LEAP to listing: India permits direct listing of shares overseas through IFSC

MCA & MOF notify rules for the same

– Vinita Nair & Prapti Kanakia |

Indian companies were permitted to raise funds from overseas either pursuant to issue of depository receipts listed overseas or having the non-residents subscribe to issuances made in India or by way of borrowing overseas. As an initiative to provide an avenue to access global capital markets, GoI had announced the decision to ease raising of foreign funds in order to boost foreign investment inflows, unlock growth opportunities and offer flexibility to Indian companies to raise funds. Consequently, an enabling provision for direct listing of prescribed class of securities on permitted stock exchanges in permissible foreign jurisdictions was inserted vide Companies (Amendment) Act, 2020 in Section 23 of Companies Act, 2013 (‘CA, 2013’), that deals with permissible modes of issue of securities, vide notification dated September 28, 2020 and made effective from October 30, 2023. Thereafter, the Ministry of Corporate Affairs (‘MCA’) notified Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 (‘LEAP Rules’) effective from January 24, 2024. As listing of shares abroad will result in raising funds from persons resident outside India, Ministry of Finance (‘MoF’) notified FEMA (Non-Debt Instruments) Amendment Rules, 2024 amending FEMA (Non-Debt Instruments) Rules, 2019 (‘NDI Rules’) with effect from January 24, 2024. SEBI is also expected to roll out the operational guidelines for listed companies to list their equity shares on permitted stock exchanges.[1]

Additionally, FAQs on direct listing scheme (FAQs) have also been rolled out on January 24, 2024. Further, two of the key recommendations of the working group report on Direct Listing of Listed Indian Companies on IFSC Exchanges submitted in December 2023 was to notify the rules under Section 23 (3) and (4) of CA, 2013 and notify necessary amendments in NDI Rules to permit cross-jurisdiction issuance and trading of equity shares of Indian companies on IFSC exchanges.

Presently, both the LEAP Rules as well as NDI Rules have notified International Financial Services Centre in India (‘Gift City’) as the permissible jurisdiction and India International Exchange and NSE International Exchange as the permissible stock exchange. International Financial Services Centres Authority (‘IFSCA’) had issued the IFSCA (Issuance and Listing of Securities) Regulations, 2021 effective July 19, 2021 (‘IFSC Regulations’) however, in the absence of enabling provision under CA, 2013 and NDI Rules, Indian companies were unable to undertake listing of securities abroad.

In this article we provide an overview of the regulatory regime and deal with the procedural aspect.

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Mandatory conversion of share warrants issued under CA 1956 into demat securities – Snippet on MCA Notification

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FAQs on mandatory demat of securities by private companies

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You may refer to our other FAQs on dematerialization of shares here and you may also refer to our Snippet, detailed article and YouTube Video

Diktat of demat for private companies 

MCA notifies mandatory dematerialisation for securities of private companies

Two major amendments have been notified by MCA on 27th October, 2023 impacting all companies, and majorly the private companies. These include the Companies (Management and Administration) (Second Amendment) Rules, 2023 introducing the concept of “designated person” with respect to beneficial interest in shares of a company[1] and the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (“PAS Amendment Rules”). The PAS Amendment Rules encompass two major amendments: (i) with respect to the bearer share warrants under the erstwhile Companies Act, 1956, and (ii) mandatory dematerialisation for all private companies excluding small companies. In this write-up, we briefly discuss the amendments with respect to mandatory dematerialisation of securities for the private companies and the implications thereto.

Regulatory basis of present amendment

Sub-section (1A) was inserted under Section 29 of the Companies Act 2013 (“the Act”) facilitating the Central Government to prescribe such class or classes of unlisted companies for which the securities shall be held and/ or transferred in dematerialised form only. In exercise of the powers conferred under the said section, Rule 9B has been inserted vide the PAS Amendment Rules specifying the requirement of mandatory dematerialisation of securities issued by private companies.

Applicability of mandatory dematerialisation on private companies

The mandatory dematerialisation requirement is applicable on all securities of every private company, excluding small companies[2] and government companies. The provisions are applicable with immediate effect, and a timeline of 18 months is provided from the closure of the financial year in which a private company is not a small company for the compliance with the mandatory dematerialisation requirements.

For example, a private company (other than a company that is a small company as on 31st March, 2023) is required to comply with mandatory dematerialisation of securities within a period of 18 months from the end of FY 22-23, i.e., on or before 30th September 2024.

In case a company ceases to be a small company after 31st March, 2023, the timeline of 18 months triggers from the close of the financial year in which it ceases to be a small company. Therefore, if a company ceases to be a small company at any time during FY 23-24, the timeline of 18 months will trigger from 31st March, 2024 and therefore, shall be complied with by 30th September 2025.  

Applicability on a wholly-owned subsidiary

Rule 9B of the PAS Rules, enforcing mandatory dematerialisation of the securities of private companies, is applicable on all private companies other than the following: 

  1. Small company, and  
  2. Government company

In case of unlisted public companies, sub-rule (11) of Rule 9A extends a similar exemption from dematerialisation requirements. The said sub-rule covers the following public companies – 

  1. Nidhi company, 
  2. Government company, and 
  3. A wholly owned subsidiary

It is important to note that a wholly owned subsidiary, though exempt from the dematerialisation requirements under Rule 9A, similar exemption does not extend to a private company under Rule 9B. Therefore, currently it seems that a wholly-owned subsidiary, incorporated in the form of a private company, is not exempt from dematerialisation requirements. 

Further, for a private company that is a wholly-owned subsidiary of a public company, and therefore, a deemed public company, it remains an open question as to whether it will be exempt under sub-rule (11) of Rule 9A or the provisions of Rule 9B will apply.

