Since decades, ownership of shares in a company, whether a Public Limited Company or a Private Limited Company, was represented through physical share certificates issued to shareholders upon allotment of shares or other securities.
Over time, it was found that maintaining shares in physical form was not a completely reliable or transparent system. Cases of fake, duplicate, and forged share certificates were frequently reported, leading to disputes and difficulties in establishing genuine ownership of shares.
To overcome these issues and to bring greater transparency and security in the holding and transfer of shares, the system of dematerialisation (“Demat”) was introduced in India through the Depositories Act, 1996.
Under the demat system, shareholders do not hold physical share certificates. Instead, ownership of shares is maintained electronically in the records of a Depository through a Depository Participant (“DP”). The shareholder’s ownership is reflected through electronic entries in the demat account, similar to the way money deposited in a bank is reflected in a bank account statement. Although no physical certificate is issued, the shareholder continues to remain the beneficial owner of the shares.
In India, the requirement relating to dematerialisation of securities is mainly governed by Section 29 of the Companies Act, 2013 and Rules 9, 9A, and 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The system is also regulated under the Depositories Act, 1996 and regulations issued by the Securities and Exchange Board of India.
The requirement of section 29 is as below:
| Type of Company | Requirement as to Securities |
| (a) Every company making a public offer (whether a Public Company or a Private Company) |
|
| (b) Prescribed class(es) of companies (whether a Public Company or a Private Company) |
|
| (c) Companies not covered under (a) or (b) above |
|
A reading of Section 29 of the Companies Act, 2013 suggests that dematerialisation of securities is intended to apply broadly to all types of companies, including both Public Companies and Private Companies. However, the Companies (Prospectus and Allotment of Securities) Rules, 2014 provide certain exemptions and relaxations for specified classes of companies such as Small Companies, Producer Companies, Nidhi Companies, Government Companies, and wholly owned subsidiaries of Public Companies.
The relevant provisions are discussed below:
Rule 9 – Promoters’ Holding of Convertible Securities in Dematerialised Form
Rule 9 provides that where a Public Company proposes to make a public offer of convertible securities, the promoters of the company are required to hold such securities only in dematerialised form.
Further, any holding of convertible securities by the promoters that exists in physical form prior to the Initial Public Offer (“IPO”) must first be converted into dematerialised form before the public offer is made. After such conversion, the promoters are required to continue holding their securities only in dematerialised form.
The objective of this provision is to ensure transparency, traceability, and proper regulatory oversight in relation to promoter holdings at the time of a public issue.
Rules 9A and 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 deal with the issue and holding of securities in dematerialised form by Unlisted Public Companies and Unlisted Private Companies respectively. The key provisions are summarised below:
| Particulars | Rule 9A – Unlisted Public Companies | Rule 9B – Unlisted Private Companies |
| 1) Applicability | Applicable to every unlisted public company. | Applicable to every unlisted private company, other than a Small Company. |
| 2) Requirement to issue securities in demat form | Every unlisted public company shall:
– issue securities only in dematerialised form; and – facilitate dematerialisation of all its existing securities, |
Every unlisted private company (other than a Small Company) shall:
– issue securities only in dematerialised form; and – facilitate dematerialisation of all its existing securities, |
| 3) Exceptions | Not applicable to:
– Nidhi Companies; – Government Companies; and – wholly owned subsidiaries of Public Companies. |
Not applicable to:
– Small Companies; and – Government Companies. |
| 4) Meaning of Small Company | Not applicable. | A Small Company means a company, other than a public company, whose:
– paid-up share capital does not exceed ₹4 crore; and – turnover as per the immediately preceding financial year does not exceed ₹40 crore. |
| 5) Time limit where Small Company ceases to qualify | Not applicable. | Where a Small Company ceases to satisfy the prescribed limits, it shall comply with Rule 9B within 18 months from the end of the financial year in which it ceased to be a Small Company.
