Dematerialisation of Shares in India: A Step-by-Step Guide for Businesses

The term “share dematerialization” (commonly called “demat”) describes the conversion of paper-based share certificates into digital securities. These digital shares are stored in a demat account, managed by SEBI-authorized depositories like NSDL (National Securities Depository Limited) or CDSL (Central Depository Services Limited).

Prior to dematerialisation, shareholders possessed physical paper certificates that were vulnerable to loss, forgery, and cumbersome transfer procedures. The Depositories Act of 1996 introduced demat accounts to modernize India’s capital markets.

Under the MCA’s 2023 amendment (Rule 9B), most private companies, excluding small enterprises, must complete share dematerialization by June 30, 2025.

Why is Dematerialisation Mandatory?

1. Reduced Fraud Risk: Physical certificates can be forged or misplaced. Digital shares eliminate this risk.
2. Operational Efficiency: Instant transfers & Simplified corporate actions
3. Regulatory Compliance: Aligns private companies with public companies, which already follow dematerialisation.
4. Global Standards: Most developed markets (e.g., U.S., EU) use electronic securities for transparency.

Who Needs to Dematerialise?

*Small companies defined as: Paid-up capital < ₹4 crore AND turnover < ₹40 crore.

Exceptions to Exemptions

Even if a company qualifies as “small,” it must dematerialise if it falls under:

• NBFCs registered with RBI.
• Holding/Subsidiary companies.
• Section 8 companies (non-profits).

Benefits for Businesses

• Investor Confidence: Digital shares attract institutional investors (AIFs, VCs).
• Cost Savings: Eliminates printing/storage of physical certificates.
• ESOP Management: Streamlines employee stock ownership plans (e.g., vesting, tracking).

MCA’s Rule 9B – Key Provisions, Deadlines, and Compliance

In October 2023, the Ministry of Corporate Affairs (MCA) amended the Companies (Prospectus and Allotment of Securities) Rules, 2014 by introducing Rule 9B, making dematerialisation compulsory for most private companies. This rule aims to bring transparency, reduce fraud, and align private companies with publicly listed entities that already operate under dematerialised shares.

Key Provisions of Rule 9B

1. Mandatory Dematerialisation for Private Companies

   • All private companies (except small companies and government companies) must:
     • Issue new shares only in dematerialized form.
     • All physical share certificates must be converted to electronic form before the regulatory deadline of June 30, 2025.

2. Promoters, Directors & KMPs Must Dematerialise First

   • Before issuing new shares, buybacks, or bonus/rights issues, companies must ensure that:
     • Promoters, directors, and Key Managerial Personnel (KMP) have dematerialised their holdings.
   • This prevents partial compliance and ensures uniformity in shareholding records.

3. Transfer Restrictions for Physical Shares

   • After the deadline, shareholders cannot transfer physical shares—they must first dematerialise them.
   • All new shares must be issued in demat form.

4. Alignment with Depositories Act, 1996

   • Companies must comply with SEBI’s regulations under the Depositories Act, including:
     • Appointing a Registrar and Transfer Agent (RTA).
     • Obtaining an ISIN (International Securities Identification Number).

Step-by-Step Procedure for Dematerialisation of Shares

The dematerialisation process for private companies involves several structured steps to ensure compliance with MCA’s Rule 9B. Below is a detailed breakdown:

Step 1: Amendment of Articles of Association (AoA)

Before initiating dematerialisation, the company must amend its Articles of Association (AoA) to allow:

• Electronic holding of shares (removing clauses that restrict dematerialisation).
• Recognition of depository mechanisms (NSDL/CDSL).

Process:

1. Board Resolution – Approve AoA amendments.
2. Shareholder Approval – Pass a Special Resolution (if required).
3. Filing with MCA – Submit Form MGT-14 (for amendments).

Timeframe: 2-3 weeks.

Step 2: RTA Selection and Onboarding

SEBI-approved RTAs facilitate company-depository (NSDL/CDSL) transactions.

Key Responsibilities of RTA:
✔ Maintain electronic records of shareholders.
✔ Process dematerialisation requests.
✔ Handle corporate actions (bonus issues, transfers).

