Dematerialisation of Private Company Securities: A Practical Guide for Companies, Shareholders and Foreign Investors

Dematerialisation is no longer relevant only to listed companies. Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (“PAS Rules”) requires a substantial category of private companies to issue securities only in dematerialised form and facilitate the dematerialisation of their existing securities.

For affected companies, this is not merely a secretarial compliance exercise. It can affect share transfers, private placements, fund-raising, rights issues, bonus issues, buybacks, restructurings and investor exits. Companies should therefore assess their demat readiness before undertaking a corporate action or transaction.

What is dematerialisation?

Dematerialisation means converting securities held through physical certificates into electronic form. Once the process is completed, the securities are held in the shareholder’s demat account instead of through paper certificates.

In India, dematerialised securities are maintained through the depository system operated by National Securities Depository Limited (“NSDL”) and Central Depository Services (India) Limited (“CDSL”). A shareholder opens a demat account with a depository participant (“DP”), such as a bank or broker. The company, on the other hand, generally appoints a SEBI-registered registrar and transfer agent (“RTA”) to assist with obtaining the ISIN, processing dematerialisation requests and coordinating with the depositories.

An International Securities Identification Number (“ISIN”) is allotted to each class of securities. A company may therefore need separate ISINs for its equity shares, preference shares and debentures, depending on its capital structure. Dematerialisation does not affect the shareholder’s underlying rights. The shareholder continues to hold the same voting, dividend and other rights; only the manner in which the securities are held and transferred changes.

Which private companies are covered?

Rule 9B applies to every private company other than a small company. A covered private company must:

• Issue its securities only in dematerialised form; and

• Facilitate dematerialisation of all its securities.

Applicability is determined by the company’s status as a small company on the last day of a financial year ending on or after 31 March 2023, based on its audited financial statements. The rule generally provides an 18-month compliance period from the end of the relevant financial year. Rule 9B was introduced through the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023.

For private companies that were not small companies as on 31 March 2023, the Ministry of Corporate Affairs (“MCA”) extended the compliance date to 30 June 2025. Government companies are excluded from Rule 9B. Producer companies receive a longer compliance period of five years from the end of the relevant financial year.

Small-company exemption

Small-company status should be assessed carefully. Under Section 2(85) of the Companies Act, 2013, a holding company, subsidiary company, Section 8 company and a company governed by a special Act cannot be a small company, irrespective of its financial size.

Accordingly, an Indian subsidiary of a foreign company is ordinarily covered by Rule 9B even where it has limited operations or nominal paid-up capital.

With effect from 1 December 2025, a company is generally regarded as a small company only if its paid-up share capital does not exceed INR 10 crore and its turnover does not exceed INR 100 crore, subject to the statutory exclusions noted above. Both financial conditions must be satisfied.

The rules do not expressly clarify whether a company that was previously covered by Rule 9B may discontinue compliance if it subsequently falls within the revised small-company thresholds. Until the MCA provides further clarification, a company should take a considered position before discontinuing its RTA, ISIN or depository arrangements.

Key compliance steps

A company should undertake a structured demat-readiness exercise before applying for an ISIN or entering into a transaction.

1. Confirm applicability

The company should determine whether Rule 9B applies by reviewing its audited financial statements, paid-up capital, turnover and statutory status. It should also consider whether it is a holding company, subsidiary, Section 8 company or otherwise excluded from the small-company definition.

The conclusion should be documented, particularly where the company considers itself outside the scope of Rule 9B.

2. Review the Articles and agreements

The company should review its Articles of Association (“AoA”) for provisions dealing with physical share certificates, transfer forms, board approval, pre-emption rights, lien, pledge, transmission and restrictions on transfer.

Dematerialisation does not remove restrictions contained in the AoA or shareholders’ agreements. Rights of first refusal, tag rights, drag rights, lock-ins, consent rights and other contractual restrictions may continue to apply. However, the documents should be updated where necessary to ensure that they operate effectively with a depository-based holding and transfer system.

3. Reconcile corporate records

Before applying for an ISIN, the company should reconcile its:

• Register of members;

• Share certificates and certificate counterfoils;

• Register of transfers and transmissions;

• Board and shareholder resolutions;

• Historical allotment records and Forms PAS-3;

• Capitalisation table and investor records;

• Transfer instruments and stamp-duty records;

• Lost, duplicate, cancelled or replaced certificates; and

• Pledges, liens, disputes, court orders and succession claims.

Discrepancies in shareholder names, signatures, holding pattern, certificate details or quantities can delay, or result in rejection of, dematerialisation requests.

4. Appoint an RTA and obtain ISINs

The company should appoint a SEBI-registered RTA and complete the required arrangements with NSDL and/or CDSL. An ISIN is required for each relevant class of security.

The company should ensure that its RTA and depository arrangements remain active after the initial exercise. Rule 9B applies the relevant provisions of Rule 9A to covered private companies, with necessary modifications. This includes ongoing reconciliation and related compliance requirements.

5. Inform shareholders

Once the ISIN is activated, the company should notify existing shareholders of:

• The ISIN and RTA details;

• The procedure for opening a demat account;

• The documents and forms required for dematerialisation;

• The requirement to submit original physical certificates; and

• The restrictions on transfer and further subscription where securities continue to be held in physical form.

