DEMATERIALIZATION OF SHARES FOR PRIVATE COMPANIES AND THEIR EXTENDED DEADLINE

RAHUL Y – FINAL YEAR OF B.C.A LLB (HONS)

THE TAMIL NADU DR AMBEDKAR LAW UNIVERSITY

ABSTRACT

Keywords: Dematerialization, Private Companies, Rule 9B, Compliance Deadline

Dematerialization of securities is a significant reform in India’s corporate regulatory landscape, aiming to enhance transparency, reduce fraud, and streamline securities transactions. Traditionally applicable only to listed companies, the requirement has now been extended to certain private companies through Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014. This mandates that private companies, other than small companies, must issue and hold securities only in dematerialized form.

The relevance of dematerialization lies in its potential to digitize records, eliminate forgery-prone physical certificates, and ensure better compliance with statutory and financial reporting requirements. To facilitate a smooth transition, the Ministry of Corporate Affairs (MCA) has provided an extended deadline private companies that cease to be small companies as of 31st March 2023 are required to comply with demat provisions by 30th September 2024, giving them 18 months from the end of the financial year.

This legal development also clarifies that private companies which are subsidiaries of public companies fall under Rule 9A, being treated as public companies for compliance purposes, despite retaining their private status in structure. The move signifies a broader regulatory shift toward digitization and governance uniformity, placing private companies under similar scrutiny as their listed counterparts. This abstract sets the context for a detailed examination of the dematerialization process, its benefits, challenges, legal framework, and long-term implications for private corporate governance in India.

INTRODUCTION

In recent years, India’s corporate sector has witnessed reforms aimed at improving transparency, digitalization, and compliance standards across the board. One of the most significant steps in this direction is the dematerialization of shares, which refers to the conversion of physical share certificates into electronic format, maintained through demat accounts with depository participants. Initially applicable only to listed companies, the ambit of dematerialization has now been expanded to include private companies, signaling a shift toward greater formalization and accountability in the private sector.

Under the Companies (Prospectus and Allotment of Securities) Rules, 2014, the Ministry of Corporate Affairs introduced Rule 9B, making it mandatory for private companies, other than small companies, to issue and hold securities only in dematerialized form. This change aligns private companies with the governance and compliance practices followed by public and listed entities. The regulation aims to eliminate the risks associated with physical certificates such as loss, forgery, and delays in transfer while enabling smoother, more secure, and transparent transactions.

To ease the compliance burden, especially for smaller businesses transitioning to this system, the MCA has provided an extended timeline. Companies that are not classified as small companies as of 31st March 2023 have until 30th September 2024 to comply, offering a window of 18 months to adapt and meet the requirements. This includes obtaining ISINs, enabling shareholders to open demat accounts, and filing Form PAS-6 on a half-yearly basis. Interestingly, private companies that are subsidiaries of public companies do not fall under Rule 9B, but under Rule 9A, owing to the deeming fiction under Section 2(71) of the Companies Act, 2013. These companies are legally treated as public companies for the purposes of compliance, despite maintaining private company characteristics in their articles.

UNDERSTANDING THE PROCESS OF DEMATERIALIZATION

Dematerialization, in the context of the corporate sector, refers to the process of converting the physical share certificate into an electronic form. This system replaces the traditional paper based holding with the digital records maintained though a depository system. It ensures enhanced security, transparency, and efficiency in the handling of securities.

In India, the two main depositories National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are responsible for maintaining ownership records of dematerialized securities. Although dematerialization was initially mandatory only for listed companies, regulatory changes now extend its scope to certain categories of unlisted private companies under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Small companies and government companies are exempted from the requirements of Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Accordingly, they are not mandatorily required to dematerialise their securities. This shift signals the government’s push for greater formalization and regulatory oversight in the private company ecosystem.

PROCESS OF DEMATERIALIZATION OF PRIVATE COMPANIES

First in order to convert a physical share certificate into an electronic form, the Company’s Article of Association must reserve the clause allowing the process of dematerialization. If no clause is present, then the company needs to pass a special resolution in a General meeting to amend the respective AOA as per section 14 of the Companies act, 2013. Now the Company can dematerialize their shares.