In case of a Producer Company, the compliance period is 5 years. Further, for companies that ceased to be Small Companies as on 31.03.2023, the extended compliance timeline is up to 30.06.2025. |
| 6) Obtaining ISIN and facilitating demat | The company shall apply to a Depository and obtain an International Securities Identification Number (“ISIN”) for each type of security and inform all existing security holders about the demat facility. | Same provisions as applicable under Rule 9A. |
| 7) Mandatory dematerialisation before further issue/ corporate action | Before making any:
– offer for issue of securities; – buy-back of securities; – bonus issue; or – rights issue, |
Same provisions as applicable under Rule 9A. |
| 8) Requirement for shareholders before transfer/subscription | Any security holder intending to transfer securities or subscribe to securities (whether through private placement, bonus issue, or rights issue) on or after 02.10.2018 must ensure that all existing securities are held in dematerialised form before such transfer or subscription. | Any security holder intending to transfer securities or subscribe to securities after the date on which Rule 9B becomes applicable to the company must first dematerialise all existing securities. |
| 9) Payment of fees, deposits and compliances | The company shall:
– make timely payment of fees to the Depository and Registrar & Share Transfer Agent (“RTA”); – maintain security deposit equivalent to at least two years’ fees; and – comply with applicable regulations, circulars, directions, and guidelines issued by Securities and Exchange Board of India (“SEBI”) and Depositories. |
Same provisions as applicable under Rule 9A. |
| 10) Restriction in case of default | A company defaulting in payment of fees or maintenance of security deposit shall not make any offer of securities, buy-back, bonus issue, or rights issue until the default is rectified. | Same provisions as applicable under Rule 9A. |
| 11) Other applicable laws and regulations | The provisions of the Depositories Act, 1996, SEBI (Depositories and Participants) Regulations, 2018, and SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 shall apply. | Same provisions as applicable under Rule 9A. |
| 12) Half-yearly audit report (Form PAS-6) | Every applicable unlisted public company shall file Form PAS-6 with the Registrar of Companies within 60 days from the conclusion of each half-year, duly certified by a Practising Company Secretary or Practising Chartered Accountant.
Any difference between issued capital and dematerialised capital shall immediately be reported to the Depository. |
Same provisions as applicable under Rule 9A. |
| 13) Investor grievances | Grievances of security holders shall be filed before the Investor Education and Protection Fund Authority (“IEPFA”). The Authority may initiate action against Depositories, Participants, or RTAs after consultation with SEBI. | Same provisions as applicable under Rule 9A. |
Thus, on a combined reading of Section 29 of the Companies Act, 2013 and Rules 9, 9A and 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the applicability of mandatory dematerialisation of securities for Public and Private Companies may be summarised as under:
| Applicable | Not Applicable |
| 1. Listed Public Companies (a Private Company cannot be listed) | 1. Government Companies (whether Public or Private) |
| 2. Other Unlisted Public Companies not covered under the exemption category, such as Government Companies, Nidhi Companies, and wholly owned subsidiaries of Public Companies | 2. Small Companies (which are necessarily Private Companies) |
| 3. Unlisted Private Companies other than Small Companies | 3. Nidhi Companies (which are necessarily Public Companies) |
| 4. Wholly owned subsidiaries of Public Companies (considering that the entire shareholding is held by the holding company and therefore separate dematerialisation requirements have been exempted.) |
Accordingly, mandatory dematerialisation has now become the general rule for most companies in India, with limited exemptions provided to certain specified categories of companies.
It is hoped that the above discussion will help readers in understanding the legal framework relating to dematerialisation of securities under the Companies Act, 2013 and the rules made thereunder.
For ease of reference, the text of Section 29 of the Companies Act, 2013 and the relevant Rules is reproduced below.
Section 29- Public offer of securities to be in dematerialised form.
(1) Notwithstanding anything contained in any other provisions of this Act,—
(a) every company making public offer; and
(b) such other class or classes of companies as may be prescribed,
shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.
(1A) In case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder.
(2) Any company, other than a company mentioned in sub-section (1), may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.
Companies (Prospectus and Allotment of Securities) Rules,2014
Rule 9. Dematerialisation of securities.—
(1) The promoters of every public company making a public offer of any convertible securities may hold such securities only in dematerialised form:
Provided that the entire holding of convertible securities of the company by the promoters held in physical form up to the date of the initial public offer shall be converted into dematerialised form before such offer is made and thereafter such promoter shareholding shall be held in dematerialized form only.
(2) Every public company which issued share warrants prior to commencement of the Companies Act, 2013 (18 of 2013) and not converted into shares shall, –
(a) within a period of three months of the commencement of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 inform the Registrar about the details of such share warrants in Form PAS-7; and
(b) within a period of six months of the commencement of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, require the bearers of the share warrants to surrender such warrants to the company and get the shares dematerialised in their account and for this purpose the company shall place a notice for the bearers of share warrants in Form PAS-8 on the website of the company, if any and shall also publish the same in a newspaper in the vernacular language which is in circulation in the district and in English language in an English newspaper, widely circulated in the State in which the registered office of the company is situated.
(3) In case any bearer of share warrant does not surrender the share warrants within the period referred to in sub-rule (2), the company shall convert the such share warrants into dematerialised form and transfer the same to the Investor Education and Protection Fund established under section 125 of the Act.
