chapter 18

Dematerialization of shares held in Private Limited Companies - Deadline extended to June 30, 2025The Ministry of Corporate Affairs (MCA) finally issued a official notification on February 12, 2025  to extend the deadline for the mandatory dematerialization of securities for private companies up to June 30, 2025 from the existing due date of Sept. 30, 2024.This provides private companies (other than small and producer companies) with more time to complete the dematerialisation of securities and obtain ISIN (International Securities Identification Number). All private companies, excluding small companies and producer companies, that intend to issue new shares, transfer shares, or make any alterations in their capital structure must do so only in dematerialised form.What is the Dematerialization of Shares?Dematerialization is the process of converting physical share certificates and other securities into an electronic format, eliminating the need for paper-based documents. Once dematerialized, these securities are held in a demat account, which functions like a digital repository for financial instruments.A depository is an entity that holds securities in an electronic form and facilitates seamless transactions. It ensures security, transparency, and ease of trading. The two SEBI-registered depositories in India are:NSDL (National Securities Depository Ltd.) – Associated with the National Stock Exchange (NSE) and CDSL (Central Depository Services (India) Ltd.) – Associated with the Bombay Stock Exchange (BSE).In October 2023, the Ministry of Corporate Affairs (MCA) introduced Rule 9B under the Companies (Prospectus and Allotment of Securities) Rules, 2014. This regulation made it mandatory for certain private companies to dematerialize their securities, aligning them with corporate governance standards applicable to public companies.The dematerialization of shares applies to various entities within the securities market, ensuring transparency, security, and ease of transactions.All public companies in India are mandated to hold and transact their securities in dematerialized form.All private limited companies, except those categorized as small companies, must comply with dematerialization regulations.Any private limited company that is a holding company or a subsidiary of another corporate entity must dematerialise its shares.This applies even if the company qualifies as a small company under financial thresholds.Exception to DematerializationA small company is defined as a private limited company that meets the following financial criteria:Paid-up capital of  Rs. 4 crore (INR 40,000,000) or less and Turnover of Rs 40 crores (INR 400,000,000) or less in the preceding financial year.Small companies are exempt from mandatory dematerialisation unless they are, a holding company of another entity or a subsidiary company of another corporate bodyExtention of last Date for Dematerialization of Physical Shares :  Considering the challenges faced by companies in executing the dematerialisation process, the Ministry of Corporate Affairs (MCA) has extended the compliance deadline to  June 30, 2025, revised from the earlier deadline of September 30, 2024.Companies that have not obtained their ISIN or completed dematerialisation now have extra time to comply.They must coordinate with depositories like  NSDL or CDSL,  transfer agents  and professionals to initiate the dematerialisation process.Those who have already obtained their ISIN and dematerialised securities will not be affected. However, they should continue ensuring that any new share issuance or transfer occurs only in dematerialised form.How to Convert Physical Shares into Demat?Converting physical share certificates into electronic form is a simple and efficient process. 1)  Open a Demat Account : To begin, you need to open a Demat account with a Depository Participant (DP), such as a bank, stockbroker, or financial institution. This account will hold your shares in electronic form. You must fill out an account opening form and provide essential details, including:Bank account details (Account number, IFSC code, Bank name, and Branch address), Identity and address proofPAN cardOnce your Demat account is successfully set up, you can initiate the dematerialization process.2). Submit a Demat Request Form : Obtain a Demat Request Form (DRF) from your DP, complete it accurately, and sign it.  The names and signatures on the form should match with same updated in the share certificates and the company’s records.3).  Verification and Processing: After submission, the DP will verify your details and issue a Dematerialization Request Number (DRN) to track the status of your request.4). Forwarding to Registrar and Share Transfer Agent (RTA): Your DP will forward the dematerialization request along with your physical share certificates to the respective Registrar and Share Transfer Agent (RTA) of the issuing company.5).  Conversion to Electronic Form: Once the RTA verifies and approves the request, your physical share certificates will be cancelled and converted into electronic form to prevent misuse.6). Credit to Your Demat Account : The dematerialized shares are then credited to your Demat account, allowing you to sell, transfer, or pledge them as needed.Failure to comply with Rule 9B of the Companies Act, 2013, can result in serious consequences for private companies, including:a) Companies failing to comply will be barred from issuing or allotting any securities, including those related to bonus issues and buybacks.b)  Shareholders holding physical shares will be restricted from selling or transferring their securities. They may also lose eligibility for rights issues and dividend benefits.c). Penalties for Company Officers: Officers in default may face penalties of up to INR 50,000 for non-compliance.Initial penalty: INR 10,000Continuing penalty: INR 1,000 per day until compliance is met, up to a maximum of INR 200,000.The extension of the dematerialisation deadline to June 30, 2025, provides much-needed relief for private companies, allowing them additional time to comply with Rule 9B of the Companies Act, 2013. Companies should take advantage of this extension to complete the demat process, obtain their ISIN, and ensure compliance to avoid penalties and restrictions on share transactions.  CA  V. K. S. Shetty, Bangalore01/03/2025