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.