted shares in electronic form. Furthermore, all subscribers are required to obtain a PAN from the Indian tax authorities prior to opening a demat account in India.

  1. Timely Execution to Avoid Delays

Given that share allotment can only be completed once the subscribers have an active PAN and demat account, it is advisable for foreign subscribers to initiate this process concurrently with the incorporation of Indian Subsidiary in India. Any delay in obtaining these requirements may result in non-compliance with statutory deadlines and procedural setbacks.

Alternative Business Structures for Foreign Investors

Foreign investors who prefer not to undertake the process of obtaining a PAN and opening a demat account in India may explore alternative business structures that align with their operational and regulatory needs:

  1. Limited Liability Partnership (LLP): Unlike private limited companies, LLPs are not subject to the mandatory dematerialization requirement, making them a viable option for foreign investors seeking a flexible business structure with fewer regulatory formalities.
  2. Branch Office/Liaison Office: Foreign entities looking to establish a presence in India without incorporating a private limited company can consider setting up a branch or liaison office, subject to regulatory approvals from the Reserve Bank of India and other relevant authorities.

For Indian Subsidiaries incorporated on or after September 30, 2024, adherence to the MCA’s new dematerialization mandate is a critical compliance requirement. Ensuring that all equity shares are electronically held from the outset enhances corporate governance, reduces fraud risks, and aligns with India’s ongoing digital transformation. Foreign investors are encouraged to assess their business objectives and compliance readiness to determine the most suitable structure for their Indian operations.

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