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 need to dematerialise their shares

• 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 that fall within its threshold must:

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

2. Issue all future shares only in demat form

So if you're asking yourself "Do I need to Dematerialise my company's shares even if it is private", the answer is simple. Does it fall within either of these criteria?

1. Has a turnover in the previous assessment year of over ₹40 crore

2. Has a paid up capital of ₹4 crore

If yes, then you need to dematerialise your company's shares.

And what about the deadline to dematerialise shares in India as per Rule 9B?
The MCA has set the compliance deadline as June 30, 2025 (extended from September 30, 2024).

But do note that our depositories are currently facing a massive backlog since thousands of companies are rushing to get their shares dematerialised. So, we do expect this deadline to further extend.

But that's not all. For companies who have raised through an AIF, Category I, II or III, they have to dematerialise their shares too and here's why.

SEBI’s Dematerialisation Guidelines for AIF Investments

In addition to MCA’s rules, SEBI has set separate dematerialisation requirements for Alternate Investment Funds (AIF):

• From July 1, 2025: All new investments by AIFs must be made only in dematerialised form.

• For earlier investments (before July 1, 2025):

  • These are generally exempt unless:

    1. The company is already covered under MCA’s Rule 9B, or

    2. The AIF (alone or with other SEBI-registered entities) has control over the company.

For AIFs, dematerialisation must be done by October 31, 2025 (extended from the earlier deadline of January 30, 2025).

Now, this implies that companies that have issued shares to these AIFs need to get their shares dematerialised, without which, the AIFs can't do it. And if you are planning to raise from AIFs, you need to have your shares digitised before they can invest in your company.

However, some companies are exempted from dematerialising their shares.

Which private companies are exempt from Dematerialisation?

Not every company is required to dematerialise their shares as per MCA's Rule 9B as long as you fall within this criteria.

1. Small Private Companies: Small private companies are defined as those companies with

   • Paid-up capital below ₹4 crore (AND not falling into excluded categories), and

   • Turnover below ₹40 crore for the immediately preceding financial year

   • Important Note: Some small companies still need to comply with Rule 9B and need to mandatorily dematerialise their shares if they are

     • NBFCs registered with the RBI

     • Holding companies

     • Subsidiary companies

     • Section 8 companies (non-profit entities)

     • Companies formed under a special Act

     • Indian subsidiaries of foreign companies

2. Government Companies

3. Wholly-owned subsidiaries of public companies (these fall under Rule 9A instead)
   
   

What are the Dematerialisation requirements as per MCA's Rule 9B?

All companies that come under MCA Rule 9B's mandatory dematerialisation threshold should follow these requirements compulsorily.

1. All New Share issuances should be done 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. This has to be done before any
   
   

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

   • Buy back of shares

   
   The company must also ensure that all promoters, directors, and key managerial personnel already hold their securities in demat form. If not, they are not eligible for new issuances or buybacks.
   
   

2. Shares should be Dematerialised before transfers and subscriptions

   • Shareholders must dematerialise their holdings before transferring them.

   • New investors subscribing through private placement, rights issue, or bonus shares must ensure that these securities are already dematerialised.
     
     

How to Dematerialise Shares by Private Companies in India?

Dematerialisation may seem overwhelming if you’re new to the process. 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)

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.

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.

What does an RTA do?

• Verification of dematerialisation requests from depository participants

• Processing and forwarding requests to depositories

• Facilitating ISIN applications and documentation

• Managing tripartite agreements with depositories

• Coordinating with shareholders throughout the process

• Maintaining electronic records and regulatory compliance

• Handling ongoing corporate actions in electronic format

How to appoint an RTA?

• 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 ISIN required?

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

What are the 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. Create a Demat Account

The company needs to open a Demat account with a Depository Participant (DP). Promoters, directors, and all shareholders must open demat accounts through their depository participant to complete the conversion process.

Why is a Demat account necessary?

Without a demat account, physical shares cannot be converted into electronic format.

How to open a DEMAT account in India:

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 in India:

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.

