Dematerialisation Mandate For Private Limited Companies – Practical Implications, Grey Areas And Implementation Roadmap

Topic - Dematerialisation Mandate for Private Limited Companies – Practical Implications, Grey Areas and Implementation Roadmap

1. Introduction – A Structural Shift in Private Company Compliance

The Ministry of Corporate Affairs ("MCA") has introduced a transformative regulatory requirement mandating the dematerialisation of securities for private limited companies, marking a clear departure from long-established corporate practices. The extension of the dematerialisation regime to private limited companies represents one of the most significant compliance reforms in recent years.

Until now, dematerialisation was largely confined to listed and public unlisted companies, while private companies—constituting the overwhelming majority of Indian corporates—continued to operate within a predominantly physical share certificate framework. With the introduction of Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, this position has fundamentally changed.

This amendment effectively integrates private limited companies into the national depository system, triggering far-reaching legal, operational and governance implications for companies, shareholders and compliance professionals alike.

2. Legislative Framework

2.1. Statutory Basis

The dematerialisation mandate for private limited companies finds its statutory foundation in Section 29 of the Companies Act, 2013, which empowers the Central Government to prescribe classes of companies whose securities are required to be held or transferred exclusively in dematerialised form.

This enabling provision was strengthened by the Companies (Amendment) Act, 2019, through the insertion of sub-section (1A) to Section 29, expressly authorising the Central Government to prescribe dematerialisation requirements for unlisted companies, thereby laying the legislative groundwork for extending the dematerialisation framework beyond listed entities.

Pursuant to this authority, Rule 9B was introduced through a notification dated 27 October 2023, prescribing detailed obligations relating to the issuance, holding and dematerialisation of securities by private limited companies. Rule 9B operates in conjunction with the Depositories Act, 1996 and the regulations framed thereunder by the Securities and Exchange Board of India (SEBI), effectively bringing private companies within the national depository architecture.

• Legislative Intent – Beyond Mere Digitisation

While the reform is publicly positioned as a measure to promote ease of doing business and enhance transparency, the underlying regulatory intent is considerably broader. The dematerialisation mandate appears designed to achieve multiple systemic objectives, including:

• Creation of a traceable and verifiable ownership trail
• Greater discipline and oversight in the recording of share transfers
• Curtailment of benami and opaque shareholding structures
• Facilitation of real-time regulatory visibility and oversight
• Alignment of corporate shareholding records with KYC and anti-money laundering frameworks

This reform must therefore be seen as part of a broader compliance ecosystem rather than a standalone procedural change.

2.3 Scope of Applicability and Exemptions

Covered Entities

The dematerialisation mandate under Rule 9B applies to every private company, other than a small company, which as on the last day of a financial year ending on or after 31 March 2023, does not qualify as a small company based on its audited financial statements for such financial year.

Accordingly, applicability is to be examined with reference to the company's status as a small company at the end of the relevant financial year, as determined from its audited financials.

Definition of "Small Company" – Position at the Time of Notification

At the time Rule 9B was notified on 27 October 2023, the definition of a "small company" under Section 2(85) of the Companies Act, 2013 prescribed specific thresholds of paid-up share capital and turnover.

Private companies which did not satisfy this definition as on the relevant financial year-end were brought within the scope of Rule 9B and were required to initiate compliance in accordance with the timelines prescribed thereunder.

Effect of Subsequent Amendment to the Definition of "Small Company" (December 2025)

A significant interpretational issue arises pursuant to the subsequent amendment to the definition of "small company" in December 2025, whereby the monetary thresholds were enhanced, resulting in an expanded class of companies qualifying as small companies.

As a consequence, certain private companies which were earlier covered under Rule 9B, based on the definition prevailing at the time of notification, now qualify as small companies under the amended definition.

In the absence of any express saving clause, grandfathering provision or clarification from the Ministry of Corporate Affairs, a view may be taken that the applicability of Rule 9B is dynamic in nature and continues to be linked to a company's status as a small company for the relevant financial year. On this interpretation, a private company which subsequently qualifies as a small company under the amended definition may revert to an exempt position, provided it continues to satisfy the revised thresholds on an ongoing basis.

