What is Dematerialisation of Shares?

Dematerialisation is the process of converting physical share certificates into electronic format, stored securely in a demat account that is managed by depositories such as National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

These depositories work with Depository Participants (DPs) i.e., banks or brokers like HDFC Securities, ICICI Securities, to facilitate the seamless management of these dematerialised securities including buying/selling or transfer of these securities.

Which companies are supposed to Dematerialise their shares?

Until recently, dematerialisation of shares was not compulsory for private companies in India. It was only required for:

• Listed (public) companies

• Certain large private companies

As a result, most private companies continued to use physical share certificates, a system that carried risks such as loss, theft, damage, or forgery.

With the introduction of Rule 9B by the Ministry of Corporate Affairs (MCA), this has changed. Now, all private companies must:

• Convert existing physical shares into electronic (demat) form, and

• Issue all future shares only in demat form

The MCA has set the compliance deadline as June 30, 2025 (extended from September 30, 2024).

This marks a major shift in corporate governance for private companies in India, aligning them with the transparency and security standards long applied to public companies.

What is MCA's Rule 9B?

Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 makes it mandatory for most private companies to issue and manage their shares only in dematerialised form (electronic form).

Who does this apply to?

• All private companies, except small private companies.

• A small company means one with paid-up capital below ₹4 crore and turnover below ₹40 crore.

Key requirements as per MCA's Rule 9B

• Issue only in demat form

  Companies must issue new securities only in dematerialised form and enable conversion of all existing securities into demat, as per the Depositories Act, 1996.

• Timeline to comply

  If a private company crosses the small-company threshold after March 31, 2023, it has 18 months from the end of that financial year to comply.

Before new offers

Whenever such a company plans to:

Issue new shares (private placement, rights issue, bonus issue, etc.)

Buy back shares

• → It must ensure that all promoters, directors, and key managerial personnel already hold their securities in demat form.

• Transfer and subscription

• Shareholders must dematerialise their holdings before transferring them.

• New investors subscribing through private placement, rights issue, or bonus shares must hold them only in demat form.

• Linked rules

• The compliance framework under Rule 9A (for listed/public companies) also applies here in a similar manner.

• Exemption

• This rule does not apply to government companies.
  
  
  

Who does Rule 9B apply to?

Applicability of Rule 9B

Rule 9B applies to all private companies that exceed the thresholds of a small company, as defined under the Companies Act:

If a company surpasses these thresholds as of March 31, 2023, it must comply with Rule 9B by September 30, 2024. Companies crossing these thresholds after this date must comply within 18 months of the fiscal year-end. Subsidiaries of Public Companies must also comply under Rule 9A, which applies to unlisted public companies.

Who is Exempt from Rule 9B (DEMAT)?

• Small Companies: Meet capital and turnover thresholds above.

• Government Companies: Fully exempt.

• Section 8 Companies Limited by Guarantee: Not covered, but Section 8 companies with share capital are required to comply.

• Nidhi Companies: Exempt from Rule 9B as they are mandatorily registered as public companies.

What are the steps for Dematerialisation in Private Companies

Dematerialisation may seem overwhelming if you’re new to the process, but it’s a crucial step for compliance, efficiency, and transparency in managing your startup's shares. This guide will take you through the process, step by step, while explaining the “why” behind each action.

1. Amend the Articles of Association (AoA)

The Articles of Association (AoA) is the internal rulebook that governs your company’s operations. Before you begin dematerialising shares, your AoA must include a provision that explicitly allows shareholders to hold and issue shares in dematerialised form.

Why is this necessary?
If your AoA does not include this clause, the company cannot legally proceed with dematerialisation.

Steps to amend the AoA:

1. Convene a Board Meeting:

   • Pass a board resolution approving the amendment.

   • Draft the proposed changes to include a clause for dematerialised shares.

2. Legal Review:

   • Share the updated draft with legal advisors to ensure compliance with Rule 9B.

3. Schedule an Extraordinary General Meeting (EGM):

   • Notify shareholders and obtain their approval for the amendment through a special resolution (75% approval required).

4. File Form MGT-14:

   • Submit Form MGT-14 to the Registrar of Companies (RoC) within 30 days of the resolution being passed.

   • Attach the amended AoA, board resolution, and shareholder approval details.

2. Appoint a Registrar and Transfer Agent (RTA)

A Registrar and Transfer Agent (RTA) is a SEBI-registered intermediary that facilitates the dematerialisation process. While appointing an RTA is not mandatory, they simplify coordination between the company, the depositories (NSDL/CDSL), and shareholders.

Why is this helpful?
RTAs manage shareholder records, verify dematerialisation requests, and streamline communication between all parties.

What to do:

• Identify and appoint a SEBI-registered RTA to handle the dematerialisation process.

• If you choose not to hire an RTA, the company will need to manage the coordination internally, which may require additional resources.

3. Obtain an International Securities Identification Number (ISIN)

An ISIN is a 12-digit unique code that identifies each type or class of share issued by the company (e.g., equity shares, preference shares). It’s essential for dematerialising shares.

Why is this required?
An ISIN acts as the identifier for digital shares in the demat system. Without it, shares cannot be converted to electronic form.

