Dematerialization of Shares for Private Companies in India

Dematerialization of Shares for Private Companies in India. In a recent development, through an MCA notification dated October 27, 2023, the Ministry of Corporate Affairs (MCA) introduced Rule 9B in the PAS Rules called Companies (Prospectus and Allotment of Securities) Rules, 2014, mandating the dematerialization of securities for certain private companies. 
Before this amendment, it was obligatory for all unlisted public companies to exclusively hold and issue securities in dematerialized form. Private companies are now required to complete the dematerialization of shares or issue new shares in dematerialized form within 18 months from the conclusion of the financial year ending on March 31, 2023. Consequently, the compliance deadline is set for September 30, 2024. Thereafter Every non-small Private Limited Company is required to obtain an ISIN, file ROC Form PAS-6, and complete demat registration with NSDL/CDSL, according to Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
As per the MCA notification dated 05.03.2021, every company (Public Limited or Private Limited) shall file MGT-7 (except person companies and small companies) and mention the name of the Registrar and Share Transfer Agent and the Security ISIN. (Not applicable for small private companies and OPC as defined in the Companies Act).
Rule 9A: Issue of Securities in Dematerialised Form by Unlisted Public Companies
As you must be aware, the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018, notified by the Ministry of Corporate Affairs on September 10, 2018, state that:
Every unlisted public company making any offer for the issue of any securities, buyback of securities, or issue of bonus shares or rights offer shall ensure that before making such an offer, the entire holding of securities of its promoters, directors, and key managerial personnel has been dematerialized by the provisions of the Depositories Act, 1996, and the regulations made thereunder.
Further, with the amendment to Section 29 of the Companies Act, 2013, dated July 31, 2019, the word "PUBLIC" has been omitted. Hence, Private Limited Companies may also be required to obtain an ISIN.
Rule 9B: Issue of Securities in Dematerialised Form by Private Companies
Certain Private Companies:

Every private company, other than small companies, is required to comply.

Small Company Definition:

A "Small Company" means a company, other than a public company:

With a paid-up share capital that does not exceed Rs. 4 crore, or such higher amount as may be prescribed.

With a turnover that does not exceed Rs. 40 crore, as per the profit and loss account for the immediately preceding financial year.

Who Are Considered Certain Private Companies?

All unlisted public companies.

All unlisted private companies except small and government companies.

Section 8 companies.

Nidhi companies.

Private companies that are holding companies,  wholly-owned subsidiaries, or subsidiaries of other private companies.

What is ISIN (International Securities Identification Number)?
ISIN (International Securities Identification Number) is a unique 12-digit alphanumeric identification number allotted to security, such as fully paid-up equity, partly paid-up equity and equity with differential voting and dividend rights. This number uniquely identifies securities and is used globally for trading and settlement.
Process for Dematerialisation
The process for dematerialization is similar to opening a bank account and must select a Depository Participant (DP) to act as an intermediary between the depository and the company (or security holder), helping to complete the formalities. Investors need to fill in a form and submit a PAN card, proof of address, and bank account details. Compliance Calendar LLP has partnered with leading DPs and RTAs to process dematerialization.
Steps for Dematerialisation or conversion of Physical share to demat

Surrender of physical share certificates to the DP.

DP informs the depository about the request.

DP submits certificates to the Registrar of the issuer company.

The Registrar communicates with the DP to confirm the request.

Dematerialisation is completed by the Registrar.

Accounts are updated by the Registrar and informed to the DP.

The demat account of the investor is updated.

Advantages of Dematerialisation

Elimination of risks associated with physical certificates

Improves corporate governance

Prevents malpractices

Exemption from payment of stamp duty on transfer

Ease in transfer, pledge, etc.

Facilitates mergers and consolidation of companies

Loan against securities held in DEMAT form

Penalty for Non-Compliance
As per Section 450 of the Companies Act, 2013, the company and every officer of the company in default will be liable to a penalty of Rs. 10,000. In case of continuing contravention, there will be a further penalty of Rs. 1,000 for each day after the first day during which the contravention continues, subject to a maximum of Rs. 2,50,000 for the company and Rs. 50,000 for each officer in default.
Recent MCA Adjudication for Non-Compliance
The MCA has adjudicated penalties for non-compliance in similar cases for unlisted public companies. For instance, in the matter of M/s. Premier Energies Limited, penalties were imposed under Section 454 for violation of Section 29(1A) of the Companies Act, 2013, read with Rule 9A(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
Compliance and Filings related to DEMAT 
All unlisted private companies are required to file Form PAS-6 (Reconciliation of Share Capital) with the ROC within sixty days from the conclusion of each half-year. The due dates are:

For the half-year period from April to September: 29th November.
For the half-year period from October to March: 30th May.