As per section 29(2) of the Companies Act 2013, after amending the AOA, the company must approach the depository (NSDL or CDSL) to declare which securities can be dematerialized. The Company and the depository should sign an agreement regarding the eligible securities. If the securities are issued by the State or Central Government, then the process of dematerialization is not required. In case, the company has appointed an Registrar / Agent for transferring or issuing shares who has SEBI registration, then the depository also enters into an tripartite agreement with the company and the Registrar / Agent.

Now the shareholders who want to dematerialize their shares, must surrender their physical share certificates to the Company. The Company then informs the depository and they cancel these physical certificates, replacing the physical ownership with the depository as the registered owner in company records. This is the actual dematerialisation of shares as per Sub-section (2) of 6 of the Depositories Act, 1996. The depository must have systems as per Regulation 30 of SEBI (Depositories and Participants) Regulations to coordinate daily with the company and its agents or participants to reconcile the ownership records of securities electronically. This ensures records are accurate and up-to-date. Shareholders must open a Demat Account with a Depository Participant (DP), which acts as an intermediary between the investor and the depository. Once shares are converted, they are credited to the shareholder’s Demat Account, simplifying ownership tracking and transactions.

To facilitate the dematerialisation of securities, every private company except small company and government company is required to follow the below mentioned procedure:

A company has to approach a SEBI registered Registrar to an Issue and Share Transfer Agent (RTA). The RTA will ask for the required documents of the company. The Company needs to enter into a tri-partite agreement between the Company, Registrar and the CDSL/NSDL or both.
Thereafter, the company is required to make necessary applications to a depository through RTA for securing International Security Identification Number (ISIN) for each type of security and shall inform all its existing security holders about the ISIN and the facility for dematerialisation. Companies are required to submit Form PAS-6 to the Registrar within sixty days from the conclusion of each half year duly certified by a Company Secretary in Practice or Chartered Accountant in Practice.
Further, the company shall immediately bring to the notice of the depositories any difference observed in its issued capital and the capital held in dematerialised form.
Payment of Annual fees to the R&T Agent
In case, the company issues any further type of securities, then it has to approach R&T Agent again for allotment of ISIN.
Also, the company has to ensure that the entire holding of promoters, directors and KMP are in the dematerialised form before making any further offer, buy back etc.

The list of documents that are generally required for facilitating dematerialisation of securities i.e. applying for ISIN by private companies are as follows:

Certified true copies of Memorandum & Articles of Association along with Certificate of Incorporation
Certified true copy of Board Resolution mentioning name of signatories who are authorized by Board to execute documents and list of Authorised Signatories along with specimen signature
Certified true copy of Audited annual report for the last financial year
Net worth Certificate as per audited annual report for the last financial year (Format)
Confirmation letter from Registrar & Transfer Agent (R&T Agent) (Format)
Undertaking from Company (Format)
Tripartite Agreement between Issuer, R&T Agent and NSDL/CDSL (3 copies with franking)
Other Depository specific documents may be required.

EXTENDED DEADLINE AND MCA COMPLIANCE REQUIREMENTS

The Ministry of Corporate Affairs (MCA), through the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (effective from October 27, 2023), introduced Rule 9B to mandate dematerialization of securities by private companies that are not small companies. This is a landmark move aimed at enhancing transparency, curbing benami holdings, and streamlining regulatory oversight even for unlisted entities.

According to Rule 9B(2), any private company that was not classified as a small company as on the last day of the financial year ending on or after March 31, 2023, must comply with the dematerialization mandate. A “small company” is defined under Section 2(85) of the Companies Act, 2013, which specifies certain financial thresholds: paid-up capital not exceeding ₹4 crore and turnover not exceeding ₹40 crore. Thus, private companies that cross either limit (as per audited financial statements for FY 2022–23) are required to dematerialize their securities within 18 months, setting the effective compliance deadline at September 30, 2024.

Now, the affected companies must issue all new securities only in dematerialized form [Rule 9B(1)(a)]; Facilitate dematerialization of all existing securities [Rule 9B(1)(b)]; Ensure promoters, directors, and key managerial personnel hold securities in demat form before making offers such as bonus shares, rights issue, or buybacks [Rule 9B(3)].

While Rule 9B does not independently prescribe penalties, failure to comply with this requirement may be treated as a violation of the Companies Act, 2013, attracting penalties under Section 450, which may include fines up to ₹10,000 and ₹1,000 per day for continuing default.