Steps to apply for an ISIN:

1. Appoint an RTA or Work Directly with Depositories:

   • Coordinate with NSDL or CDSL, either directly or via the appointed RTA.

2. Prepare and Submit Required Documents:

   • Certificate of Incorporation: Proof of company registration.

   • Board Resolution: Authorizing the ISIN application.

   • Share Capital Structure: Details of authorised, issued, and paid-up share capital.

   • List of Shareholders: Names and holdings of existing shareholders.

3. ISIN Approval:

   • The depository verifies the submitted documents and assigns an ISIN.

   • Share the ISIN details with all stakeholders.

   • Important: A separate ISIN is required for each class of security (e.g., equity, preference shares).

4. Facilitate Demat Account Setup for Stakeholders

A demat account is an electronic account where shareholders hold their dematerialised shares. Promoters, directors, and all shareholders must open demat accounts to complete the conversion process.

Why is this necessary?
Without a demat account, physical shares cannot be converted into electronic format.

Steps to open a demat account:

1. Choose a Depository Participant (DP):

   • Shareholders must select a DP affiliated with either NSDL or CDSL. Most banks and brokerage firms act as DPs.

2. Submit Required Documents:
   Shareholders need to provide:

   • PAN Card (mandatory for tax compliance).

   • Address Proof: Aadhaar, passport, or utility bills.

   • Bank Details: For linking the demat account.

3. KYC Verification:

   • Complete the Know Your Customer (KYC) process with the DP.

4. Activate the Demat Account:

   • Once verified, the demat account becomes active, enabling shareholders to hold electronic shares.

5. Convert Physical Shares into Digital Form

The actual dematerialisation process involves converting physical share certificates into electronic form.

Documents required for dematerialisation:

1. Dematerialisation Request Form (DRF):

   • Shareholders must obtain a DRF from their DP. A separate DRF is required for each ISIN.

2. Original Share Certificates:

   • Attach the physical certificates to the DRF.

3. KYC Documents:

   • Self-attested copies of the PAN card and address proof (old and current).

Steps for dematerialisation:

1. Shareholders submit the DRF and physical share certificates to their DP.

2. The DP verifies the request and forwards it to the RTA for approval.

3. The RTA cross-checks the details and authenticates the certificates.

4. Once approved, the shares are:

   • Converted into electronic form.

   • Credited to the shareholder’s demat account.

5. Shareholders receive confirmation from their DP.

6. Ensure Compliance for Key Stakeholders

Key personnel such as promoters, directors, and Key Managerial Personnel (KMPs) must dematerialise their shares before the company can:

• Issue new securities.

• Conduct share buybacks.

• Offer bonus or rights shares.

What to do:

• Confirm that all key personnel have opened demat accounts.

• Ensure they submit their share certificates for dematerialisation well before the compliance deadline.

7. File Half-Yearly Compliance Reports (Form PAS-6)

After initiating the dematerialisation process, companies must file Form PAS-6 twice a year to report the status of dematerialised and physical shares.

Why is this important?
Filing PAS-6 ensures regulatory transparency and helps authorities monitor compliance under Rule 9B.

Deadlines for Form PAS-6:

• For April–September: File by November 29.

• For October–March: File by May 30.

Steps to file Form PAS-6:

1. Prepare details of:

   • Total share capital.

   • Number of shares held in physical and dematerialised form.

2. Get the form certified by a Company Secretary or Chartered Accountant in practice.

3. File Form PAS-6 through the MCA portal within the deadline.

Costs Involved in Dematerialisation

Note: Costs may vary depending on service providers and shareholder numbers.

How Incentiv can help in Dematerialisation for Private Companies.

At Tabulate, we simplify Rule 9B compliance so you can focus on your business. Our platform automates processes, ensures compliance, and eliminates complexity with minimal input from your team.

1. Complete Dematerialisation Management

We manage the entire dematerialisation process by partnering with trusted SEBI-registered RTAs to ensure a smooth, fast, and error-free transition.

What we handle for you:

• Document Preparation: Draft resolutions, notifications, and ISIN applications.

• Seamless Coordination: Liaise with shareholders, RTAs, and depositories (NSDL/CDSL).

• Shareholder Onboarding: Guide stakeholders through the demat account setup process.

• Process Tracking: Monitor progress and provide real-time updates on your Tabulate dashboard.

2. Fast and Digital Amendments

We make amending the Articles of Association (AoA) and obtaining approvals effortless:

• Digital Execution: Integrated e-signatures for quick approvals.

• Automated Templates: Pre-approved, compliance-ready formats for board and shareholder resolutions.

3. Effortless Compliance and Reporting

Stay ahead of deadlines with automated compliance tracking and reporting:

• Form PAS-6 Made Easy: Export half-yearly reports in the MCA-prescribed format directly from the platform.

• Digital Register of Members: Maintain a real-time, compliant Form SH-1.

• Automated Alerts: Never miss a filing deadline.

Why Choose Us?

• Quick Turnaround: Complete compliance in as little as 3–4 weeks.

• Transparency: Real-time updates on progress via your dashboard.

• Seamless Collaboration: Centralized coordination between stakeholders, RTAs, and filings.

• Expert Support: Compliance experts guide you every step of the way.