Dematerialisation of Shares For Private Companies (Under Rule 9B)
India’s mandatory dematerialisation regime (Rule 9B) requires eligible companies to convert physical shares to electronic form (demat) to enhance transparency and reduce fraud. Convert physical shares to demat by June 30, 2025. Get expert help from Setindiabiz.
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What is the dematerialisation of shares?
Dematerialisation, or “Demat”, is simply the process of converting physical share certificates into electronic form, similar to how we moved from cash to digital banking. It became mandatory for private companies through an amendment to Section 29 of the Companies Act in 2019, which empowered the government to require unlisted companies to issue securities only in electronic form. This change was implemented through Rule 9B in October 2023, extending the requirement from public companies to private companies (except small ones) to reduce fraud, enhance transparency, and make share transfers more efficient.
| Private companies (other than small standalone companies) must complete the dematerialisation process by June 30, 2025 (extended due date), which involves appointing a registrar, connecting with a depository (NSDL or CDSL), obtaining an ISIN number, and facilitating the conversion of existing shares. For newly incorporated companies that don’t qualify as “small companies,” they must issue their initial shares directly in demat form after the compliance deadline, meaning they need to establish the necessary infrastructure before making their first allotment, rather than converting existing certificates |  |
Pricing for dematerialisation
End-to-end support
- Expert Consultation
- RTA Identification
- Documentation & Drafting
- Coordination with Depositories
- Assistance with Obtaining ISIN
- End-to-End Process
- Demat A/c not covered
- RTA, Depository Fee on Actual
Professional Fee
* The government fee, RTA Charges, & Depository Fee On Actual.
Legal Framework of Dematerialisation
The mandatory dematerialisation of securities in India is primarily anchored in Section 29 of the Companies Act 2013. Section 29(1) initially required only companies making public offers to issue securities in dematerialised form. However, the Companies (Amendment) Act 2019 introduced a critical change through Section 29(1A), effective from August 15, 2019, which empowered the Central Government to mandate that specified classes of unlisted companies must issue securities only in dematerialised form and facilitate dematerialisation of all their existing securities.
This mandate was implemented through amendments to the Companies (Prospectus and Allotment of Securities) Rules, 2014. Rule 9A, introduced on October 2, 2018, first required unlisted public companies to dematerialise their securities. Later, Rule 9B was introduced on October 27, 2023, extending this requirement to private companies (except small companies and government companies). Initially, Rule 9B set a compliance deadline of September 30, 2024 (18 months from the end of FY 2022-23). However, recognising implementation challenges, the Ministry of Corporate Affairs issued the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2025 on February 12, 2025, which extended the deadline to June 30, 2025, for private companies, Section 8 companies, and Nidhi companies. Producer companies received a longer extension until March 31, 2028.
Applicability of the Dematerialisation Rule
Rules 9A and 9B of the Companies (Prospectus and Allotment of Securities) Rules implement mandatory dematerialisation in phases: Rule 9A (2018) for unlisted public companies and Rule 9B, notified in October 2023, extended this requirement to private companies (except small companies and government companies), including subsidiaries, Nidhi companies, and Section 8 companies with share capital. The Ministry of Corporate Affairs has granted extensions for Rule 9B compliance, with the most recent amendment in February 2025 extending the deadline to June 30, 2025, for most entities, while producer companies have been given until March 31, 2028.