9A. Issue of securities in dematerialised form by unlisted public companies.
(1) Every unlisted public company shall –
(a) issue the securities only in dematerialised form; and
(b) facilitate dematerialisation of all its existing securities
in accordance with provisions of the Depositories Act, 1996 and regulations made there under.
(2) Every unlisted public company making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer shall ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been demateriarised in accordance with provisions of the Depositories Act 1996 and regulations made there under.
(3) Every holder of securities of an unlisted public company,_
(a) who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialised before the transfer; or
(b) who subscribes to any securities of an unnlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure that all his existing securities are held in dematerialized form before such subscription.
(4) Every unlisted public company shall facilitate dematerialisation of all its existing securities by making necessary application to a depository as defined in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996 and shall secure International security Identification Number (ISIN) for each type of security and shall in-form all its existing security holders about such facility.
(5) Every unlisted public company shall ensure that-
(a) it makes timely payment of fees (admission as well as annual) to the depository and registrar to an issue and share transfer agent in accordance with the agreement executed between the parties;
(b) it maintains security deposit at all times, of not less than two years, fees with the depository and registrar to an issue and share transfer agent in such form as may be agreed between the parties; and
(c) it complies with the regulations or directions or guidelines or circulars, if any, issued by the securities and Exchange Board or Depository from time to time with respect to dematerialisation of shares of unlisted public companies and matters incidental or related thereto.
(6) No unlisted public company which has defaulted in sub-rule (5) shall make offer of any securities or buyback its securities or issue any bonus or right shares till the payments to depositories or registrar to an issue and share transfer agent are made.
(7) Except as provided in sub-rule(s), the provisions of the Depositories Act 1996, the securities and Exchange Board of India (Depositories and participants) Regulations, 2018 and the securities and Exchange Board of India (Registrars to an Issue and share Transfer Agents) Regulations, 1993 shall apply mutatis mutandis to dematerialisation of securities of unlisted public companies.
(8) Every unlisted public company governed by this rule shall submit Form PAS-6 to the Registrar with such fee as provided in Companies (Registration Offices and Fees) Rules, 2014 within sixty days from the conclusion of each half year duly certified by a company secretary in practice or chartered accountant in practice.
(8A) The company shall immediately bring to the notice of the depositories any difference observed in its issued capital and the capital held in dematerialised form.
(9) The grievances, if any, of security holders of unlisted public companies under this rule shall be filed before the Investor Education and protection Fund Authority.
(10) The Investor Education and protection Fund Authority shall initiate any action against a depository or participant or registrar to an issue and share transfer agent after prior consultation with the securities and Exchange Board of India.
(11) This rule shall not apply to an unlisted public company which is:—
(a) a Nidhi;
(b) a Government company or
(c) a wholly owned subsidiary
9B. Issue of securities in dematerialised form by private companies:-
(1) Every private company, other than a small company, shall within the period referred to in sub-rule (2) –
(a) issue the securities only in dematerialised form; and
(b) facilitate dematerialisation of all its securities,
in accordance with provisions of the Depositories Act, 1996 (22 of 1996) and regulations made thereunder.
(2) A private company, which as on last day of a financial year, ending on or after 31st March, 2023, is not a small company as per audited financial statements for such financial year, shall, within eighteen months of closure of such financial year, comply with the provisions of this rule.
Provided that a producer company covered under this sub-rule shall, within a period of five years of closure of such financial year, comply with the provision of this sub-rule.
Provided further that a private company, other than a Producer company, which is not a small company as on 31st March, 2023, may comply with the provision of this sub-rule by 30th June, 2025.
(3) Every private company referred to in sub-rule (2) making any offer for issue of any securities or buyback of securities or issue of bonus shares or rights offer, after the date when it is required to comply with this rule, shall ensure that before making such offer, entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised in accordance with the provisions of the Depositories Act, 1996 (22 of 1996)and regulations made thereunder.
(4) Every holder of securities of the private company referred to in sub-rule (2),-
(a) who intends to transfer such securities on or after the date when the company is required to comply with this rule, shall get such securities dematerialised before the transfer; or
(b) who subscribes to any securities of the concerned private company whether by way of private placement or bonus shares or rights offer on or after the date when the company is required to comply with this rule shall ensure that all his securities are held in dematerialised form before such subscription.
(5) The provisions of sub-rules (4) to (10) of rule 9A shall, mutatis mutandis, apply to the dematerialisation of securities under this rule.
(6) The provisions of this rule shall not apply in case of a Government company.
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