Companies must act swiftly to ensure compliance within the timeline, as delays can affect future fundraising, restructuring, or shareholder exits. Early adoption also allows smoother integration with depository systems and avoids last-minute complications or penal consequences. This transition marks a strategic shift toward formalizing private equity holdings and aligns with the government’s broader vision of increasing corporate governance in unlisted space.

LEGAL AND REGULATORY IMPLICATION

The legal framework for the dematerialization of shares is primarily governed by Section 29 of the Companies Act, 2013 and the Companies (Prospectus and Allotment of Securities) Rules, 2014. Section 29(1) mandates that: (a) Companies making a public offer must issue securities only in dematerialized form. (b) Other prescribed classes of companies must follow the same, as per rules notified by the central government. Further, Section 29(1A) (inserted via the Companies (Amendment) Act, 2019) extends this requirement to certain unlisted companies, making it legally binding for them to hold and transfer securities only in demat form as per the Depositories Act, 1996.

Rule 9A: Applies to unlisted public companies, requiring them to dematerialize existing and new securities. Rule 9B: Applies to private companies, but only those not classified as small companies as of March 31, 2023. These companies must comply within 18 months, by September 30, 2024. Importantly, a private company that is a subsidiary of a public company is considered a deemed public company under Section 2(71). Such companies are governed by Rule 9A, not Rule 9B. The MCA’s demat mandate aims to improve transparency, curb opaque ownership, and align unlisted entities with the digitized securities ecosystem, strengthening India’s corporate governance framework.

CONCLUSION

The introduction of mandatory dematerialization of securities for private companies marks a significant milestone in India’s journey toward corporate transparency and governance reform. Traditionally, private companies have operated with minimal regulatory oversight when it comes to shareholding patterns and transfer of securities. However, with the extension of demat provisions under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the regulatory framework now seeks to bring private companies in line with public companies on matters concerning the integrity and traceability of securities transactions.

The key takeaway is the phased implementation of dematerialization for private companies, particularly those not classified as small companies as of March 31, 2023. From a legal standpoint, the move is backed by Section 29 of the Companies Act, 2013 and the corresponding Rules 9A and 9B. Companies that fail to comply within the prescribed timeline may face regulatory scrutiny and may be restricted from raising capital or transferring shares, adversely impacting their operations.

Crucially, this transformation is not merely a compliance requirement; it represents a cultural shift in how private businesses manage their corporate records. As India aspires to become a $5 trillion economy, such reforms align with the broader vision of digital governance and a more robust financial ecosystem.

In conclusion, dematerialization is not only a regulatory necessity but a strategic advantage. Private companies should treat this extended deadline as an opportunity to align with best practices, enhance investor trust, and future-proof their governance structures in an increasingly digital economy.

REFERENCES

Companies Act, 2013, Section 29 – Public offer of securities to be in dematerialised form (including sub-sections (1), (1A), and (2)).
Companies Act, 2013, Sections 2(71) & 2(85) – Definitions of Public Company and Small Company.
Companies (Prospectus and Allotment of Securities) Rules, 2014:
3.1 Rule 9A – Applicable to unlisted public companies.
3.2 Rule 9B – Applicable to private companies (introduced via G.S.R. 802(E), dated 27 October 2023).
Notification G.S.R. 125(E), Ministry of Corporate Affairs, dated 12 February 2025 – Extended the compliance deadline under Rule 9B to 30 June 2025.
LawGratis. Section 29 of the Companies Act, 2013 – Public Offer and Dematerialisation Mandate. https://www.lawgratis.com/blog-detail/section-29-of-the-companies-act-2013
Dematerialisation of Securities of Unlisted Companies – Regulatory Framework and Practical Insights, Chartered Secretary Journal, April 2024. https://www.icsi.edu/media/webmodules/CSJ/April_24/20.pdf
Ministry of Corporate Affairs. Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 – Notification dated 27 October 2023. https://www.taxtmi.com/highlights?id=85774
https://www.irccl.in/post/mca-s-directive-for-dematerialization-of-securities-for-private-companies
IndiaFilings. Mandatory Dematerialization for Private Companies – Deadline Extended to June 30, 2025. https://www.indiafilings.com/learn/mandatory-dematerialization-for-private-companies-extended-to-june-30-2025