| No | Entity Type | Rule No | Notification Date | Last Date to Comply |
|---|---|---|---|---|
| 1 | Unlisted Public Companies | Rule 9A | 10-Sep-2018 | 02-Oct-2018 |
| 2 | Private Limited (Non-Small Company) | Rule 9B | 27-Oct-2023 | 30-Jun-2025* |
| 3 | Subsidiary of Private Limited | Rule 9B | 27-Oct-2023 | 30-Jun-2025* |
| 4 | Subsidiary of Foreign Company | Rule 9B | 27-Oct-2023 | 30-Jun-2025* |
| 5 | Section 8 Company (having capital) | Rule 9B | 27-Oct-2023 | 30-Jun-2025* |
| 6 | Nidhi Company | Rule 9B | 27-Oct-2023 | 30-Jun-2025* |
| 7 | Producer Company | Rule 9B | 27-Oct-2023 | 31-Mar-2028* |
| 8 | Small Company | NA | NA | Exempted |
| 9 | Government Companies | NA | NA | Exempted |
| 10 | Wholly Owned Subsidiaries (of Public Cos) | NA | NA | Exempted |
| * Extended deadline as per MCA notification dated February 12, 2025 | ||||
Definition of Small Company
A small company is exempt from the requirement of Rule 9B (dematerialisation). Therefore, it is essential to understand the meaning of a small company in some detail. A “small company” under Section 2(85) of the Companies Act is a private company with paid-up capital not exceeding ₹4 Crore AND annual turnover not exceeding ₹40 Crore. Notably, a company cannot qualify as “small” if it’s a holding company, subsidiary company, Section 8 company, or governed by any special Act, regardless of financial metrics. The definition of “small company” has been significantly expanded in recent years to reduce compliance burdens and promote ease of doing business for smaller entities:
| No | Criteria | Old Definition (2021 to 15 Sep 2022) |
New Definition Post-2022 Effective 15 Sep 2022 |
|---|---|---|---|
| 1 | Paid-up Capital Limit | Not exceeding ₹50 lakh | Not exceeding ₹4 Crores |
| 2 | Turnover Limit | Not exceeding ₹2 Crores | Not exceeding ₹40 Crores |
| 3 | Regulatory Amendment | Companies (Specification of Definition Details) Amendment Rules 2021 | Companies (Specification of Definition Details) Amendment Rules 2022 |
This 80-fold increase in the threshold limits (from ₹50 lakh to ₹4 Crores for capital and ₹2 Crores to ₹40 Crores for turnover) has significantly expanded the number of companies that can qualify for small company status and benefit from reduced regulatory requirements. However, remember that holding companies, subsidiaries, Section 8 companies, and companies governed by special Acts cannot qualify as small companies regardless of financial metrics.
Documents Required for Dematerialisation
Dematerialisation involves interaction between companies, shareholders, registrars and transfer agents (RTAs), and depositories. Proper documentation forms the basis for this transition from physical to electronic securities. Preparing and organising all necessary documents ensures compliance with regulatory requirements and facilitates a smooth conversion process with minimal delays or complications.
| Company Documents (Existing) | Documents to be Drafted |
|---|---|
| 1. Certificate of Incorporation | 1. DP Agreement with NSDL or CDSL |
| 2. Memorandum and Articles | 2. RTA Appointment Letter |
| 3. List of shareholders & their holdings | 3. RTA Service Agreement |
| 4. Board Resolution | 4. ISIN Application Forms |
| 5. Specimen Signatures of authorised Signatory | 5. Shareholder Notification Letter |
| 6. Sample Share Certificates | 6. Board Resolution |
| 7. Latest Annual Return filed with ROC | 7. Compliance Declaration |
| 8. PAN Card of the company | 8. Register of Dematerialised Securities |
| 9. Registered Office Proof (utility bill) | |
| 10. KYC Documents of directors/AR |
Step-by-Step Dematerialisation Process
The journey from physical share certificates to electronic holdings requires careful planning and execution. Dematerialisation involves multiple stakeholders, including the company, shareholders, depositories, and regulators. Setindiabiz serves as your expert navigator through this complex process, providing end-to-end support from initial assessment to final implementation. Our team handles the documentation, coordination, and compliance aspects, allowing you to focus on your core business while ensuring a smooth transition to the dematerialised environment.
Step 1: Initial Compliance Assessment
Before beginning the dematerialisation process, companies must determine whether they fall within the mandatory requirements. Setindiabiz thoroughly reviews your company structure, shareholding pattern, and corporate status to confirm the applicability of Rule 9A or 9B. We analyse whether your company qualifies for exemptions (such as the small company exemption) and establish a clear compliance timeline based on your situation. This critical first step prevents unnecessary procedures for exempt companies and ensures proper preparation for those who must comply.
Step 2: Board Meeting and Resolutions
Once we confirm that your company needs to dematerialise its securities, the next step is to obtain formal approval through board resolutions. Setindiabiz drafts comprehensive board resolutions that authorise the dematerialisation process, appoint authorised representatives to execute necessary documents, and approve the selection of service providers. Our expertly crafted resolutions ensure all legal requirements are met while giving management the necessary authority to proceed with implementation. We can also assist in preparing the meeting notice, agenda, and minutes to document these critical decisions properly.
Step 3: RTA Selection and Appointment
A Registrar and Transfer Agent (RTA) plays a crucial role in the dematerialisation process by acting as an intermediary between your company and the depository. Setindiabiz helps you choose an appropriate SEBI-registered RTA based on your company's size, location, and specific needs. We negotiate service terms, prepare the appointment documentation, and establish clear communication channels. The RTA will maintain your electronic register of members, process dematerialisation requests, and handle various corporate actions going forward. Our established relationships with leading RTAs ensure you receive quality service at competitive rates.
