Ministry of Corporate Affairs (“MCA”) has made a major move to improve the security, efficiency and transparency of shareholding management by mandating that all private companies, excluding small and government companies, must convert their physical shares to electronic form by September 30, 2024. In accordance with the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, the MCA published a notice on October 27, 2023, requiring Non-Small Private Companies to dematerialize their shares by September 30, 2024. However, in response to industry feedback and to facilitate a smoother transition, the MCA issued an amendment on February 12, 2025, extending the compliance deadline to June 30, 2025. This extension applies to all private companies, other than producer companies, that were not classified as small companies as on March 31, 2023
This follows the earlier requirement for public companies to do so since 2018. The new Rule 9B stipulates that these companies must issue and transfer securities in dematerialized form. Dematerializing securities helps to transform the conventional way of financial markets from paper-based securities into an efficient and electronic format. The process of transforming paper share certificates into an electronic format is known as dematerialization. These electronic holdings are then stored in a demat account managed by a depository.
In India, two primary depositories, the National Securities Depository Limited (“NSDL”) and the Central Depository Services (India) Limited (“CDSL”), are responsible for maintaining these electronic records. This process removes the risks associated with physical share certificates, such as theft, loss, and forgery, and simplifies the transfer and management of shares. The Amendment applies to private companies as defined by the Act, with the exception of (a) government companies and (b) small companies, which are defined as private companies with a paid-up share capital of INR 4 crores or less and a turnover of INR 40 crores or less.
This mandate has been introduced keeping in view of legal, regulatory and economic factors and its impact is expected to have both short-term compliance costs and long-term systemic advantages. Private companies in India have traditionally operated outside the purview of stringent securities regulation and relied on physical share certificates to provide securities. However, this physical mode of holding shares has been linked to multiple vulnerabilities, including the ease of forging or duplicating certificates, backdating of share transfers, hence they have been vehicles of benami ownership and money laundering. The government aimed to introduce a secure and auditable system of recording securities ownership and reducing the risk of fraud and curbing illicit financial activities.
The requirement mandates that eligible companies issue all securities only in dematerialized form and ensure that their existing securities are also converted into electronic format before any further transfers or corporate actions such as buybacks, bonus issues, or rights offers. The process now involves several steps and roles of various intermediaries including obtaining an ISIN, registration with authorized depository like NDSL or CDSL and working with an RTA agent to execute the demat process. Existing shareholders will also have to dematerialize their current holdings before they can transfer them. Companies that do not qualify as “small’ have to comply within 18 months from their closing date. These changes impose new compliance burdens on family businesses or mid-sized companies that have conventionally operated informally. This would result in increased costs, especially for companies that lack specialized compliance teams. However, the government has tried to strike a balance by exempting certain genuine small companies, recognizing that the systemic risk posed by such entities is limited compared to the strain on their operations.
The impact of this reform is not just efficient regulatory but also practical. Such digitized shareholding structures that is wholly transparent makes it easier for the companies to raise funds, attract investors and carry out mergers or share buybacks. It would simplify due diligence processes and makes cap tables cleaner and more accessible for potential investors. Yet this step does not come without its transitional challenges. The need for legal support increases in amending Articles of Association and various procedural compliances. The long-term benefits of improved investor confidence, reduced risk of ownership disputes and easier regulatory checks will likely outweigh the initial costs of both time and money. In the larger scheme, this reform helps bridge the regulatory gap between listed and unlisted companies, in line with the global norm.
Accordingly, the mandate by MCA for dematerialization of securities by private companies is a significant policy shift towards accountability and transparency. While the transition may feel like a compliance hurdle for some but ultimately paves way for a cleaner securities market and economy, such tighter regulatory scrutiny is desirable and necessary.
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please recheck definition of small company