How much does it cost for Dematerialisation of shares?

The cost typically ranges from ₹50,000 to ₹2,00,000 depending on company size and complexity.

Key charges include:

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

How Incentiv can help in Dematerialisation for Private Companies.

At Incentiv, we automate the entire dematerialisation processes, ensure compliance, and eliminate complexity with minimal input from your team.

1. Complete Dematerialisation Management

We manage the entire dematerialisation setup 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.

Frequently Asked Questions:

Q1: How much does it cost to dematerialise shares in India?

A: Total cost ranges ₹50,000-₹2,00,000 including ISIN fee (₹15,000-₹25,000), RTA charges (₹20,000-₹50,000), demat account setup (₹500-₹2,000), dematerialisation per certificate (₹150-₹400), and professional fees (₹25,000-₹75,000).

Q2: Do I need to dematerialise shares if my company is small?

A: Small companies (≤₹4 crore capital, ≤₹40 crore turnover) are exempt UNLESS they're holding/subsidiary companies, have AIF investments, or are NBFC/Section 8 companies.

Q3: What happens if I miss the June 30, 2025 deadline?

A: ₹10,000 penalty plus ₹1,000/day (max ₹2,00,000), officers face ₹50,000 fines, no new share issuances/buybacks/bonus shares allowed, physical shares become non-transferable.

Q4: What if shareholders have lost their physical share certificates?

A: File police complaint, publish newspaper notice, obtain indemnity bond, get court affidavit, then apply for duplicate certificates before dematerialisation. Process adds 30-45 days.

Q5: Can I dematerialise shares if there's a dispute over ownership?

A: No, resolve ownership disputes first through arbitration/court orders. Depositories won't accept disputed certificates. Get clear title before starting dematerialisation.

Q6: What happens to ESOP shares during dematerialisation?

A: Unvested ESOPs remain in company's demat account, vested but unexercised options need separate demat accounts for employees, exercised shares follow normal dematerialisation process.

Q7: How to handle fractional shares during dematerialisation?

A: Fractional shares cannot be dematerialised. Consolidate through buyback/transfer to create whole shares, or cash out fractions before dematerialisation starts.

Q8: What if a shareholder dies during the dematerialisation process?

A: Legal heirs must complete succession/probate, update shareholding records, then dematerialise in heir's name. Original physical certificates remain valid until succession is complete.

Q9: Can NRI shareholders dematerialise without visiting India?

A: Yes, through NRI demat accounts with authorized dealers. Requires additional FEMA compliance documents, PIS permissions, and may take 60-90 days longer than resident accounts.

Q10: What if the company declares dividends/bonus during dematerialisation?

A: Corporate actions are frozen during dematerialisation process. Complete dematerialisation first, then process pending corporate actions through demat accounts only.

Q11: What happens if a company becomes a small company again after dematerialisation of shares? Will it have to reverse it?

A: No, companies do not need to reverse dematerialisation if they become small again. Once shares are dematerialised, they can remain in electronic form regardless of the company's subsequent size classification. The small company exemption (≤₹4 crore capital, ≤₹40 crore turnover) only means they are not required to dematerialise - it's not a prohibition against staying dematerialised.

Q12: Why was my DRF (Dematerialisation Request Form) rejected?

A: Common rejection reasons include signature mismatch with registrar records, incorrect share numbers between certificate and DRF, name spelling differences, fake/duplicate certificates, missing or incorrect ISIN, stop transfers due to court orders/liens, incomplete KYC documents, and certificate damage/mutilation. Check rejection letter for specific reason and resubmit with corrections.

Q13: Can foreign shareholders dematerialise shares in Indian private companies?

A: Yes, but foreign nationals and corporates must open specialized demat accounts through authorized DPs with additional FEMA compliance. Required documents include PAN card, FEMA approvals, FDI compliance certificates, and enhanced KYC. Process takes 60-90 days due to regulatory checks. All foreign holdings must be dematerialised by June 30, 2025.