MCA Extends Deadline for Mandatory Dematerialization of Private Company
Shares to June 30, 2025

Overview

The Ministry of Corporate Affairs (MCA) has officially extended the deadline
for private companies to dematerialize their securities. According to a
notification issued on February 12, 2025, the compliance deadline under Rule
9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
has been revised from September 30, 2024, to June 30, 2025. This extension
provides companies with additional time to transition from physical to
electronic shareholding in alignment with regulatory requirements.

Understanding Rule 9B

Rule 9B, introduced in October 2023, mandates that certain classes of
private companies must dematerialize their securities before undertaking any
issuance, transfer, or alteration of share capital. This requirement aligns
private companies more closely with the corporate governance norms
applicable to public companies.

Applicability of the Rule

The dematerialization mandate applies to all private businesses, except for
small companies as defined under the Companies Act—those having a paid-up
capital of ₹4 crore or less and a turnover of ₹40 crore or less in the
previous financial year—as well as producer companies.

However, private companies that are holding or subsidiary companies must
comply with the dematerialization requirement, even if they qualify as small
companies under the financial thresholds.

Impact on Share-Related Transactions

Once Rule 9B becomes fully enforceable on June 30, 2025, private companies
that fall within its scope must ensure that:

1. All share issuances, transfers, buybacks, and related actions are
   conducted exclusively in dematerialized form.
2. An ISIN (International Securities Identification Number) is obtained
   through a SEBI-registered depository.
3. Shareholders holding physical shares convert them into demat form to
   remain eligible for rights issues, dividend payouts, and other corporate
   benefits.

What is Dematerialization?

Dematerialization is the process of converting paper share certificates into
electronic format. These electronic holdings are maintained in a demat
account through a Depository Participant (DP), linked with one of the two
SEBI-regulated depositories in India:

1. National Securities Depository Limited (NSDL)
2. Central Depository Services (India) Limited (CDSL)

Dematerialization enhances transparency, reduces the risk of fraud or loss
of physical certificates, and enables efficient digital transactions.

Process for Dematerializing Shares

1. Open a Demat Account: Create an account with a
   SEBI-registered Depository Participant and provide the required paperwork,
   such as proof of identity, proof of address, PAN, and bank account
   information.
2. Submit a Dematerialization Request: Fill out a
   Dematerialization Request Form (DRF), attach original physical share
   certificates, and submit them to your DP.
3. Verification and Processing: The DP verifies the request
   and generates a Dematerialization Request Number (DRN) for tracking.
4. Registrar Review: The DP sends the request to the
   company’s Share Transfer Agent (RTA) and Registrar for verification.
5. Electronic Conversion: Upon approval by the RTA, the
   physical certificates are canceled, and an equivalent number of shares are
   credited to the shareholder’s demat account.

Consequences of Non-Compliance

Private companies that fail to comply with the dematerialization mandate
under Rule 9B will face the following consequences:

1. Prohibition on issuing or allotting any securities, including bonus shares
   and rights issues.
2. Shareholders holding physical certificates may be unable to transfer their
   shares or receive certain entitlements.
3. Monetary penalties, including:
   
   1. ₹10,000 as an initial fine for the company and its officers.
   2. A daily default penalty of ₹1,000, up to a maximum of ₹2,00,000.

Implications for Private Companies

1. Companies that have not yet initiated the dematerialization process must
   coordinate with depositories (NSDL or CDSL), Registrar and Transfer
   Agents, and legal or compliance professionals to ensure readiness before
   the June 30, 2025 deadline.
2. Companies already in compliance should ensure that all future share
   transactions continue to be executed in dematerialized form.

Conclusion

1. The MCA’s extension provides additional time for private companies to
   complete the transition to electronic shareholding.
2. The compliance requirements remain unchanged, and failure to act may lead
   to operational restrictions and financial penalties.
3. It is advisable for all applicable entities to prioritize
   dematerialization well before the new deadline of June 30, 2025, as
   announced in the MCA notification.

For further assistance with ISIN acquisition, demat account setup, or
regulatory coordination, the Plutus team is available to support your
compliance needs.