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Summary: The Indian government mandates the compulsory dematerialization of physical shares in private companies by September 30, 2024, as per the Ministry of Corporate Affairs’ amendment in October 2023. This rule applies to all private companies, excluding small companies and government entities. Dematerialization involves converting physical share certificates into digital form through SEBI-registered depositories like NSDL and CDSL. The process begins with updating the company’s Articles of Association (AoA) to permit shareholders to hold shares electronically, followed by appointing a Registrar and Transfer Agent (RTA). The company must submit various documents, including its Board Resolution, financial statements, shareholding list, and other corporate records. Once the necessary documents are verified, the company executes a Tripartite Agreement with the RTA and depositories. An International Securities Identification Number (ISIN) is then obtained, and the company opens a Demat account for share conversion. Promoters, directors, and Key Managerial Personnel (KMPs) must also hold shares in dematerialized form. Compliance reporting is required via Form PAS 6, with penalties for non-compliance, including the inability to issue securities, sell shares, or incur monetary fines. All private companies must adhere to these rules, with no exceptions granted, except for small companies and government entities.

The Central Government of India mandates to private companies for the compulsory dematerialisation of their physical shares by Sept 30, 2024.

In October of 2023, the Ministry of Corporate Affairs (MCA) amended the Companies (Prospectus and Allotment of Securities) Rules 2014 via the Companies (Prospectus and Allotment of Securities) Second Amendment Rules 2023 (PAS Amendment Rules) by adding rule 9B.

This new rule mandates dematerialisation for all private companies excluding small companies and government companies.

All private companies shall have to convert all issued physical share certificates into digital form.

As per provisions of the Depositories Act, 1996 and regulations made the perspective of Dematerialization.  A small private company is termed to as a company with a paid-up capital of less than ₹4 crore and  turnover of less than ₹40 crore.

In India, there are two depositories registered with SEBI:

NSDL-National Securities Depository Ltd.

CDSL- Central Depository Services (India) Ltd.

NSDL and CDSL are both safe custodians for your dematerialised securities in India.

Steps for dematerialisation of shares by private companies:

Step 1: Amendment of Articles of Association (AoA)

Your company’s AoA needs to be updated to authorize shareholders to hold shares in dematerialised form. This may involve legal assistance.

Step 2: Appointment of Registrar and Transfer Agent (RTA) by passing Board Resolution:

You need to appoint a SEBI (Securities and Exchange Board of India) registered independent Registrar and Transfer Agent (RTA). They will act as intermediaries between the company and the depositories (CDSL or NSDL).

Step 3: Documents required for  submission to the RTA :

a) Board Resolution Copy, AOA, MOA, Certificate of Incorporation (COI)

b) Networth Certificate ( certified by PCA/PCS)

C) Authorised Signatory  [Authorization given to any Director(s) or other respective person (s) who will sign, execute, and such as on behalf of the company]

d) GST registration certificate or for not having GST registration to the company, then you have to provide Undertaking letter

e) Financial statements, Audit Reports

f) Shareholding list with Distinctive number, certificate numbers, Folio number, number of shares as per physical share certificate

g) Corporate action details (if held on applicable financial year, then you need to give that details like- Further issue, Bonus issues, Buy back of shares etc )

h) Such other documents

RTA will review and confirm to the company so that further process shall initiate for registration with NSDL or CDSL.

Step 4: Tripate Agreement Execution :

RTA, CDSL/ NSDL, and company will execute the Tripate Agreement for further process with atleast one witness from each side of the party.

Step 5: Obtaining International Securities Identification Number (ISIN):

Apply for an ISIN number for each type of share your company has issued (e.g., common stock, preferred stock). This unique code identifies your company’s securities globally.

‍Step 6: Opening demat account:

The company needs to open a Demat account with a Depository Participant (DP). DPs are usually banks or brokerage firms authorized to facilitate dematerialisation.

Step 7: Dematerialisation of existing shares:

This Facilitates the conversion of existing physical share certificates held by shareholders into electronic form through the DP. This may involve shareholders submitting their physical certificates to the DP.

Step 8: Dematerialisation for promoters, directors & Key Managerial Personnel (KMP):

It ensures all promoters, directors, and KMPs hold their shares in dematerialised form before issuing any new securities. They need to link their Demat accounts with the company and have their shareholdings electronically credited to them.

Step 9: Compliance reporting (in Form PAS 6):

You required to submit half-yearly returns in the form of PAS 6, notifying the dematerialisation of share details to MCA.

Consequences and penalties for non-compliance of dematerialisation-

While there are no specific penalties for non-compliance with Section 29 of the Companies Act, which signifies the dematerialisation mandate along with Rule 9B of the PAS Rules, it’s important to note that the general penalties outlined in Section 450 of the Companies Act could potentially be applicable in this scenario:

1) The company can’t issue or allot any securities including bonus shares in any form and buyback of shares/securities.

2) Any shareholder who has not dematerialised their holdings will be unable to sell their shares or subscribe to additional shares.

3) The company faces monetary penalties of INR 10,000 plus INR 1,000 for each day the violation continues, with a maximum of INR 200,000. Every officer in default of the company  also faces the same penalties, with a maximum of INR 50,000.

Any other exemption for non complying Dematerialization?

No such exemption granted by MCA apart from Government company and Small company. All companies have to mandatorily follow it.

Section 8 companies, along with public limited companies, holding or subsidiary companies, companies governed by a special Act, NBFCs, and Indian subsidiaries of foreign entities, are required to dematerialize their securities, irrespective of their paid-up capital or turnover

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