Step 4: Depository Connectivity
Establishing connectivity with a depository (NSDL or CDSL) is a fundamental requirement for dematerialisation. Setindiabiz facilitates this process by preparing all required documentation, coordinating with your selected depository, and ensuring proper verification and approval. The connectivity agreement outlines the terms of service, fees, and operational procedures. We manage the entire application process, address any queries from the depository, and follow up until successful connectivity is established. This critical infrastructure enables the electronic holding and transfer of your company's securities.
Step 5: ISIN Acquisition
Each class of securities requires a unique International Securities Identification Number (ISIN) for identification in the depository system. Setindiabiz prepares and submits ISIN applications for your equity shares, preference shares, debentures, or any other securities. We compile all supporting documentation, including certified copies of your company's constitutional documents, details of security features, and board resolutions. Our team follows up with the depository until ISINs are assigned and properly registered. These unique identifiers are essential for accurately tracking and transferring dematerialised securities.
Step 6: Shareholder Communication
Effective communication with shareholders is crucial for a smooth dematerialisation process. Setindiabiz develops comprehensive notification packages that inform shareholders about the mandatory dematerialisation, explain the conversion process, outline the benefits, and provide clear instructions. We can prepare FAQs, step-by-step guides, and contact information for assistance. For companies with a large shareholder base, we can help design a phased communication approach to manage the volume of dematerialisation requests efficiently. Clear communication reduces confusion and encourages timely action by shareholders.
Step 7: Processing dematerialisation Requests
As shareholders submit dematerialisation Request Forms (DRFs) through their Depository Participants, your company must efficiently verify and process these requests. Setindiabiz creates systems and procedures for tracking incoming requests, verifying share certificates against company records, and approving valid requests. We coordinate with your RTA to ensure timely processing, proper cancellation of physical certificates, and accurate crediting of electronic securities to shareholder demat accounts. Our structured approach minimises delays and errors, ensuring a positive experience for your shareholders.
Step 8: Compliance Verification and Reporting
Throughout the dematerialisation process, companies must maintain proper records and ensure compliance with regulatory requirements. Setindiabiz develops compliance tracking systems, prepares regular status reports, and conducts verification checks to identify any potential issues. We can generate shareholder progress reports showing the percentage of holdings converted to demat form, highlight any problematic cases requiring special attention and recommend follow-up actions. Our comprehensive approach ensures you maintain complete visibility into the progress of dematerialisation and can demonstrate compliance with regulators if required.
Step 9: Future Securities Transaction Protocol
After the compliance deadline, companies must ensure all future securities transactions conform to the dematerialised framework. Setindiabiz helps establish protocols for new share allotments, transfers, and corporate actions in the electronic environment. We create standardised forms for collecting shareholder demat account details, develop procedures for electronic credit of new securities, and update your record-keeping systems. These protocols ensure ongoing compliance with the dematerialisation mandate and prevent inadvertent issuance of physical securities, which would violate regulatory requirements.
Step 10: Final Compliance Certification
Once the dematerialisation process is substantially complete, documenting compliance is important for corporate records. Setindiabiz prepares a comprehensive compliance report detailing the actions taken, the current status of dematerialisation, and confirmation of adherence to regulatory requirements. This report serves as valuable documentation for board meetings, stakeholder communications, and potential regulatory inquiries. For companies requiring formal certification, we can assist in preparing declarations or obtaining third-party verification of compliance. This final step provides peace of mind that your company has successfully met its dematerialisation obligations.
Exemptions from Mandatory Dematerialisation
While the dematerialisation mandate broadly applies to unlisted public companies and many private companies, the regulatory framework does provide certain exemptions to reduce the compliance burden on specific entity types. These exemptions recognise that for some companies, the costs and complexities of dematerialisation may outweigh the benefits, particularly for smaller entities or those with specialised structures.
| Entities Exempt from Dematerialisation Requirements | |
|---|---|
| ✅ Small Private Companies |
|
| ✅ Government Companies | |
| ✅ Wholly Owned Subsidiaries of Public Companies | |
| ✅ Section 8 Companies Without Share Capital | |
| ✅ Companies Registered Under Special Acts | |
Consequences of Non-Compliance
Failing to comply with mandatory dematerialisation requirements can result in significant financial penalties for companies. The regulatory framework imposes a dual approach to enforcement: it creates functional limitations that effectively freeze securities transactions for non-compliant companies while also establishing statutory penalties to discourage non-compliance.
| Operational Restrictions | Statutory Penalties |
|---|---|
|
Basic Penalty Structure: U/s 450
Continuing Default Penalties
|
Penalties are typically imposed through formal adjudication proceedings conducted by the Registrar of Companies (ROC), which may involve hearings and evidence submission. In cases of willful or fraudulent non-compliance, other provisions of the Companies Act with more severe penalties might be invoked. Companies may have the option to compound the offence by paying specified fees and regularising compliance, though this does not eliminate the obligation to dematerialise.
