With just 10 days left for the timeline set by the ministry of corporate affairs (MCA) to expire, companies have initiated steps for facilitating the transfer of securities in demat. The first step is the obtaining of the International Securities Identification Number (ISIN) for each of the securities issued and, thereafter, intimating the shareholders about it to facilitate transfer on and after 2 October 2018. This article discusses the implementation difficulty being faced by holding companies that are complying with the requirement for its wholly-owned subsidiaries (WOS).
The typical shareholding structure in case of WOS is a under:
a. Nominee shareholder holding jointly with the holding company
- Nominee shareholder submits declaration in Form MGT-4 declaring that it holds shares on behalf of the beneficial owner being the holding company;
- 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;
b. Nominee shareholder holding singly on behalf of the holding company
- Nominee shareholder submits declaration in Form MGT-4 declaring that it holds shares on behalf of the beneficial owner being the holding company.
- The holding company submits declaration in Form MGT-5 declaring that it beneficially holds the shares registered in the name of the nominee shareholder.
- The WOS files eForm MGT-6 with the registrar of companies (RoC) on receipt of the aforesaid declaration.
In case of private companies, there is at least one nominee shareholder and, in case of public companies, there are six nominee shareholders for the purpose of complying with the requirement of the 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 the new employee, and the aforesaid forms are re-submitted.
Mandatory demat neither adds value nor provides further transparency in the case of WOS.
Practical Issues
The following practical issues are likely to be faced:
In case of a nominee shareholder holding jointly with the 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 the 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 a 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. The declaration furnished in Form MGT-4 and MGT-5 may also be given.
In case the holding company holds the shares entirely in its demat account:
- In that case, the company cannot be said to have the minimum number of members in view of the definition of members under Section 2 (55) of Companies Act, 2013 ( reproduced hereunder):
“(55) ‘member’€–, in relation to a company, means—xxxxx
(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;
- In case the holding company holds shares entirety in its account, the beneficiary position will only show the name of the holding company and not the remaining nominee shareholders.
Conclusion
There is an urgent need for MCA to exempt several provisions, including the current one, in case of WOS, as these will be perfunctory compliance given the shareholding pattern of the WOS. A WOS is similar to a one person company the only difference being that the member is a company instead of a natural person. Accordingly, the requirement to hold an annual general meeting (AGM), passing of special resolutions and 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 this issue before the MCA to be implemented appropriately.
(CS Vinita Nair Dedhia is Partner at Vinod Kothari & Co).