Restriction on Securities Transactions
Before initiating any offer for issue, buyback, bonus issue, rights issue, or any share transfer, a private company must ensure that all securities held by its promoters, directors, and key management personnel are dematerialized.
Key Considerations

Appointment of an RTA (Registrar and Share Transfer Agent) is not mandatory if the company has in-house arrangements.
It is recommended to pay stamp duty on physical share certificates before dematerializing.
Depositories offer an optional facility to keep the ISIN under the status ‘Frozen for Debit’ to prevent unauthorized transfers.

Reason to Choose CDSL
CDSL offers a simplified admission process with minimal documentation and a single point of contact to assist with queries. They ensure compliance with all requirements and assist in admitting companies based on their needs.
Documents and Proposal
The company needs to hold a Board Meeting to appoint a Registrar & Transfer Agent (RTA) for the Depository and seek admission of the company's securities into the CDSL system to dematerialize the certificates of shareholders. Authorized persons should be appointed to sign all necessary documents to implement the decisions.
Role of RTA

Regular updation of the data downloaded by NSDL/CDSL on a periodical basis

Confirmation of the updates to NSDL/CDSL daily

Scanning the front and back of the share certificate before dematerialization

Handling correspondence and changes of address (COA) / changes of bank details (COB), rematerialization, dematerialisation, transfer, and transmission

Managing corporate actions, such as any additional allotment

Corporate Account Opening Checklist for Demat Account
If a shareholder is a company or body corporate, it must open a demat account subject to a checklist of required documents:

List of Directors on company letterhead.

List of Authorised Signatories on company letterhead.

Two Photographs of directors and authorized signatories.

Company PAN Copy with seal and signature of the authorized signatory or director.

Address Proof in the company's name (e.g., Certificate of Incorporation, bank statement, utility bill, MCA copy, or lease agreement) with seal and signature of the authorized signatory or director.

Self-Attested PAN Copies of all authorized signatories and directors.

Self-Attested Address Proof of all authorized signatories and directors.

Certificate of Incorporation Copy with the signature of the authorized signatory or director.

MOA and AOA with seal and signature of the authorized signatory or director on the first four pages.

Latest Two Years’ Balance Sheet with seal and signature of the authorized signatory or director.

Net Worth Certificate certified by a CA.

Board Resolution to open and operate the trading and demat account.

Latest Shareholding Pattern on company letterhead.

Net-Worth Certificate for New Companies from a CA with UDIN and income tax declaration on company letterhead.

Cancelled Cheque.

Bank Statement or Passbook for the last six months.

Retainership Services
CCL can offer dedicated compliance services for the end-to-end process of dematerialisation, including:

Sharing relevant information and compiling required documents.

Liaisoning with CDSL, DP, and RTA on behalf of the company.

Opening demat accounts and filing PAS-6 timely.

Intimating CDSL/RTA of any changes during the year and ensuring accurate reporting.

Reason to Choose Compliance Calendar LLP
Compliance Calendar LLP is committed to delivering timely, proactive, and user-friendly services for businesses preparing for ISIN generation and the conversion of physical shares to demat format. Our team of experienced professionals provides expert consultation and advisory support, ensuring each step is handled with precision and efficiency in partnership with CDSL, DP, and RTA.
We anticipate the needs of our clients and provide practical and innovative solutions, making the transition to dematerialized shares as seamless as possible. We look forward to collaborating with you and providing the support needed to achieve your objectives.
For more information and assistance, please visit Compliance Calendar LLP and connect at 9988424211 or email at info@ccoffice.in
Source: 
MCA notification:-
https://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf
https://www.mca.gov.in/Ministry/pdf/CompaniesProspectusAllotmentRule_23012019.pdf
http://www.mca.gov.in/Ministry/pdf/CompaniesProspectus3amdRule_10092018.pdf

In a recent development, through an MCA notification dated October 27, 2023, the Ministry of Corporate Affairs (MCA) introduced Rule 9B in the PAS Rules called Companies (Prospectus and Allotment of Securities) Rules, 2014, mandating the dematerialization of securities for certain private companies.

