Note on Pledging of Demat Securities of an Unlisted Private Limited Company

Introduction

Any securities held in the Demat form can be pledged with the lender if the lender accepts the same. 

Few points to be noted before pledging the securities:

-        Both the lender and the borrower (Pledgee and the Pledgor) must have a demat account, either with the same DP or with different DP.

-          The pledge request form is to be given to the DP for pledging the securities.

-       The securities on being pledged gets blocked in the demat account and can not be used for any further transactions. However the securities still remain in the pledgor’s account.

-          Even when the securities are pledged the pledgor would still receive the corporate benefits.

-          In order to unpledge the securities the unpledge request form has to be given to the DP.

-         If the pledgee wants to transfer or sell the securities for realizing the loan amount, then it can do so only after intimating the pledgor.

-      On repayment of the loan, the pledge is to be released in the DP account and the securities pledged available for further transactions.

Companies Act implications:

-          When the banks insist for the transfer of shares to their name then Form 22 B is to be filed with the ROC on receiving the declaration from the parties and the members register has to be updated accordingly as per Section 187 C of the Companies Act 1956.

o        Form 22 B is filed to allow the pledgee to be the beneficial owner of the securities. 

-      The Board of Director’s approval either through circulation or through board meeting is required for this purpose.

-         Form 8 need not be filed with the ROC as a charge that is created other wise than by pledge is exempted and Section 125(4) of the Companies Act 1956 does not mandate the company to file the charge with the ROC within 30 days.

Tax planning is legitimate if it is within the framework of the law

A scheme of arrangement u/s 391 to 394 of the Companies Act was entered into which provided that five private limited companies would be merged with Unichem Laboratories. Pursuant to the Scheme, (a) the entire undertaking of the transferor companies would stand vested with the transferee, (b) The shares held by the transferor companies in the transferee company would be cancelled& (c) shares of the transferee company would be issued to the shareholders of the transferor companies. The scheme was challenged by a shareholder on the ground that it was propounded to avoid capital gains tax that would have arisen if the transferor companies would have directly transferred their shares to the promoters and that it was a “colourable device to evade tax”.Reliance was placed on McDowell 154 ITR 148 (SC), Wood Polymer 47 CC 597 (Guj) & Groupe Industrial Marcel Dassault (AAR). HELD by the High Court rejecting the objection:

Please follow the below case for the details of the case:

http://itatonline.org/archives/index.php/in-re-avm-capital-services-private-limited-bombay-high-court-tax-planning-is-legitimate-if-it-is-within-the-framework-of-the-law