India: Mandatory Dematerialisation of Shares for Indian Private Companies by 2024

In a significant move aimed at enhancing the security, efficiency, and transparency of shareholding management, the Government of India has mandated that all private companies, excluding small and government companies, must convert their physical shares to electronic form by September 30, 2024. This requirement, introduced by the Ministry of Corporate Affairs (“MCA”) through Rule 9B, marks a substantial shift in how private companies manage their securities.

Understanding Dematerialisation

Dematerialisation is the process of converting physical share certificates into an electronic format. These electronic holdings are then stored in a demat account managed by a depository. In India, two primary depositories, the National Securities Depository Limited (“NSDL”) and the Central Depository Services (India) Limited (“CDSL”), are responsible for maintaining these electronic records. This process eliminates the risks associated with physical share certificates, such as loss, theft, and forgery, and simplifies the transfer and management of shares.

The Mandate: Rule 9B

The Ministry of Corporate Affairs (“MCA”) amended the Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules), in October 2023 by introducing Rule 9B. This new rule mandates that all private companies, except small companies (defined as those with a paid-up capital of less than ₹4 crore and a turnover of less than ₹40 crore), must dematerialise their shares by September 30, 2024.

Key provisions of Rule 9B include:

1. Issue of Securities: Private companies must issue securities only in dematerialised form.
2. Existing Shares: All existing physical share certificates must be converted to electronic form.
3. Promoters and Directors: Before issuing new securities, companies must ensure that the shareholdings of promoters, directors, and key managerial personnel are dematerialised.
4. Share Transfers and Subscriptions: Any transfer or subscription of securities must be done in dematerialised form.
5. Compliance Timeline: Companies must comply within 18 months if they exceed the « small company » criteria based on financial records post-March 31, 2023.

Steps for Dematerialisation

To comply with Rule 9B, private companies need to follow a systematic process:

1. Amendment of Articles of Association (AoA): Update the AoA to authorize shareholders to hold shares in dematerialised form.
2. Appointment of Registrar and Transfer Agent (“RTA”): Appoint a SEBI-registered RTA to manage the dematerialisation process.
3. Obtaining International Securities Identification Number (“ISIN”): Apply for an ISIN for each type of share issued by the company.
4. Opening Demat Account: Open a demat account with a Depository Participant, such as a bank or brokerage firm.
5. Dematerialisation of Existing Shares: Facilitate the conversion of physical share certificates held by shareholders into electronic form.
6. Compliance for Key Personnel: Ensure all promoters, directors, and key managerial personnel hold their shares in dematerialised form.
7. Regular Reporting: Submit half-yearly returns in the form of PAS 6, notifying the MCA of the dematerialisation details.

Important Considerations

1. Fees: Opening and maintaining demat accounts involve fees.
2. KYC and PAN: The dematerialisation process requires Know Your Customer (“KYC”) documents and a PAN card for the company and its shareholders.
3. System Capacity: With millions of registered companies in India, depositories may face challenges in managing a high volume of dematerialisation applications, potentially leading to delays.

Consequences and Penalties for Non-Compliance

Failure to comply with Rule 9B can result in several penalties:

• The company will be unable to issue or allot any securities, including bonus shares and buybacks.
• Shareholders who have not dematerialised their holdings will be unable to sell their shares or subscribe to new ones.
• The company faces monetary penalties of INR 10,000 plus INR 1,000 for each day of continued violation, up to a maximum of INR 200,000.
• Officers in default also face similar penalties, with a maximum fine of INR 50,000.

Role of EquityList

EquityList offers comprehensive services to help private companies transition to dematerialised shares. The platform provides a one-stop solution by partnering with a reputed RTA to manage the entire process, including drafting necessary documents, coordinating with shareholders, and ensuring smooth compliance with the new regulations. EquityList also facilitates the regular reporting requirements, making the dematerialisation process seamless and efficient.