Requirements for existing shareholders

Rule 9B does not automatically invalidate existing physical share certificates. A shareholder may continue to hold securities in physical form.

However, a holder proposing to transfer securities must first dematerialise the relevant securities. Further, a holder proposing to subscribe to securities through a private placement, rights issue or bonus issue must ensure that all securities already held by that holder in the company are in dematerialised form.

In practical terms, physical holdings may remain legally valid but become commercially restrictive.

To dematerialise securities, the holder generally opens a demat account with a DP, submits a Dematerialisation Request Form (“DRF”) along with the original certificate(s), and awaits verification by the company or RTA. Once verified, the securities are credited electronically to the holder’s demat account.

The holder’s name, signature and the sequence of joint holders should match the company’s records and the demat account. Lost certificates, transmission cases and disputed holdings must generally be resolved before dematerialisation can be completed.

Impact on transactions and corporate actions

Dematerialisation requirements should be addressed at the planning stage of a transaction.

Transfers

A transferor must dematerialise the securities proposed to be transferred before completing a transfer. This affects promoter transfers, internal group transfers, secondary sales, investor exits and family arrangements.

Dematerialisation does not replace compliance with the company’s AoA, shareholders’ agreement, applicable stamp-duty requirements, tax obligations, lender-consent requirements or foreign-exchange regulations.

New issues and corporate actions

Before making an offer for issue of securities, buyback, bonus issue or rights issue, a private company covered by Rule 9B must ensure that the entire holding of its promoters, directors and key managerial personnel is held in dematerialised form.

The company should also ensure that each proposed allottee has an operational demat account capable of receiving the relevant securities, since a company covered by Rule 9B is required to issue securities in dematerialised form. An existing shareholder proposing to subscribe to a further issue must also ensure that its existing holding in the company has been dematerialised before the subscription.

These matters should be addressed before accepting subscription money in a private placement. Under Section 42 of the Companies Act, 2013, a company must allot securities within 60 days of receipt of application money. If it does not do so, it must refund the money within the prescribed period, subject to the statutory consequences for delay.

Foreign shareholders and overseas parents

Dematerialisation requires additional planning where a company has foreign shareholders or an overseas parent company. An Indian subsidiary cannot qualify as a small company and may therefore be covered by Rule 9B regardless of its financial size.

A foreign shareholder may need to provide constitutional documents, board approvals, authorised-signatory documents, PAN-related documentation, beneficial ownership information, FATCA/CRS declarations, bank details and details relating to the original investment. Depending on the jurisdiction and the DP’s requirements, overseas documents may need to be notarised, apostilled or consularised.

The process may take time, particularly where original physical certificates must be located and sent to India. Foreign shareholders should therefore begin demat-account onboarding well before an intended investment, transfer, restructuring or exit.

Dematerialisation does not replace compliance with the Foreign Exchange Management Act, 1999 (“FEMA”) and the applicable foreign-investment framework. Securities issued to, or transferred by or to, a non-resident remain subject to sectoral caps, entry-route conditions, pricing guidelines, payment requirements, reporting obligations and authorised dealer bank procedures.

The parties should ensure consistency between the company’s statutory registers, depository records, transaction documents, valuation documents and FEMA filings.

Ongoing compliance and common issues

Dematerialisation is not a one-time exercise. A company covered by Rule 9B should maintain active RTA and depository arrangements, reconcile its security-holder records and monitor ongoing compliance.

The company should also assess its obligation to file Form PAS-6, being the reconciliation of share capital audit report, within 60 days from the end of each half-year. The filing position should be reviewed with reference to Rule 9B, the applicable provisions of Rule 9A and the then-current MCA filing framework.

Common issues include:

• Incorrect assessment of Rule 9B applicability;

• Incorrect reliance on the small-company exemption;

• Incomplete allotment, transfer or share-certificate records;

• Mismatch in shareholder names, signatures or joint-holder sequence;

• Lost certificates or pending transmission claims;

• Delay in opening demat accounts for promoters, directors, investors or employees;

• Separate ISIN requirements for different classes of securities;

• Inactive RTA or depository arrangements;

• Delays in PAS-6 filing or reconciliation; and

• Mismatch between company records, depository records, transaction documents and FEMA filings.

How we can assist

We assist companies, promoters, investors and foreign shareholders with:

• Assessing applicability of Rule 9B and small-company status;

• Conducting demat-readiness, capitalisation-table and corporate-records reviews;

• Reviewing and amending Articles of Association and transaction documents;

• Reviewing shareholders’ agreements and transfer restrictions;

• Preparing board and shareholder approvals;

• Coordinating with RTAs and depositories for ISIN activation;

• Reviewing historical allotments, transfers, certificates and statutory registers;

• Advising on demat requirements in fund-raising, private placements, rights issues, bonus issues, buybacks, transfers and restructurings;

• Assisting foreign shareholders with demat-account documentation, corporate approvals and India-related regulatory requirements; and

• Advising on FEMA, foreign-investment and related reporting requirements.

Conclusion

Dematerialisation should be treated as a corporate-compliance and transaction-readiness requirement, rather than a formality to be addressed immediately before a proposed transfer, investment round or restructuring.

A timely review of Rule 9B applicability, statutory records, capital structure, Articles of Association, shareholder documentation, ISIN requirements and foreign-investment compliance can reduce execution risk and help avoid delays in fund-raising, internal reorganisations, share transfers and investor exits.