Compulsory Dematerialisation of the Shares of a Private Company

Introduction

In October 2023, MCA or the Ministry of Corporate Affairs revised the Companies (Prospectus and Allotment of Securities) Rules 2014 by adding rule 9B. Rule 9B calls for the dematerialisation of all private companies, apart from small and government companies.    

In this blog, we will look at what the dematerialisation process is all about and what the Rule 9B includes.

What is Dematerialisation?

The dematerialisation process includes the conversion of physical shares to digital format. This electronic form of shares is then stored in a demat account handled by a depository, and an account to which the trader has access to.

There are two depositories registered under SEBI:

1. NSDL or National Securities Depository Ltd
2. CDSL or Central Depository Services Ltd

It depends on who a trader holds their demat account or who their DP is to determine who the depository would be for that account.

The 9B Rule Explained

Before October 2023 and the amendment by the MCA, dematerialisation of the shares by a private company was an option and was only mandatory for public sector companies or larger private companies. 

As a result of this, most private company shares were traded in physical form, with the fear of loss, theft and even forgery always existing. However, post the October 2023 amendment, Private Companies have been asked to convert all their existing physical shares to digital ones by September 24th, 2024. 

The 9B rule states that:

• Every Private Company, apart from small private companies will:

• Issue only digital certificates of shares from the date
• Convert all physical certificates to digital certificates

Here a “small company” can be categorized as a private company that has a paid-up capital of less than ₹4 Crores and a turnover of less than ₹40 Crores. 

1. At the end of a financial year, i.e. 31st March of a given year, if a company does meet the “small company” category criteria, then it will also have to follow the dematerialisation process. 
2. Private companies that do not come under the “small company” category need to make sure that any and every security held by its directors, promoters and managerial personnel is dematerialised before the company can issue new securities, bonus shares etc.
3.   For holders of securities by private companies, they would need to:
4. Dematerialise their shares or securities before they think of transferring it
5. Dematerialise their shares or securities before accessing them through private placements, bonus shares etc.
6. These rules shall not apply to government companies. 

Important Things to Keep in Mind During the Dematerialisation Process

Dematerialisation makes the process of online trading safer and more convenient for both the company and the investor/shareholder. Here is a list of things that need to be kept in mind when it comes to the compulsory dematerialisation ruling:

1. The dematerialisation process applies to all securities including stocks, bonds, etc and not just equity shares
2. The private company is allowed to issue securities in physical form before the specified date but it has to be done in digital form post the specified date, i.e. 30th September, 2024. 
3. Transferring securities in the physical form of the company can take place before September 30th. However, to transfer securities on or after 30th September, the securities need to be dematerialised first.

    Conclusion

The dematerialisation of private company shares can contribute greatly to a safer and more convenient process of online trading, leading to fewer fraudulent activities. The process also lens more transparency to the trading system, thus offering the best experience to both the company and the shareholder.