– Shares required to be credited in personal demat accounts of nominee holders
CS Vinita Nair (email@example.com)
This is in continuation to previous write up ‘Physical to Demat: A move from opacity to transparency’. With just 10 days left for the timeline set by Ministry of Corporate Affairs (MCA) to expire, Companies initiate steps for facilitating transfer of securities in demat. The first step being obtaining of ISIN for each of the securities issued and thereafter, intimating the shareholders about the same in order to facilitate transfer on and after October 2, 2018.
This article discusses the implementation difficulty that is being faced by holding companies complying with the aforesaid requirement for its wholly owned subsidiaries.
Relevance in case of WOS
Typical shareholding structure in case of WOS is a under:
- Nominee shareholder holding jointly with the holding company
a. Nominee shareholder submits declaration in Form MGT-4 declaring that it holds shares on behalf of the beneficial owner being the holding company;
b. The company , being the beneficial owner as well as registered owner (joint holder) is not required to submit Form MGT-5 as the name reflects in the register of members
- Nominee shareholder holding singly on behalf of the holding company
a. Nominee shareholder submits declaration in Form MGT-4 declaring that it holds shares on behalf of the beneficial owner being the holding company.
b. The holding company submits declaration in Form MGT-5 declaring that it beneficially holds the shares registered in the name of the nominee shareholder.
c. The WOS files eForm MGT-6 with the Registrar on receipt of aforesaid declaration.
In case of private companies, there is atleast 1 nominee shareholder and in case of public companies, there are 6 nominee shareholders for the purpose of complying with the requirement of minimum number of shareholders.
The nominee shareholders holding the shares on behalf of the holding company are employees of the holding company or of the WOS. Most commonly, these shares are held in physical form and the share certificates of the nominee shareholders are also with the holding company for safekeeping. In the event where the nominee shareholder ceases to be the employee, the shares are transferred in the name of new employee, and aforesaid forms are re-submitted.
Mandatory demat neither adds value nor provides further transparency in case of WOS.
Following practical issues are likely to be faced:
In case of nominee shareholder holding jointly with holding company:
- The Company as well as the nominee shareholder must be having their respective demat accounts. However, for the purpose of joint holding in demat, both the company and the nominee shareholder will have to jointly open a demat account. Where the employee ceases to be nominee, the account may have to be closed or modified to have the new nominee shareholder as first holder.
In case of nominee shareholder holding singly, on behalf of holding company:
- The shares will have to be credited in the personal demat account of the nominee shareholder. In that case, the holding company will not have any control on the shares. Where the employee resigns and the holding company intends to have new nominee shareholder, the transfer can be effected in the demat account of the new shareholder only where the Delivery Instruction Slip (DIS) is signed by the transferor nominee. Therefore, it is prudent to have the DIS signed beforehand to avoid any difficulty while effecting the transfer later.
- Additionally, the depositories should also have a mechanism to mark/ lock such securities in the manner done in case of pledge, in order to disable the nominee from transferring shares without the consent of the holding company.
There is an urgent need for MCA to exempt several provisions, including the current one, in case of WOS, as these are perfunctory compliance given the shareholding pattern of the WOS. A WOS is similar to a One Person Company with the only difference that the member is a Company instead of a natural person. Accordingly, the requirement to hold AGM, passing of special resolutions, holding shares in demat adds no further transparency. The holding is entirely reported in the balance sheet of the holding company. Corporates may appropriately represent the same before MCA to implement appropriately.