MCA grants five-year grace period for dematerialization for manufacturing companies

In a significant move, the Ministry of Corporate Affairs (MCA) has granted relief to “producer companies” by extending the compliance period for mandatory dematerialisation of their existing shares.

Producer companies that were previously required to fully dematerialize their shares by September 30, 2024, have now been given until the end of March 2028 to achieve full compliance with this requirement.

In October last year, the MCA mandated that all private companies (except small companies) must dematerialise existing shares by the end of September 2024. Further, private companies have been required to issue new securities only in dematerialised form.

A Producer Company is a corporate entity for farmers and producers, primarily engaged in agriculture and related activities. As a legal entity, they are recognised as a company under the Companies Act, which facilitates access to credit and better post-harvest management.

Ownership of and membership in such entities is restricted to “primary producers” or “producer institutions” and membership shares may not be publicly traded.

Prasenjit Chakravarti, partner at Khaitan & Co, said the latest MCA notification offering a five-year compliance window to manufacturers to meet the securities issuance requirements is a business-friendly and future-oriented reform.

He added that the relaxation reflects the government’s understanding of the operational challenges faced by the agricultural and cooperative sectors.

It provides much-needed flexibility, allowing production companies to strengthen governance and provide transparency without immediate regulatory pressure. This step not only facilitates sustainable growth, but also gives production companies the opportunity to “build a house on solid ground,” supporting long-term economic resilience, Chakravarti said.

Sonam Chandwani, partner at KS Legal, said the relaxation in the rules was granted to producer companies because their members, often small farmers and rural producers, face significant challenges due to dematerialisation.

“Many of them lack the financial knowledge, access to technology and resources to meet complex regulatory requirements. These companies are primarily concerned with the welfare of their members and are engaged in small-scale local operations, which is why dematerialisation was not implemented earlier,” she said.

Chandwani said the government now aims to support the gradual transition of these organisations towards compliance by ensuring they can modernise without feeling overwhelmed, allowing them to focus on their core mission of member welfare and rural development.

Vishal Gehrana, principal partner of Karanjawala & Co, said the amendment takes into account the particular challenges these companies often face in the rural and agriculture sectors, where resources and infrastructure may be limited.

He added that it strikes the necessary balance between maintaining regulatory standards and providing the necessary support to enable such companies to thrive.

“By granting this additional time, the amendment not only encourages compliance but also strengthens the sense of agency among manufacturing companies, enabling them to adapt and thrive in an increasingly digital economy,” Gehrana added.