Dematerialization Deadline for Private Company Shares Extended to June 30, 2025

Introduction

The Ministry of Corporate Affairs (MCA) has officially extended the deadline for mandatory dematerialization of securities by private companies. As per the notification dated February 12, 2025, the new compliance deadline is now June 30, 2025. This extension amends Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, which requires certain categories of private companies to convert their securities into dematerialized form.

Key Highlights of the MCA Notification

1. Extended Compliance Deadline – June 30, 2025
The Ministry of Corporate Affairs has extended the deadline for compliance with Rule 9B(2) from March 31, 2023, to June 30, 2025. This extension allows eligible private companies (excluding small and producer companies) additional time to complete the dematerialization of their securities and obtain an International Securities Identification Number (ISIN).

2. Scope of Applicability
The revised rule applies to all private companies, except small and producer companies.
Key compliance requirements include:

Issuing new securities only in dematerialized form
Transferring shares or altering capital structure exclusively through dematerialized securities

3. Purpose of the Amendment

To provide a smoother transition for private companies that are yet to comply
To enhance transparency and bring private companies in line with public company regulations
To promote efficient investor participation and support digital securities transactions

Understanding Dematerialization of Shares

Dematerialization refers to the process of converting physical share certificates and other securities into electronic form, eliminating the need for paper-based documents. Once converted, these securities are held in a demat account, which serves as a digital repository for various financial instruments.

A depository is a registered entity that holds securities in electronic form and enables smooth and secure transactions. It promotes transparency, reduces the risks of theft or loss, and simplifies the trading process. In India, depositories operate under the Depositories Act, 1996 and are regulated by the Securities and Exchange Board of India (SEBI).

The two SEBI-registered depositories in India are:

NSDL (National Securities Depository Limited) – Associated primarily with the National Stock Exchange (NSE)
CDSL (Central Depository Services (India) Limited) – Linked with the Bombay Stock Exchange (BSE)

Rule 9B: Mandatory Dematerialization for Private Companies

In October 2023, the Ministry of Corporate Affairs (MCA) introduced Rule 9B under the Companies (Prospectus and Allotment of Securities) Rules, 2014. This rule mandates that specified categories of private companies must dematerialize their securities. The objective is to bring private companies in line with the corporate governance and transparency standards followed by public companies

Applicability of Dematerialization of Shares

Dematerialization of shares applies to different types of companies within the securities market to enhance transparency, security, and ease of transactions.

Public Companies
All public companies in India are required to hold and transact their securities exclusively in dematerialized form.

Private Limited Companies
All private limited companies, except those classified as small companies, must comply with dematerialization requirements.

Holding and Subsidiary Companies
Private limited companies that are holding companies or subsidiaries of other corporate entities must dematerialize their shares, regardless of whether they meet the criteria of a small company based on financial thresholds

Small Companies – Exemption from Dematerialization

A small company is a private limited company that satisfies both of the following financial criteria:

Paid-up capital of ₹4 crore (₹40,000,000) or less
Turnover of ₹40 crore (₹400,000,000) or less in the previous financial year

Such small companies are generally exempt from mandatory dematerialization. However, this exemption does not apply if the company is:

A holding company of another entity, or
A subsidiary of another corporate body

Extended Deadline for Dematerialization of Physical Shares

In response to challenges faced by companies in completing the dematerialization process, the Ministry of Corporate Affairs (MCA) has extended the compliance deadline. The new deadline for mandatory dematerialization of shares is now June 30, 2025, postponed from the earlier date of September 30, 2024

Impact of the Deadline Extension on Private Companies

For Non-Compliant Companies: Private companies that have yet to obtain their ISIN or complete dematerialization now have additional time to comply. They should coordinate with depositories (NSDL/CDSL), registrar and transfer agents (RTAs), and relevant professionals to initiate and finalize the dematerialization process.
For Compliant Companies: Companies that have already obtained their ISIN and dematerialized their securities remain unaffected by the extension. They must continue to ensure that any new share issuance or transfers are conducted exclusively in dematerialized form.

How to Convert Physical Shares into Demat?

Converting physical share certificates into electronic form is a straightforward and efficient process. Here’s a step-by-step guide to help you complete the dematerialization:

Step 1: Open a Demat Account
Start by opening a Demat account with a Depository Participant (DP), such as a bank, stockbroker, or financial institution. This account will hold your shares electronically.
You will need to fill out an account opening form and submit the following documents:

Bank account details (account number, IFSC code, bank name, branch address)
Identity and address proof
PAN card

Once your Demat account is activated, you can begin the dematerialization process.

Step 2: Submit a Demat Request Form (DRF)
Get a Demat Request Form (DRF) from your DP, fill it out carefully, and sign it. Make sure that the names and signatures match those on your physical share certificates and company records.

Step 3: Verification and Processing
After submitting the DRF, your DP will verify the details and provide you with a Dematerialization Request Number (DRN) to track your request.

Step 4: Forwarding to Registrar and Share Transfer Agent (RTA)
Your DP will send your dematerialization request along with the physical share certificates to the company’s Registrar and Share Transfer Agent (RTA) for verification.

Step 5: Conversion to Electronic Form
Upon successful verification and approval by the RTA, your physical share certificates will be cancelled and converted into electronic form to prevent misuse.

Step 6: Credit to Your Demat Account
Finally, the dematerialized shares will be credited to your Demat account, enabling you to sell, transfer, or pledge them as required

Penalties for Non-Compliance with Dematerialization Requirements

Failure to comply with Rule 9B of the Companies Act, 2013, can lead to significant consequences for private companies, including:

Restrictions on Securities Transactions: Non-compliant companies will be prohibited from issuing or allotting any securities, including bonus shares and buybacks.
Limitations for Shareholders: Shareholders holding physical shares will be unable to sell or transfer their securities and may lose eligibility for rights issues and dividend payments.

Monetary Penalties for Companies and Officers

For Companies: Officers responsible for non-compliance may face monetary penalties.
Initial Penalty: ₹10,000
Continuing Penalty: ₹1,000 per day until compliance is achieved, capped at ₹2,00,000

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About the Author

Priya
Priya is a skilled writer known for simplifying complex legal concepts into clear, practical guidance. Her work empowers entrepreneurs with the insights needed to navigate business laws confidently, helping them launch and manage their ventures successfully

May 31, 2025