Before this amendment, it was obligatory for all unlisted public companies to exclusively hold and issue securities in dematerialized form. Private companies are now required to complete the dematerialization of shares or issue new shares in dematerialized form within 18 months from the conclusion of the financial year ending on March 31, 2023. Consequently, the compliance deadline is set for September 30, 2024. Thereafter Every non-small Private Limited Company is required to obtain an ISIN, file ROC Form PAS-6, and complete demat registration with NSDL/CDSL, according to Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

As per the MCA notification dated 05.03.2021, every company (Public Limited or Private Limited) shall file MGT-7 (except person companies and small companies) and mention the name of the Registrar and Share Transfer Agent and the Security ISIN. (Not applicable for small private companies and OPC as defined in the Companies Act).

Rule 9A: Issue of Securities in Dematerialised Form by Unlisted Public Companies

As you must be aware, the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018, notified by the Ministry of Corporate Affairs on September 10, 2018, state that:

Every unlisted public company making any offer for the issue of any securities, buyback of securities, or issue of bonus shares or rights offer shall ensure that before making such an offer, the entire holding of securities of its promoters, directors, and key managerial personnel has been dematerialized by the provisions of the Depositories Act, 1996, and the regulations made thereunder.

Further, with the amendment to Section 29 of the Companies Act, 2013, dated July 31, 2019, the word "PUBLIC" has been omitted. Hence, Private Limited Companies may also be required to obtain an ISIN.

Rule 9B: Issue of Securities in Dematerialised Form by Private Companies

Certain Private Companies:

Every private company, other than small companies, is required to comply.

Small Company Definition:

A "Small Company" means a company, other than a public company:

With a paid-up share capital that does not exceed Rs. 4 crore, or such higher amount as may be prescribed.
With a turnover that does not exceed Rs. 40 crore, as per the profit and loss account for the immediately preceding financial year.

Who Are Considered Certain Private Companies?

All unlisted public companies.
All unlisted private companies except small and government companies.
Section 8 companies.
Nidhi companies.
Private companies that are holding companies, wholly-owned subsidiaries, or subsidiaries of other private companies.

What is ISIN (International Securities Identification Number)?

ISIN (International Securities Identification Number) is a unique 12-digit alphanumeric identification number allotted to security, such as fully paid-up equity, partly paid-up equity and equity with differential voting and dividend rights. This number uniquely identifies securities and is used globally for trading and settlement.

Process for Dematerialisation

The process for dematerialization is similar to opening a bank account and must select a Depository Participant (DP) to act as an intermediary between the depository and the company (or security holder), helping to complete the formalities. Investors need to fill in a form and submit a PAN card, proof of address, and bank account details. Compliance Calendar LLP has partnered with leading DPs and RTAs to process dematerialization.

Steps for Dematerialisation or conversion of Physical share to demat

Surrender of physical share certificates to the DP.
DP informs the depository about the request.
DP submits certificates to the Registrar of the issuer company.
The Registrar communicates with the DP to confirm the request.
Dematerialisation is completed by the Registrar.
Accounts are updated by the Registrar and informed to the DP.
The demat account of the investor is updated.

Advantages of Dematerialisation

Elimination of risks associated with physical certificates
Improves corporate governance
Prevents malpractices
Exemption from payment of stamp duty on transfer
Ease in transfer, pledge, etc.
Facilitates mergers and consolidation of companies
Loan against securities held in DEMAT form

Penalty for Non-Compliance

As per Section 450 of the Companies Act, 2013, the company and every officer of the company in default will be liable to a penalty of Rs. 10,000. In case of continuing contravention, there will be a further penalty of Rs. 1,000 for each day after the first day during which the contravention continues, subject to a maximum of Rs. 2,50,000 for the company and Rs. 50,000 for each officer in default.

