Mandatory Demat of Shares for Private Companies: A Complete Guide

Short answer: Yes, dematerialization of shares is mandatory for most Indian private companies, except for those classified as 'small companies'. Under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, these private companies must dematerialize their entire holding of shares. This rule aims to improve transparency, security, and efficiency in share transfers and record-keeping, aligning private companies with the practices of public companies.

What is dematerialization of shares?

Dematerialization is the process of converting physical share certificates into an equivalent number of securities in electronic form. These electronic securities are then credited to an investor's demat account held with a Depository Participant (DP). In India, depositories like the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) hold these securities, eliminating the risks associated with physical certificates like theft, forgery, and loss.

Is demat mandatory for all private companies?

No, it is not mandatory for all private companies. The rules provide a specific exemption for 'small companies'. According to Section 2(85) of the Companies Act, 2013, a company is considered 'small' if it meets both of the following criteria:

1. Paid-up share capital: Does not exceed ₹4 crore.
2. Turnover: Does not exceed ₹40 crore as per its last profit and loss account.

A company must satisfy both conditions to be classified as a small company. If a private company's paid-up capital or turnover exceeds these limits, it must comply with the mandatory dematerialization rules.

What is the deadline for mandatory demat?

The deadline for compliance is 18 months from the end of the financial year in which the company ceases to be a 'small company'. For instance, if a company's turnover exceeded ₹40 crore in the financial year 2024-25 (ending 31 March 2025), it would no longer be a small company. The deadline for that company to complete the dematerialization process is 30th September 2026.

Any private company that is not a small company must ensure that all its securities are in dematerialized form. Furthermore, after this date, any offer for the issue of securities, buyback of securities, or issue of bonus shares must be in dematerialized form only.

Feature	Physical Shares	Dematerialized (Demat) Shares
Form	Paper certificates	Electronic book-entry
Storage	Physical custody, risk of loss/damage	Held in a secure demat account with a DP
Transfer	Physical transfer deed, stamp duty, lengthy process	Instantaneous electronic transfer
Security	Prone to theft, forgery, mutilation	High security with digital safeguards
Record-Keeping	Company's Register of Members	Managed by Depository and RTA, single source of truth
Transmission	Cumbersome legal process with documentation	Simplified process through the DP
Compliance	Becoming obsolete and non-compliant for many	Mandatory for non-small private companies

What is the process for dematerializing shares?

A private company must follow a structured process to dematerialize its shares. This involves appointing intermediaries and coordinating with all shareholders.

1. Board Approval: The Board of Directors must pass a resolution to approve the dematerialization of the company's securities and to appoint a Registrar and Transfer Agent (RTA).
2. Appoint an RTA: The company must enter into a tripartite agreement with a SEBI-registered RTA. The RTA manages the company's share registry and acts as an intermediary between the company and the depositories.
3. Obtain ISIN: The company, through its RTA, must apply to a depository (NSDL or CDSL) to obtain an International Securities Identification Number (ISIN) for each class of its securities. The ISIN is a unique 12-character code that identifies the security.
4. Inform Shareholders: The company must inform all its shareholders about the mandatory dematerialization and guide them to open individual demat accounts with a Depository Participant (DP) of their choice.
5. Shareholder Action: Each shareholder submits their physical share certificates along with a Dematerialization Request Form (DRF) to their DP.
6. Verification and Credit: The DP forwards the physical certificates and DRF to the company's RTA. The RTA verifies the documents, cancels the physical certificates, and confirms the dematerialization to the depository. The depository then credits the equivalent number of shares to the shareholder's demat account.
7. Compliance Filing: The company must file Form PAS-6 (Reconciliation of Share Capital Audit Report) with the Registrar of Companies (ROC) on a half-yearly basis.

Worked example

Let's consider 'Bengaluru Robotics Pvt. Ltd.', a private company incorporated in 2020. As of 31st March 2025, its financials are:

• Paid-up Share Capital: ₹2 crore
• Turnover for FY 2024-25: ₹55 crore

Step 1: Determine Applicability Since the company's turnover (₹55 crore) exceeds the ₹40 crore threshold, it is not a 'small company' for the purposes of this rule, even though its paid-up capital is below the limit. Therefore, mandatory dematerialization applies.