However, given that Rule 9B compliance timelines may already have commenced for such companies prior to the amendment, this position remains subject to regulatory interpretation and practical enforcement approach.

Categorical Exclusions from the "Small Company" Definition

Notwithstanding the above, the following entities are expressly excluded from the definition of "small company" under Section 2(85) of the Companies Act, 2013 and, accordingly, remain within the scope of Rule 9B, irrespective of financial thresholds:

• Holding companies and subsidiary companies
• Companies registered under Section 8
• Companies or body corporates governed by any special Act

Dynamic Applicability – A Continuing Compliance Assessment

A critical aspect of Rule 9B is that its applicability is not static. The moment a private company ceases to qualify as a small company, whether due to an increase in paid-up share capital, turnover or loss of exemption status, the dematerialisation mandate becomes applicable, and the statutory compliance timeline begins to run from the end of the relevant financial year.

This creates ongoing compliance monitoring obligations for companies approaching the small company thresholds.

3. Compliance Timelines and Recent Amendments

3.1 General Compliance Timeline

Private companies (other than small companies and producer companies) are required to comply with the dematerialisation mandate within eighteen months from the end of the financial year ending on or after 31 March 2023.

Accordingly, private companies which did not qualify as small companies as on 31 March 2023, based on their audited financial statements for FY 2022–23, were originally required to comply with the dematerialisation requirements on or before 30 September 2024.

3.2 Extension of Deadline to 30 June 2025

Recognising the practical and operational challenges faced by private companies in implementing dematerialisation, the Ministry of Corporate Affairs issued the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2025, inserting a second proviso to Rule 9B(2).

Pursuant to this amendment, a private company (other than a producer company) which was not a small company as on 31 March 2023 is permitted to comply with the dematerialisation provisions on or before 30 June 2025.

This extension provides critical relief to affected companies, allowing additional time to complete the technical and procedural requirements associated with dematerialisation, including:

• Appointment of Registrar and Share Transfer Agents (RTAs);
• Execution of tripartite agreements with depositories;
• Obtaining International Securities Identification Numbers (ISINs); and
• Facilitating dematerialisation of existing physical shareholdings.

3.3 Implications for Companies Incorporated in 2024

The revised timelines also provide important guidance for private companies incorporated in subsequent financial years.

Private companies incorporated in FY 2024–25, which do not qualify as small companies as on 31 March 2025, will be required to comply with the dematerialisation mandate within eighteen months from the end of that financial year, i.e., on or before 30 September 2026.

Given the time-intensive nature of ISIN allotment and shareholder dematerialisation processes, such companies are now entering a critical preparatory phase and would be well advised to initiate ISIN applications and related compliance actions well in advance of the statutory deadline.

4. Scope of the Mandate

4.1 Dual Requirement

Rule 9B(1) imposes two distinct obligations on covered private companies:

(a) Issue of new securities only in dematerialised form:All securities issued after the compliance deadline must be issued in dematerialised form only. Physical share certificates cannot be issued for new allotments.

(b) Facilitate dematerialisation of all existing securities:Companies must enable and facilitate the conversion of all existing physical securities into dematerialised form. This requires establishing systems and arrangements with depositories (NSDL/CDSL) and RTAs to allow shareholders to dematerialise their holdings.

4.2 Restrictions on Corporate Actions

Rule 9B(3) mandates that before making any offer for issue of securities, buyback of securities, issue of bonus shares, or rights offer after the compliance deadline, the entire holding of securities of the company's promoters, directors, and key managerial personnel must be dematerialised.This ensures that persons in control of the company lead by example in adopting dematerialised holdings.