Recent MCA Adjudication for Non-Compliance

The MCA has adjudicated penalties for non-compliance in similar cases for unlisted public companies. For instance, in the matter of M/s. Premier Energies Limited, penalties were imposed under Section 454 for violation of Section 29(1A) of the Companies Act, 2013, read with Rule 9A(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Compliance and Filings related to DEMAT

All unlisted private companies are required to file Form PAS-6 (Reconciliation of Share Capital) with the ROC within sixty days from the conclusion of each half-year. The due dates are:

For the half-year period from April to September: 29th November.
For the half-year period from October to March: 30th May.

Restriction on Securities Transactions

Before initiating any offer for issue, buyback, bonus issue, rights issue, or any share transfer, a private company must ensure that all securities held by its promoters, directors, and key management personnel are dematerialized.

Key Considerations

Appointment of an RTA (Registrar and Share Transfer Agent) is not mandatory if the company has in-house arrangements.
It is recommended to pay stamp duty on physical share certificates before dematerializing.
Depositories offer an optional facility to keep the ISIN under the status ‘Frozen for Debit’ to prevent unauthorized transfers.

Reason to Choose CDSL

CDSL offers a simplified admission process with minimal documentation and a single point of contact to assist with queries. They ensure compliance with all requirements and assist in admitting companies based on their needs.

Documents and Proposal

The company needs to hold a Board Meeting to appoint a Registrar & Transfer Agent (RTA) for the Depository and seek admission of the company's securities into the CDSL system to dematerialize the certificates of shareholders. Authorized persons should be appointed to sign all necessary documents to implement the decisions.

Role of RTA

Regular updation of the data downloaded by NSDL/CDSL on a periodical basis
Confirmation of the updates to NSDL/CDSL daily
Scanning the front and back of the share certificate before dematerialization
Handling correspondence and changes of address (COA) / changes of bank details (COB), rematerialization, dematerialisation, transfer, and transmission
Managing corporate actions, such as any additional allotment

Corporate Account Opening Checklist for Demat Account

If a shareholder is a company or body corporate, it must open a demat account subject to a checklist of required documents:

List of Directors on company letterhead.
List of Authorised Signatories on company letterhead.
Two Photographs of directors and authorized signatories.
Company PAN Copy with seal and signature of the authorized signatory or director.
Address Proof in the company's name (e.g., Certificate of Incorporation, bank statement, utility bill, MCA copy, or lease agreement) with seal and signature of the authorized signatory or director.
Self-Attested PAN Copies of all authorized signatories and directors.
Self-Attested Address Proof of all authorized signatories and directors.
Certificate of Incorporation Copy with the signature of the authorized signatory or director.
MOA and AOA with seal and signature of the authorized signatory or director on the first four pages.
Latest Two Years’ Balance Sheet with seal and signature of the authorized signatory or director.
Net Worth Certificate certified by a CA.
Board Resolution to open and operate the trading and demat account.
Latest Shareholding Pattern on company letterhead.
Net-Worth Certificate for New Companies from a CA with UDIN and income tax declaration on company letterhead.
Cancelled Cheque.
Bank Statement or Passbook for the last six months.

Retainership Services

CCL can offer dedicated compliance services for the end-to-end process of dematerialisation, including:

Sharing relevant information and compiling required documents.
Liaisoning with CDSL, DP, and RTA on behalf of the company.
Opening demat accounts and filing PAS-6 timely.
Intimating CDSL/RTA of any changes during the year and ensuring accurate reporting.

Reason to Choose Compliance Calendar LLP

Compliance Calendar LLP is committed to delivering timely, proactive, and user-friendly services for businesses preparing for ISIN generation and the conversion of physical shares to demat format. Our team of experienced professionals provides expert consultation and advisory support, ensuring each step is handled with precision and efficiency in partnership with CDSL, DP, and RTA.

We anticipate the needs of our clients and provide practical and innovative solutions, making the transition to dematerialized shares as seamless as possible. We look forward to collaborating with you and providing the support needed to achieve your objectives.

For more information and assistance, please visit Compliance Calendar LLP and connect at 9988424211 or email at info@ccoffice.in

Source:

MCA notification:-

https://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf

https://www.mca.gov.in/Ministry/pdf/CompaniesProspectusAllotmentRule_23012019.pdf

http://www.mca.gov.in/Ministry/pdf/CompaniesProspectus3amdRule_10092018.pdf