MCA UPDATE: DEADLINE TO DEMATERIALISE SECURITIES EXTENDED FOR PRODUCER COMPANIES

Introduction

Last year, the Ministry of Corporate Affairs (“MCA”) mandated that all private companies, excluding small companies, to facilitate the dematerialisation of existing securities and issue new securities solely in dematerialised form (click here to read our article). In furtherance to that, recently, MCA vide a Circular dated 20 September 2024 (“Circular”) has provided a five-year extension specifically to producer companies to dematerialise their securities. This amendment to the Companies (Prospectus and Allotment of Securities) Rules, 2014, (“Rules”) acknowledges the unique operational challenges faced by agricultural and cooperative sectors.

The dematerialization of securities is primarily governed by the Depositories Act, 1996, and various SEBI regulations. Initially, dematerialization was mandatory only for public listed companies. However, with the introduction of the Companies Act, 2013, and subsequent amendments, the scope of dematerialization was expanded. As per the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, effective from 27 October 2023, Rule 9B was inserted whereby it was mandated that even private companies have to issue securities in dematerialised form only. Prior to this notification, the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018, effective from 2 October 2018, had only mandated that unlisted public companies are required to issue securities only in dematerialized form and facilitate dematerialization of all their existing securities.

The amendment to the Rules is called as Companies (Prospectus and Allotment of Securities) Amendment Rules, 2024. The amendment was made to Rule 9B of the Rules which states that: “Provided that a producer company covered under this sub-rule shall, within a period of five years of closure of such financial year, comply with the provision of this sub-rule.” This amendment grants the producer companies a relaxation period of five years for converting all their securities in demat form.

As per Section 581A (l) of the Companies Act 1956 "Producer Company" means a body corporate having objects or activities specified in section 581B and registered as Producer Company under this Act;

As per Section 581B Objects of a producer company are as under-

(1) The objects of the Producer Company shall relate to all or any of the following matters, namely : -

(a) production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit: Provided that the Producer Company may carry on any of the activities specified in this clause either by itself or through other institution;

(b) processing including preserving, drying, distilling, brewing, vinting, canning and packaging of produce of its Members ;

(c) manufacture, sale or supply of machinery, equipment or consumables mainly to its Members

(d) providing education on the mutual assistance principles to its Members and others;

(e) rendering technical services, consultancy services, training, research and development and all other activities for the promotion of the interests of its Members ;

(f) generation, transmission and distribution of power, revitalisation of land and water resources, their use, conservation and communications relatable to primary produce;

(g) insurance of producers or their primary produce ;

(h) promoting techniques of mutuality and mutual assistance ;

(i) welfare measures or facilities for the benefit of Members as may be decided by the Board;

(j) any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) or other activities which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner ;

(k) financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) which include extending of credit facilities or any other financial services to its Members.

(2) Every Producer Company shall deal primarily with the produce of its active Members for carrying out any of its objects specified in this section.

Legal Status of Producer companies

1. Producer companies are a unique form of corporate entity introduced by the Companies (Amendment) Act, 2002, which inserted Part IX A into the Companies Act, 1956;

2. As per Section 581C (5) of the Companies Act, 1956:

"On registration under sub-section (1), the Producer Company shall become a body corporate as if it is a private limited company to which the provisions contained in this Part apply, without, however, any limit to the number of Members thereof, and the Producer Company shall not, under any circumstance whatsoever, become or be deemed to become a public limited company under this Act."

MHCO Comment: This relaxation reflects the government’s understanding of the operational challenges faced by the agricultural and co-operative sectors. By providing this extension, the amendment not only promotes compliance but also empowers producer companies, allowing them to adapt and thrive in a rapidly evolving digital economy.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us for any assistance.