Through its recent decision the Ministry of Corporate Affairs (MCA) reached a breakthrough by requiring private limited companies to participate in the dematerialization process. The management team seeks to prevent fraudulent practices while implementing better governance standards through digital initiatives that match national digitalization goals.
Only listed companies and certain public limited companies had previously needed to hold their securities through dematerialized form. The MCA requires private companies including a few exemptions to convert their physical shareholding into electronic form through Demat.
The rule comes from a modification to the Companies (Prospectus and Allotment of Securities) Rules, 2014 in its Rule 9A section.
Unlisted public companies along with private companies can issue securities through dematerialized form based on rule 9A of the Companies (Prospectus and Allotment of Securities) Rules due to the October 27th 2023 notification (G.S.R. 802(E)) that increased accessibility to private companies.
MCA Notification Date: 27th October 2023
Applicable Rule: Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023
New Insertion: Rule 9B – Dematerialization of securities by private companies
Under Rule 9B, all private companies (excluding small companies and certain government companies) are required to facilitate dematerialization of shares.
The rule is effective from 27th October 2023.
Private companies must ensure dematerialization before making any new issuance or transfer of shares.
Existing physical shares must be converted to Demat within the prescribed timeline.
Here is a step-by-step guide for private companies to comply with MCA’s Demat requirement:
Step 1: Appoint a Registrar and Transfer Agent (RTA)
Engage with a SEBI-registered RTA to handle the dematerialization process and interface with depositories (NSDL or CDSL).
Step 2: Enter into Tripartite Agreement
Sign a Tripartite Agreement between:
Step 3: Obtain ISIN for Securities
Apply for an ISIN (International Securities Identification Number), which uniquely identifies each type of security issued by the company.
Step 4: Facilitate Shareholder Demat
Inform all shareholders about the need to open Demat accounts.
Shareholders must:
Step 5: File with ROC
File all necessary forms and returns such as:
When operating under Rule 9B private firms need to:
Ensure all securities are dematerialized before any new allotment or transfer
Not process any transfer in physical form
Update their Articles of Association (AOA), if necessary, to reflect provisions for Demat
Ensure timely communication and assistance to shareholders in completing their dematerialization
Failure to comply with the provisions under Rule 9B can attract penalties under the Companies Act, 2013, including:
Rejection of filings like PAS-3
Invalidation of share transfers
Penalties against the company and officers for non-compliance
The system enables improved visibility into who holds ownership stakes in the company through its power to track shareholding and ownership details.
Reduced Risk of forgery, duplication, or loss of physical certificates
The system simplifies capitalization table administration for young businesses along with expanding entities.
Fundraising Norms compliance requires VCs/PEs to process shares in Demat form as several entities enforce this requirement now.
Better Corporate Governance
A fully digital corporate environment becomes more attainable through the MCA's requirement for Demat share registration by private organizations. The initial expenses involved in implementing both companies and shareholder obligations under this mandate will be eclipsed by future efficiencies together with regulatory improvements and transparency benefits.
Every base constituent company except those that are small and government-based entities needs to establish demat architecture alongside RTA coordination tasks and shareholder facilitation for their shift to dematerialization.
The information provided in this blog is purely for general informational purposes only. While every effort has been made to ensure the accuracy, reliability and completeness of the content presented, we make no representations or warranties of any kind, express or implied, for the same.
We expressly disclaim any and all liability for any loss, damage or injury arising from or in connection with the use of or reliance on this information. This includes, but is not limited to, any direct, indirect, incidental, consequential or punitive damage.
Further, we reserve the right to make changes to the content at any time without prior notice. For specific advice tailored to your situation, we request you to get in touch with us.