The Ministry of Corporate Affairs (MCA) has expanded the scope of dematerialisation by notifying the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. Effective through the introduction of Rule 9B, private companies, excluding small and government companies, are now required to issue securities in dematerialised form and facilitate the conversion of existing physical securities. This blog outlines which companies are covered, the compliance timelines, key procedural requirements, and legal consequences, including stamp duty implications and obligations for foreign shareholders.
1. Background
Following the 2018 requirement for unlisted public companies to dematerialise their securities, MCA has now mandated similar treatment for private companies under Rule 9B. Issued through the Second Amendment Rules, 2023, this rule directs eligible private companies to issue and convert all securities into demat form in compliance with the Depositories Act, 1996.
This shift aims to bring transparency, curb untraceable transactions, and align private companies with the evolving regulatory landscape.
2. Applicability
- Rule 9B applies to qualified private companies, meaning all private companies except small companies and government companies.
- A holding company or subsidiary company, even if they meet small company thresholds, do not qualify as a small company and must comply.
- The exclusion available to wholly owned subsidiaries (WOS) under Rule 9A (which applies to unlisted public companies) does not extend to Rule 9B.
Special Cases of Applicability:
- A private company wholly owned by another private company must comply.
- A private company wholly owned by an unlisted public company may be exempted under Rule 9A, if it qualifies as a WOS.
- Holding company applicability is limited to Indian entities, but subsidiary applicability is broader, including subsidiaries of foreign bodies corporate.
3. Timeline for Dematerialisation
| Company Status | Dematerialisation Due Date |
| Qualified private company as on 31 March 2023 | 30 September 2024 |
| Qualified private company as on 31 March 2024 | 30 September 2025 |
| Ceased to be qualified by 31 March 2024 | Still due by 30 September 2024 |
| Qualified during the year but not on 31 March | Rule 9B not applicable |
Currently, no provision exists for re-materialisation once the company becomes non-qualified.
4. Compliance Requirements
Qualified private companies must:
- File PAS-6 reconciling physical and demat holdings within 60 days of each half-year.
- Ensure promoters, directors, and KMPs hold securities in demat form before any issue, buyback, bonus, or rights offer.
- Make sure security holders dematerialise their holdings before subscribing or transferring any securities post the due date.
5. Brief Steps for Dematerialisation of Securities
- Amend AOA if it doesn’t permit demat issuance.
- Register with NSDL or CDSL, submit documents, pay fees.
- Obtain an ISIN for each class of security (equity, CCPS, debentures, etc.).
- Inform security holders about their ISIN.
- Security holders open a demat account and submit demat requests.
- Depository verifies with R&T agent or in-house team, then credits securities.
Each dematerialised security must have a unique ISIN.
6. Consequential Implications
6.1 Ownership and Voting
- The depository becomes the registered owner for transfer purposes, but beneficial ownership and rights stay with the actual holder.
- For WOS entities, nominee shareholders must also open demat accounts.
6.2 Stamp Duty
- No stamp duty on the transfer to depository during demat.
- Stamp duty is applicable at:
- Issuance: Payable by the company.
- Transfer: Collected by the depository from transferor.
While stamping of physical securities is removed, the liability itself remains.
6.3 Additional Considerations
- No need to issue physical share certificates or Form SH-4.
- Foreign investors must obtain a PAN to open a demat account.
- The depository’s register of beneficial owners replaces the company’s member register.
- For dividend and tax compliance:
- Beneficial ownership is used for distribution and record-keeping.
- Capital gains from demat securities are calculated on a FIFO basis, unlike physical shares.
7. Concluding Remarks
The dematerialisation mandate for private companies is a significant compliance step aimed at eliminating opacity in ownership and tightening controls on corporate transactions. By excluding holding and subsidiary companies from the small company exemption, the compliance net widens substantially.
While the requirement does not affect the free transferability restriction that defines a private company, it does introduce new obligations such as costs, procedural changes, and foreign investor onboarding. Buyers must now check whether the seller has dematerialised their shares before executing transfers, making this regulation a critical one for M&A, funding, and restructuring transactions.