1. Select a SEBI-approved RTA (e.g., KFintech, Link Intime).
2. Sign an agreement outlining fees and services.
3. Notify Depositories (NSDL/CDSL) about RTA appointment.

Cost: One-time setup fee + annual maintenance charges.

Step 3: Obtaining ISIN (International Securities Identification Number)

An ISIN is a 12-digit identifier for dematerialized securities.

Process:

1. Submit Application to depositories via RTA.
2. Documents Required:
   • Incorporation certificate.
   • Latest audited financials.
   • List of shareholders.
3. Verification & Approval (7-10 working days).

Note: Each share class (equity, preference) requires a separate ISIN.

Step 4: Opening Demat Accounts

Both companies and shareholders require DP-registered demat accounts.

For the Company:

• Open a company demat account (for tracking issued shares).
• Submit MoA, AoA, PAN, and Board Resolution.

For Shareholders:

• Submit Demat Account Opening Form.
• Provide KYC documents (PAN, Aadhaar, address proof).

DP Options: Banks (SBI, HDFC), brokers (Zerodha), or standalone DPs.

Timeframe: ~5-7 days per account.

Step 5: Dematerialisation of Physical Shares

Existing shareholders must convert physical certificates to electronic form.

Process:

1. Submit Dematerialisation Request Form (DRF) to DP.
2. Surrender Physical Certificates (defaced with “Surrendered for Demat”).
3. DP Verifies & Submits to RTA.
4. RTA Confirms & Updates Depository.
5. Shares Credited to Demat Account (~15-20 days).

Note:

• Defective certificates (mismatched details, damage) may cause delays.
• Transmission cases (deceased holder) require additional documentation.

Next Steps After Dematerialisation

• Half-yearly PAS-6 Filing – Report demat holdings to MCA.
• Compliance Tracking – Ensure all future shares are issued in demat form.

This structured approach ensures smooth dematerialisation of shares per regulatory requirements.

Roles of Depositories, DPs, and RTAs in Dematerialisation

The dematerialisation of shares involves three key intermediaries that ensure a smooth transition from physical to electronic shareholding. Key responsibilities include:

1. Depositories: NSDL vs. CDSL

India has two depositories, both regulated by SEBI:

Functions of a Depository:

✔ Hold securities electronically in demat form.

✔ Settle trades (buy/sell transactions).

✔ Maintain records of ownership and transfers.

✔ Process corporate actions (bonus issues, splits, dividends).

Which One Should a Company Choose?

• NSDL: Better for large private companies with complex share structures.
• CDSL: Cost-effective for SMEs and startups.

2. Depository Participants (DPs): Bridging Companies and Depositories

A Depository Participant (DP) is an agent (bank, broker, or financial institution) that provides demat account services.

How DPs Facilitate Dematerialisation?

1. Open Demat Accounts
   • For companies and shareholders.
2. Process Dematerialisation Requests (DRFs)
   • Verify physical certificates and submit them to the depository.
3. Enable Share Transfers
   • Execute electronic transfers via Delivery Instruction Slips (DIS).
4. Provide Account Statements
   • Regular updates on shareholdings.

3. Registrar and Transfer Agent (RTA): The Compliance Connection

An RTA is a SEBI-registered entity that manages a company’s shareholder records.

Key Responsibilities of an RTA:

✔ Maintain the Register of Members (electronic records).
✔ Process Dematerialisation Requests (verify & update holdings).
✔ Handle Corporate Actions (dividends, bonus issues).
✔ Liaise with Depositories (NSDL/CDSL) for ISIN activation.

How These Entities Work Together?

1. Companies must appoint an RTA and choose between NSDL or CDSL depositories.
2. Shareholders open demat accounts with a DP.
3. RTA processes dematerialisation requests and updates records.
4. Depository holds shares electronically and settles transactions.

Example Workflow:

• Shareholders submit physical shares and DRF to their DP.
• The DP forwards documents to the RTA.
• The RTA verifies and updates records in the depository (NSDL/CDSL).
• Share credits to demat accounts generally complete within 15-20 working days.