Frequently Asked Questions
Mandatory dematerialisation refers to the legal requirement imposed by the Ministry of Corporate Affairs (MCA) for certain types of companies to issue securities only in electronic (dematerialised) form and facilitate the conversion of existing physical share certificates into electronic holdings credited to shareholders’ demat accounts.
The mandate originates from Section 29(1A) of the Companies Act 2013, which empowers the government to prescribe mandatory dematerialisation for unlisted companies. This power has been exercised through Rule 9A (for unlisted public companies) and Rule 9B (for private companies) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
All private companies must comply with Rule 9B except:
- Companies that qualify as “Small Companies” (paid-up capital ≤ ₹4 Cr AND turnover ≤ ₹40 Cr) that are not subsidiaries, holding companies, or Section 8 companies
- Government companies
- Producer companies (which have a later deadline of March 31, 2028)
As per Section 2(85) of the Companies Act 2013, a small company is a private company with the following:
- Paid-up share capital not exceeding ₹4 Crore, AND
- Turnover not exceeding ₹40 Crore
However, a company cannot be a small company if it is a holding company, a subsidiary company, a Section 8 company, or governed by any special Act.
No. Private companies that are subsidiaries of any other company (Indian or foreign) must follow Rule 9B regardless of their financial metrics. They cannot claim exemption as a “Small Company” even if they meet the financial thresholds.
The deadline for private companies covered under Rule 9B (that are not small companies, producer companies, or government companies) is June 30, 2025. This was extended from the original deadline of September 30, 2024.
Non-compliant companies cannot issue any further securities or conduct share buybacks. Shareholders holding physical certificates cannot transfer their shares or subscribe to new issues after the deadline. The company and its officers may also face penalties under Section 450 of the Companies Act 2013.
The company must:
- Appoint a SEBI-registered Registrar and Share Transfer Agent (RTA)
- Establish connectivity with a Depository (NSDL/CDSL)
- Obtain an International Security Identification Number (ISIN) for its securities
- Inform shareholders about the demat facility and process dematerialisation requests
- Ensure all future issuances and transfers are in demat form only
Shareholders holding physical shares must:
- Open a demat account with a Depository Participant (DP)
- Submit a dematerialisation Request Form (DRF) along with the original physical share certificates to the DP
- The DP will forward the request to the company’s RTA, and after verification, the shares will be credited to the Demat account.
Yes, if the company is an unlisted public or private company that doesn’t qualify as a ‘Small Company’ (including if it’s a subsidiary). Such companies must comply with Rule 9A or Rule 9B from incorporation and issue all shares, including initial allotment, only in dematerialised form.
Benefits include eliminating risks associated with physical certificates, facilitating and speeding up the transfer, reducing paperwork and stamp duty, facilitating pledging, speeding up settlement cycles, improving transparency, and automatically crediting dividends and other corporate actions.
Yes, Nidhi companies are covered under Rule 9B and must comply by June 30, 2025. Although initially exempted under Rule 9A, they fall under the purview of Rule 9B.
A Depository Participant is an intermediary between the investor and the depository. They help investors open demat accounts, facilitate dematerialisation requests, and provide various services related to electronic holdings, including transaction statements and corporate action information.
ISIN (International Securities Identification Number) is a unique 12-character alphanumeric identifier assigned to a security. It’s essential for the dematerialisation process as it uniquely identifies the security in the depository system, enabling electronic holdings and transfers.
Producer Companies have been granted an extended deadline until March 31, 2028, to comply with the mandatory dematerialisation requirements under Rule 9B.
Yes, Government companies are explicitly exempt from both Rule 9A (for unlisted public companies) and Rule 9B (for private companies).
Under Section 450 of the Companies Act 2013, non-compliance can result in a penalty of ₹10,000, with an additional ₹1,000 per day for continuing contravention (subject to maximum limits of ₹2,00,000 for the company and ₹50,000 for officers in default).
No, physical shares cannot be transferred after the compliance deadline (October 2, 2018, for unlisted public companies; June 30, 2025, for applicable private companies). They must first be dematerialised before any transfer can take place.
Dematerialisation is the process of converting physical share certificates into electronic form, while rematerialisation is the reverse process of converting electronic holdings back into physical certificates. With the mandatory dematerialisation requirements, rematerialisation is generally discouraged.
Companies can find a list of SEBI-registered RTAs on the SEBI website or by contacting NSDL or CDSL. Setindiabiz can also assist companies in connecting with suitable RTAs to facilitate the dematerialisation process.