Step 2: Calculate Deadline The financial year in which it crossed the threshold ended on 31st March 2025. The deadline for compliance is 18 months from this date, which is 30th September 2026.

Step 3: Action Plan (June 2026)

• The Board of Bengaluru Robotics Pvt. Ltd. passes a resolution to dematerialize its shares.
• They sign an agreement with an RTA like Link Intime or KFin Technologies.
• Through the RTA, they apply to CDSL and obtain an ISIN for their equity shares.
• The company's compliance officer emails all 15 shareholders, instructing them to open demat accounts and submit their physical share certificates along with the DRF to their respective DPs.
• By August 2026, the RTA has received all physical certificates, verified them, and confirmed the credit of electronic shares to the shareholders' demat accounts.

Step 4: Post-Compliance After dematerialization, the company cannot issue any new physical share certificates. All future share transfers, buybacks, or bonus issues must happen in demat form only. The company must also ensure timely filing of Form PAS-6.

Common mistakes

1. Incorrectly assuming 'Small Company' status: Many founders forget that both paid-up capital AND turnover limits must be met. Exceeding even one makes the company non-small and brings it under the ambit of this rule.
2. Missing the 18-month deadline: Procrastinating the process can lead to non-compliance. The process involves multiple external parties (RTA, Depository, DPs, shareholders) and can take a few months to complete.
3. Failing to inform all shareholders: The company is responsible for facilitating the process. Lack of clear communication can lead to delays as some shareholders might not have demat accounts or may be slow to respond.
4. Not filing Form PAS-6: Dematerialization is not a one-time task. The half-yearly filing of Form PAS-6, certified by a practicing Chartered Accountant or Company Secretary, is a continuing compliance requirement.

How SP & SC helps

Navigating the nuances of mandatory dematerialization requires careful planning and execution. At SP & SC, we provide end-to-end assistance to ensure your company is fully compliant. We handle the entire process, from drafting the necessary board resolutions and amending constitutional documents to liaising with RTAs and depositories to secure your ISIN. Our team also assists in coordinating with your shareholders and manages the necessary filings with the ROC, including the half-yearly Form PAS-6. For a complete compliance solution, explore our Annual Compliance Filings for Private Limited Companies.

Frequently asked questions

H3: What is a 'small company' for this rule?

A 'small company', as defined under Section 2(85) of the Companies Act, 2013, is a private company with a paid-up share capital not exceeding ₹4 crore AND a turnover not exceeding ₹40 crore. A company must satisfy both conditions. If it fails even one, it is not a small company and must comply with dematerialization rules.

H3: Can a private company issue new shares in physical form?

No. A private company to which the mandatory demat rule applies is prohibited from issuing any new shares in physical form. All further issues, whether through a rights issue, private placement, or bonus issue, must be in dematerialized form only.

H3: What is an ISIN?

An ISIN (International Securities Identification Number) is a unique 12-digit alphanumeric code assigned to a security (like a share or a debenture) to facilitate its identification during trading and settlement. It is essential for holding securities in dematerialized form.

H3: Do I need a specific demat account for my private company shares?

No, you do not need a separate or special demat account. The shares of an unlisted private company can be held in the same demat account where you might hold shares of listed companies or mutual fund units. You just need to provide your existing demat account details to the company.

H3: What happens if a shareholder does not have a demat account?

If a shareholder in a company that must comply with these rules wishes to transfer their shares, they must first get the shares dematerialized. The company is obligated to facilitate dematerialization for all its existing securities. Any shareholder subscribing to new shares must also be allotted shares only in demat form.

Get a fixed-fee quote

Compliance with mandatory dematerialization is not optional. Let our experts manage the process for you seamlessly. Share your company's incorporation documents and recent financial statements, and we will provide a written fixed-fee quote for the entire process. We handle everything from documentation and RTA appointment to ISIN procurement and final compliance. Contact SP & SC or message us on WhatsApp at +91 90356 74566 to get started.