4.3 Transfer and Subscription Restrictions

Under Rule 9B(4), two additional restrictions apply to shareholders of covered companies after the compliance deadline:

• Transfer Restriction:Any holder intending to transfer securities on or after the compliance date must first dematerialise such securities before executing the transfer
• Subscription Restriction:Any person subscribing to securities of the company (whether by way of private placement, bonus shares, or rights offer) must ensure that all their existing securities in the company are held in dematerialised form before such subscription

These provisions create strong incentives for shareholders to voluntarily dematerialise their holdings to avoid being locked out of future transactions.

5. Implementation Framework

5.1 Depository System

Dematerialisation must be undertaken in accordance with the Depositories Act, 1996 and regulations made thereunder.India has two operational depositories:

• National Securities Depository Limited (NSDL)
• Central Depository Services Limited (CDSL)

The depositories maintain electronic records of securities in dematerialised form and facilitate their transfer through a book-entry system, eliminating the need for physical certificates.

5.2 Role of Depository Participants

Shareholders must open demat accounts with Depository Participants (DPs)—intermediaries registered with SEBI including banks, financial institutions, and stockbrokers who are authorized to offer depository services.The DP acts as the interface between the shareholder and the depository, maintaining the shareholder's demat account and processing dematerialisation and transfer requests.

5.3 Registrar and Transfer Agent Requirements

Companies must engage SEBI-registered Registrars and Share Transfer Agents (RTAs) to facilitate dematerialisation. Key requirements include:

• Appointment of the same RTA for both depositories (NSDL and CDSL)
• Maintenance of all share registry work (physical and electronic) at a single point
• Processing dematerialisation requests within 15 days of receipt
• Acceptance of partial dematerialisation requests
• Securing International Securities Identification Number (ISIN) for each type of security

5.4 Application of Unlisted Public Company Framework

Rule 9B(5) provides that the detailed procedural requirements prescribed for unlisted public companies under sub-rules (4) to (10) of Rule 9A shall apply mutatis mutandis to private companies.This includes provisions regarding:

• Facilitating dematerialisation of all existing securities
• Making necessary applications to depositories and securing ISINs
• Timely payment of fees to depositories and RTAs
• Maintaining security deposits with depositories and RTAs
• Compliance with SEBI regulations on dematerialisation
• Filing Form PAS-6 (Reconciliation of Share Capital Audit Report) on a half-yearly basis
• Informing depositories of any differences in issued capital versus dematerialised capital

6. Rationale & Benefits

6.1 Enhanced Transparency and Governance

Dematerialisation creates an immutable electronic trail of shareholding and transfers, significantly reducing opportunities for manipulation of share registers, creation of duplicate certificates, and fraudulent transfers. This aligns with the broader objectives of the Companies Act, 2013 to enhance transparency and accountability in corporate governance.

6.2 Facilitation of Transmission and Succession

One of the most significant practical benefits of dematerialisation is the simplification of transmission of securities upon the death of a shareholder. In the physical regime, transmission requires extensive documentation including succession certificates, probate, or letters of administration. With dematerialised holdings, the process is streamlined through the nominee mechanism built into demat accounts, significantly reducing the time and cost involved in estate settlement.

6.3 Enabling Corporate Actions

Dematerialisation facilitates smoother execution of corporate actions including bonus issues, rights issues, buybacks, and mergers. Distribution of corporate benefits is automated, reducing administrative burden and ensuring faster credit to shareholder accounts. This is particularly relevant as the requirement for dematerialisation of promoter/director/KMP holdings before corporate actions under Rule 9B(3) demonstrates the regulatory intent to leverage dematerialisation for improving corporate action mechanics.

6.4 Integration with Digital Ecosystem

The mandate aligns with the government's Digital India initiative and creates infrastructure for potential future developments, including:

• Electronic voting in shareholder meetings
• Digital delivery of notices and corporate communications
• Integration with SEBI's KYC Registration Agency (KRA) system
• Potential for secondary market trading of private company securities through recognized platforms

6.5 Reduction in Physical Documentation

Elimination of physical share certificates reduces storage costs, eliminates risks of loss, theft, or damage to certificates, and removes the need for executing transfer deeds for every transfer. The shift to book-entry transfers through depositories is faster, cheaper, and more secure.

