Dematerialisation of Shares

Table of Contents

Dematerialisation of Shares for Private Companies – Legal Support by Nd Salva

With the introduction of Rule 9B under the Companies Act, 2013, dematerialisation of shares is now mandatory for most private limited companies in India. This shift from physical to electronic shareholding is a critical compliance requirement—and an opportunity to modernise company operations.

At Nd Salva, we provide end-to-end legal and procedural support for the conversion of physical shares into electronic form, ensuring complete compliance with SEBI and MCA requirements through NSDL/CDSL frameworks.

What is Dematerialisation of Shares?

Dematerialisation is the process of converting physical share certificates into electronic form, which are held in a Demat account maintained through a Depository Participant (DP). This transformation improves security, transparency, and ease of handling securities.

In India, demat services are regulated under the Depositories Act, 1996. Two SEBI-registered depositories manage this process:

  • NSDL – National Securities Depository Limited

  • CDSL – Central Depository Services (India) Limited

Mandatory Dematerialisation – Rule 9B of the Companies Act, 2013

The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, introduced Rule 9B, which mandates that all private limited companies—except small and government companies—must convert physical shares into dematerialised form by September 30, 2024.

Key Provisions of Rule 9B:

  • Issuance of New Securities: Must only be in dematerialised form

  • Conversion of Existing Shares: All existing physical shares must be converted to Demat

  • Promoters/Directors: Shares held by key managerial personnel must be dematerialised before any new issuance

  • Transfer/Subscription: Allowed only in dematerialised form going forward

  • Compliance Timeline: Private companies that ceased being small companies after March 31, 2023, have 18 months to comply

Deadline: For most companies following a March 31 financial year-end, the final compliance date is September 30, 2024

Applicability of Dematerialisation

Applicable to:

  • All Public Companies

  • Private Limited Companies except those classified as small companies

  • Holding & Subsidiary Companies (regardless of size or turnover)

Exemptions for Small Companies

A small company is defined as:

  • Paid-up capital ≤ ₹4 crore

  • Turnover in the previous financial year ≤ ₹40 crore

However, holding or subsidiary companies do not qualify for exemption, even if they meet the above thresholds.

Benefits of Dematerialisation

  • Improved Security: Eliminates risks of theft, loss, or forgery of physical share certificates

  • Faster Transactions: Electronic format enables quicker share transfers and issuance

  • Cost Efficiency: Saves on printing, courier, and stamp duty on physical documents

  • Anywhere Access: Shareholders can monitor and manage holdings online

  • Automatic Corporate Actions: Dividends, bonuses, and splits are auto-updated in the Demat account

  • Pledge Facility: Demat shares can be pledged for loans, making access to credit easier

Dematerialisation Process for Private Companies

The dematerialisation of shares involves both corporate-level compliance and individual shareholder action. Here’s a step-by-step breakdown:

For Companies:

1. Amend the Articles of Association (AoA)

  • Ensure the AoA permits electronic shareholding and issuance in dematerialised form

  • Amend if necessary via special resolution

2. Appoint a SEBI-Registered Registrar and Transfer Agent (RTA)

  • Acts as the official intermediary with NSDL/CDSL

  • Handles validation and conversion of physical shares

3. Obtain ISIN (International Securities Identification Number)

  • Mandatory for every class of security issued

  • All future issuances or transfers will be tracked through this ISIN

4. Filing of PAS-6 (Half-Yearly Return)

  • Report status of shareholding in Demat form to MCA twice a year

For Shareholders:

1. Open a Demat Account

  • Shareholders must open a Demat account with a Depository Participant (DP)

  • Common DPs include banks, brokers, and financial institutions

2. Submit Demat Request Form (DRF)

  • Complete and submit DRF to the DP along with:

    • Original physical share certificate

    • KYC documents (PAN, address proof, etc.)

3. Verification & DRN Issuance

  • DP verifies the details and issues a Dematerialisation Request Number (DRN)

4. Forwarding to RTA & Approval

  • DP forwards request to the company’s RTA

  • RTA validates and approves the demat request

5. Credit to Demat Account

  • Upon approval, the shares are credited to the shareholder’s Demat account

  • Original physical certificates are destroyed to avoid duplication

Penalties for Non-Compliance with Dematerialisation

For Companies:

  • Barred from Issuing or Allotting Shares (including bonus shares and buybacks)

  • Fine up to ₹10,000 + ₹1,000 per day of continuing default (up to ₹2 lakh max)

For Company Officers:

  • Fine up to ₹50,000 for each officer in default

For Shareholders:

  • Ineligible to Transfer or Subscribe to shares unless dematerialised

Deadline Alert: All eligible private companies must comply by September 30, 2024 (or 18 months from the date they ceased to be small companies)

Why Choose Nd Salva for Dematerialisation Legal Support?

At Nd Salva, we offer holistic dematerialisation support, covering:

  • AoA Amendments
  • Appointment of SEBI-Registered RTA
  • ISIN Application Support
  • Liaison with NSDL/CDSL
  • Demat Compliance Advisory for Shareholders
  • Filing of PAS-6 and MCA Disclosures

Whether you’re a growing private limited company or a holding/subsidiary preparing for compliance, Nd Salva’s corporate law experts ensure your transition to electronic shareholding is efficient, secure, and fully compliant.

Ready to Convert Physical Shares to Demat?

Avoid penalties. Enable smooth transactions. Stay compliant.
Let Nd Salva handle your company’s dematerialisation process from start to finish.

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