The position may be summarised as below – 

Nature of wholly-owned subsidiaryNature of holding company Applicability of dematerialisation provisions 
Public company Public company Exempt under Rule 9A(11)
Public company Private company Exempt under Rule 9A(11)
Private company Private company Covered under Rule 9B as of now
Private company Public company The same being a deemed public company, there is no clarity on whether Rule 9A applies or Rule 9B. 
If considered to be a private company – covered under Rule 9B 
If considered to be a public company – exempt in terms of Rule 9A(11)

Compliances applicable to private companies

A private company, covered under the provisions of mandatory dematerialisation shall –

  1. Issue all securities in dematerialised form only;
  2. Facilitate dematerialisation of all existing securities (as and when request is received from the holder of such securities);
  3. Ensure that the entire holding of its promoters, directors and KMPs are held in dematerialised form only, prior to making any offer for issuance or buyback of securities

Apart from the aforesaid, the compliances applicable to an unlisted public company under sub-rule (4) to (10) of Rule 9A are also applicable to private companies. These include –

  1. Application with depository for dematerialisation of all existing securities and securing ISIN for each type of security;
  2. Inform the existing security holders about the facility of dematerialisation;
  3. Make timely payment and maintenance of security deposit with the depository, RTA and STA as may be agreed between the parties;
  4. Complies with all applicable regulations, directions and guidelines with respect to dematerialisation of securities of a private company;
  5. File a return in form PAS-6 with ROC on a half yearly basis within 60 days from conclusion of each half of the financial year, with respect to reconciliation of the share capital of the company;
  6. Bring to the notice of the depositories, any difference in the issued capital by the company and the capital held in dematerialised form;
  7. The grievances of any security holders under this rule (Rule 9B) to be filed with IEPF Authority, and the same, in turn, shall initiate any action against a depository or depository participant or RTA or STA, as may be required, after prior consultation with SEBI.

Compliances applicable to the holders of securities of a private company

As for persons holding securities of a private company, while the mandatory dematerialisation cannot be enforced by the private company, the same is expected to be taken care of by way of sub-rule (4) of Rule 9B that requires –

  1. Dematerialisation of securities by the securityholder, before the transfer of such securities; and
  2. Subscription to the securities issued by a private company, in dematerialised form only

Therefore, the mandatory dematerialisation of securities of a private company is ensured through placing restrictions on both a private company and the holders of securities issued by the same.

Consequences of non-compliance 

There are no specific penal provisions governing the non-compliance with the provisions of section 29 of the Act read with Rule 9B of the PAS Rules, and therefore, general penal provisions under section 450 of the Act should apply. 

Section 450 specifies the following: 
“If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.”

Implications of the present amendment

The existence of shell companies and personification of shareholders is not a rare scenario, and such a situation is likely to be more common in case of a private company, unlike a public company. Historically, dematerialisation of shares is looked upon by the government as a means to curb black money[3]. As for listed companies and unlisted public companies[4], the dematerialisation of securities is already a mandatory requirement. With the present amendments being notified, the private companies have also been covered by the mandatory dematerialisation requirements.

As on 31st January, 2023, more than 14 lac companies registered with MCA comprising 95% of the total active companies are private companies, out of which approximately 50,000 companies are small companies[5]. Thus, with the mandatory dematerialisation for private companies coming into existence, a large number of companies will be forced to move towards dematerialisation of shares. Further, while the company can be held accountable for the mandatory dematerialisation of securities held by promoters, directors and KMPs, given the closely held nature of private companies, barely any securityholder (particularly shareholders) will remain outside the purview of the same.

Further, it is clarified that, in no way such a mandatory dematerialisation for private companies can be taken to mean that the restriction on transfer of shares of such a company is relaxed, and adequate systems can be implemented at the depository’s level to ensure compliance with the basic distinguishing characteristic of a private company and thereby have filters before executing any transfer of securities.

You may also refer to our Snippet, FAQs and YouTube Video

[1] Read our article on the same here –

[2] As per the definition under the Act read with the rules made thereunder, a small company means a company, other than a public company, having paid up share capital not exceeding Rs. 4 crores and turnover not exceeding Rs. 40 crores. Further, the following cannot be a small company –

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act.



[5] As per MCA Monthly Information Bulletin – January, 2023

Evolution of concept of related parties and related party transactions

-Team Vinod Kothari and Company |

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Investments from neighbouring countries under stringent scan of GoI

– Prapti Kanakia |

Recently, the Ministry of Corporate Affairs (MCA) has implemented a series of amendments which relates to investments in India by foreign nationals or entities incorporated in a country which shares a land border with India. These amendments are in tandem with the amendment made by the Department for Promotion of Industry and Internal Trade (DPIIT) in FDI Policy and by the Ministry of Finance, Department of Economic Affairs, in FEM (Non Debt Instruments) Rules, 2019 (NDI Rules).

DPIIT amended the FDI policy vide press note no. 3 dated 17 April, 2020 to curb the hostile takeovers of Indian Companies by nationals/entities of neighbouring countries.  Erstwhile, only a citizen of Bangladesh & Pakistan or an entity incorporated in Bangladesh & Pakistan were required to take government approval for investing in India. Pursuant to amendment, any entity incorporated in a country, citizen or beneficial owner of a country, which shares land border with India, needs to obtain government approval for investing in the equity instrument of the Indian Company. Thus, nationals/entities from Pakistan, Afghanistan, China, Bhutan, Nepal, Myanmar and Bangladesh can invest in India only under approval route.

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MCA amends format of Forms SH-4 and PAS-4 to insert declaration on compliance with Government approval requirement under FEMA

Provision w.r.t. higher additional fees notified by MCA | Effective July 1, 2022

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