7. End-To-End Integration: ISIN Procurement and Dematerialization

Sequential Flow:

ISIN Procurement (Pre-requisite):

• Company Board approves dematerialization
• Appoints RTA and selects depository
• Executes tripartite agreement
• Submits ISIN application documents
• Pays admission and annual fees
• Receives ISIN from NSDL/CDSL

Activation of Securities for Dematerialization:

• Depository activates ISIN
• RTA establishes connectivity with depository

Investor-Level Dematerialization:

• Shareholders open demat accounts with DPs
• Submit physical certificates for dematerialization
• DP, RTA, and Depository process requests
• Securities credited to demat accounts electronically

Interdependencies

Critical Dependencies:

• ISIN is mandatory before dematerialization: In the absence of an allotted and activated ISIN, it is not possible to proceed with dematerialisation of securities.
• Tripartite agreement is essential: Depository, issuer, and RTA must execute agreement before ISIN activation
• RTA acts as single point: Same RTA must be appointed for both depositories to ensure consistency

Impact of Dematerialisation on M&A Transactions and Deal Execution

Clean Title & Ownership Certainty: Dematerialisation ensures conclusive, system-verified ownership, eliminating risks of lost, forged or defective physical share certificates.

Regulatory & Investor Alignment: Increasingly expected by regulators, lenders and institutional investors, especially in cross-border and structured transactions.

Faster Deal Closures: Electronic transfers reduce execution risk, documentation gaps and delays at closing.

Stamp Duty Efficiency: Enables streamlined collection with a clear electronic audit trail.

Deal Structuring Flexibility: Facilitates escrows, pledges, drag/tag rights, earn-outs and bulk transfers, which are operationally cumbersome in a physical regime

Conclusion – Strategic Takeaways for Private Companies and Stakeholders

The dematerialisation mandate for private companies signals a clear regulatory message: ownership of corporate securities is no longer intended to remain informal, opaque or paper-driven. While the transition presents immediate execution challenges, particularly for legacy shareholding structures and closely held companies, it also compels private companies to professionalise their capital governance frameworks.

From a practical standpoint, dematerialisation is not a last-mile compliance activity but a process that requires early planning, stakeholder coordination and continuous monitoring of eligibility thresholds. Companies approaching small company limits, contemplating fund-raising, corporate restructuring or promoter exits must now factor dematerialisation readiness into transaction timelines and investment documentation.

For shareholders—especially foreign investors and family-owned entities—the mandate underscores the need for advance KYC preparedness, demat account structuring and succession planning. Delays in addressing these aspects may translate into transaction bottlenecks rather than mere regulatory non-compliance.

Viewed in this light, Rule 9B represents less of a compliance burden and more of a structural recalibration of how private companies raise capital, manage ownership and execute corporate actions. Companies that treat dematerialisation as a strategic enabler rather than a statutory formality will be better positioned to navigate regulatory scrutiny, attract capital and scale operations in an increasingly digitised corporate environment.

8. Enforcement and Consequences of Non-Compliance

Penalties Under the Companies Act

Since there is no specific penalty provided for non – compliance of Rule9(b) therefore Section 450 applies and the penalties shall be as under:

Company: ₹10,000 initially; ₹1,000 per day for continuing default (maximum ₹2,50,000)

Officer in Default: ₹10,000 initially; ₹1,000 per day for continuing default (maximum ₹50,000)

Restrictions on Corporate Actions

The most immediate consequence of non-compliance is the inability to undertake corporate actions. Rule 9B(3) explicitly prohibits companies from making any offer for issue of securities, buyback, bonus shares, or rights offer until promoter/director/KMP holdings are dematerialised.This creates significant commercial pressure for compliance, as companies cannot access capital or restructure without dematerialisation.

Shareholder-Level Consequences

Shareholders who do not dematerialise face transfer and subscription restrictions under Rule 9B(4).They cannot transfer their securities or subscribe to new issues until dematerialisation is completed. This may result in:

• Inability to exit the company
• Dilution without participation rights if the company issues securities
• Complications in estate planning and transmission