India: Mandatory dematerialisation of shares & debentures of private limited companies

updated on 28 February 2024 | reading time approx. 3 minutes

Under Indian law regime, every company incorporated under the Indian Companies Act, 2013 and erstwhile Act of 1956, which is limited by shares, is required to issue certain types of securities to its stakeholders. For example, equity shares, preference shares, debentures etc., depending upon various factors. These securities are issued by the Company either in physical or dematerialized form. Till now, only public limited companies were required to issue these securities in dematerialized form and private limited companies were exempted and hence could issue their securities in the form of a physical document.

However, with effect from 27 October 2023, the Ministry of Corporate Affairs, Government of India, has made it mandatory for private limited companies also to issue their securities in dematerialized form starting from 30 September 2024 and to facilitate conversion of all their existing securities in dematerialized form by 30 September 2024.

What is dematerialization of securities »
To whom does this new requirement apply? »
What is the deadline for compliance? »
What needs to be done? »
What are the consequences and penalties for non-compliance? »
No new share transfer is planned, no new share issue is expected – why is it still relevant to act now? »

What is dematerialization of securities

The conversion of physical securities into an electronic format which is maintained by the dedicated depositories authorized by the Government of India is called Dematerialization of securities. In this context, securities include any kind of shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a similar nature.

To whom does this new requirement apply?

All the private limited companies (other than small companies) incorporated in India. A subsidiary company of a body corporate is NOT a small company (refer below note for detail)
Shareholders and debenture holders of the private limited companies (other than small companies)

Note: A small company means a private limited company having a paid-up share capital of INR 40,000,000 or less and turnover not exceeding INR 400,000,000 in the immediately preceding financial year.

However, if your company is a holding company or a subsidiary company of a body corporate, then it will NOT be considered as a Small Company, even if it meets the above criteria.

What is the deadline for compliance?

18 months from the date of closure of financial year ending on or after 31 March 2023. Hence, in case the company’s financial year ends on 31 March 2023 (Standard Financial Year) then the due date is 30 September 2024. In case the company’s financial year is January to December then considering 31 December, 2023 as the date of end of financial year, 30 June, 2025 would be the due date for the compliance.

What needs to be done?

For a private limited company, which is a subsidiary of a foreign company

Securing International Security Identification Number (ISIN) for each type of security
Make sure that all shares are converted within the legal timelines

For a securityholder of a private limited company

Get a “demat account” opened with an authorized depository within the legal timelines
Convert existing securities into dematerialized form within the legal timelines

What are the consequences and penalties for non-compliance?

In case the company or the security holders do not comply with the requirement to dematerialize their securities by 30 September 2024, the following consequences will apply:

The company will not be able to issue/allot any type of securities
The security holder will not be able to transfer or subscribe for any type of security
Monetary penalties on company and every officer in default:
- On the company: INR 10,000 + INR 1,000 for each day violation continues. Maximum limit is INR 200,000
- Every officer of the company who is in default – same as above. Maximum limit is INR 50,000

No share transfer is planned, no new share issue is expected – why is it still relevant to act now?

The electronic data is easily monitored by the Registrar of Companies (ROC). It must be expected that non-compliances are easily detected and sanctioned. Sanction proceedings result in efforts and management time beyond the penalty amounts mentioned above.

Creating the required demat account must be expected to take time and depends on cooperation with the depository. Issuing of new shares or transfer of existing shares can become necessary for operational reasons also if not foreseeable today. It is recommended to have the structure in place when there is no immediate urgency to avoid significant unexpected delay at the time swift steps are required.