Challenges and Compliance Considerations in Dematerialisation

Penalties for Non-Compliance

Missing the June 30, 2025 deadline triggers:

Common Challenges 

KYC and PAN Compliance Hurdles

Common Issues:

• Incomplete KYC: Shareholders lacking updated PAN/Aadhaar linkage.
• Mismatched Details: Name discrepancies between PAN and share certificates.
• NRI/OCI Holders: Require additional documentation (e.g., passport, OCI card).

Solution:

• Conduct a pre-emptive KYC audit of all shareholders.
• Use SEBI’s KYC Registration Agency (KRA) to centralize records.

Timeframe: KYC delays can extend the process by 2–4 weeks.

System Capacity and Processing Delays

With 24+ lakh private companies mandated to dematerialise, depositories (NSDL/CDSL) face:

• Backlogs in ISIN allocation (typical delay: 10–15 days).
• Slower DRF processing (15–20 days vs. the standard 10 days).

Mitigation Strategies:

• Start early to avoid last-minute rushes.
• Digitize records upfront to reduce manual errors.

How Infiny Solutions Simplifies Dematerialisation for Your Business

Navigating the dematerialisation of shares can be complex, but Infiny Solutions streamlines the entire process with expert guidance, cutting-edge technology, and seamless compliance management. Here’s how we help businesses stay ahead of the June 2025 deadline while minimizing costs and operational disruptions.

1. End-to-End Dematerialisation Support

Infiny Solutions acts as your single-point partner for the entire dematerialisation lifecycle:

a. Pre-Compliance Readiness

✔ AoA Amendments: Our legal team drafts and files required changes to your Articles of Association.
✔ KYC & PAN Verification: We audit shareholder records and resolve discrepancies before submission.

b. RTA & Depository Coordination

✔ RTA Selection: We partner with SEBI-approved RTAs (like KFintech) for faster processing.
✔ ISIN Activation: Handle documentation and follow-ups with NSDL/CDSL.

c. Shareholder Onboarding

✔ Bulk Demat Account Opening: Coordinate with DPs to open accounts for all shareholders.
✔ Physical Certificate Conversion: Manage DRF submissions and track dematerialisation status.

d. Post-Demat Compliance

✔ PAS-6 Filing: Automate half-yearly reporting to MCA.
✔ Cap Table Updates: Sync demat holdings with your equity management system.

2. Competitive Edge: Why Choose Infiny Solutions?

a. Proprietary Demat Tracker

Our AI-powered dashboard provides real-time updates on:

• Pending shareholder KYC.
• ISIN activation status.
• DRF processing timelines.

b. Cost Optimization

• No redundant fees: We negotiate bulk discounts with RTAs/DPs.
• Fixed-price packages for startups and SMEs.

c. Scalable for Growth

• Adapts to ESOP issuances, fundraising rounds, and exit events.
• Integrates with SEBI’s AIF rules for investor compliance.

 Get Started with Infiny Solutions

Offer: Free Dematerialisation Audit

• Identify gaps in your current process.
• Receive a customized action plan.

Next Steps:

1. Share your shareholder list and AoA.
2. We’ll handle the rest – zero operational downtime.

Contact us today to secure your June 2025 compliance!

FAQs on Dematerialisation of Shares

1. What is the deadline for dematerialising shares of private companies?

Under MCA regulations, applicable private companies must dematerialize their shares before the June 30, 2025 deadline.

2. Does the regulation allow physical share issuance post-June 2025?

No. From July 1, 2025 onward, private companies can only issue shares in demat format, and physical share transfers become invalid.

3. What happens if a company misses the dematerialisation deadline?

• Fines: ₹10,000 + ₹1,000/day (max ₹2 lakh).
• Operational freeze: Cannot issue new shares, bonuses, or buybacks.

4. Do small companies need to dematerialise shares?

Exempt unless they are:
✔ NBFCs ✔ Holding/Subsidiary companies ✔ Section 8 companies.

5. How long does the dematerialisation process take?

Typically 3–6 weeks, depending on:
✔ KYC completeness ✔ RTA efficiency ✔ Depository processing times.