Dematerialization’s Impact on Secondary Share Transfers - Rule 9B

In 2026, the days of of physical share certificates in Indian private companies (non-small) seems like it is closer to an end. Probably not overnight, or maybe not by the end of this year. But as per Rule 9B, it seems like India is heading towards a day where private shares will also be completely digital.

The Ministry of Corporate Affairs (MCA), via the introduction of Rule 9B in the PAS Rules, has fundamentally altered the mechanics of secondary transactions.

As per the rule, If your private company is not a "Small Company," you cannot legally transfer shares to a third party unless those shares are first dematerialized. The buyer's name will no longer be updated via physical SH-4 forms but rather via a Depository Participant (DP).

Which Companies does the MCA Demat Mandate Apply to?

The demat mandate applies to all private companies that are not classified as "Small Companies" or "Government Companies." As of 2026, a company is exempt (Small Company) only if its paid-up capital is < ₹10 crore AND its turnover is < ₹100 crore.

• Holding & Subsidiary Rule: If your private company is a subsidiary or a holding company of another entity, you lose the "Small Company" exemption regardless of your turnover. You must dematerialize.
• The Deadline: For most companies, the compliance window closed on June 30, 2025. Any secondary transfer occurring today in these companies must follow the electronic route.

How Does Dematerialization Affect the Secondary Sale Process?

Previously, a secondary sale involved a physical Share Transfer Deed (Form SH-4) and the surrender of a physical certificate. In the demat regime, the process is decentralized and follows these four critical steps:

Pre-Transfer: The ISIN Requirement

Before any shareholder can sell, the company must obtain an ISIN (International Securities Identification Number) for each class of shares (Equity, CCPS, etc.) from NSDL or CDSL.

• Impact: If the company hasn't secured an ISIN, the shareholder is "locked in" and cannot initiate a sale.
  

The Demat Request (DRF)

The selling shareholder must open a Demat Account with a DP (like Zerodha, ICICI, or HDFC) and submit a Demat Request Form (DRF) along with their physical certificates for "cancellation" and digital credit.

Execution of the Transfer

Instead of mailing an SH-4 to the company secretary, the transfer is executed via a Delivery Instruction Slip (DIS) or an electronic instruction through the DP. The shares move from the seller's demat account to the buyer's demat account instantly.

Post-Transfer Reporting (PAS-6)

The company must file Form PAS-6 half-yearly to reconcile the total share capital. Any mismatch between the company's records and the depository's records can trigger MCA audits and heavy penalties.

Strategic Impact on ROFR and Transfer Restrictions

A common concern for founders is: "If shares are digital, can someone bypass my ROFR (Right of First Refusal)?"

The answer is No. Even in demat form, the Articles of Association (AoA) remains the supreme document.

• Electronic Block: Companies must instruct their RTA (Registrar and Transfer Agent) to keep the shares in a "lock-in" or "restricted" status.
• Compliance: The depository system for private companies is designed to honor the restrictive covenants of the SHA and AoA. No transfer is "final" until the company acknowledges the compliance of transfer restrictions.

Frequently Asked Questions (FAQ)

Can I still transfer shares physically?

Only if your company qualifies as a Small Company (Capital < ₹10cr and Turnover < ₹100cr) and is not a subsidiary/holding company. For all other private companies, physical transfers are no longer legally recognized by the MCA.

What happens if a shareholder refuses to demat their shares?

The shareholder can continue to hold the physical certificates indefinitely, but they cannot sell or transfer them. Furthermore, they cannot participate in any Rights Issue, Bonus Issue, or Buyback until they dematerialize their holding.

What are the penalties for non-compliance?

Non-compliant companies face a penalty of ₹10,000 plus ₹1,000 per day of continuing default (up to ₹2 lakh). Directors in default face similar fines (up to ₹50,000). More importantly, the freeze on liquidity is the biggest practical penalty for investors.