Background

Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 mandates the dematerialisation of securities for private companies meeting specified criteria. This regulatory framework aims to enhance transparency, facilitate easier transfer of securities, and align private companies with modern securities management practices established under the Depositories Act, 1996.

Applicability

Issue of shares in demat form by following Companies:

1. 1. Private Limited Company other than a Small Company
   2. Section 8 Company
   3. Holding/subsidiary company
   4. A company or body corporate governed by any special Act

The provisions explicitly do not apply to Government companies.

Compliance Requirements For Dematerialization of Securities

1. Primary Obligations

Private companies falling within the scope must:

a) Issue securities only in dematerialised form All new securities issued by the company must be in electronic form through depositories (NSDL/CDSL).

b) Facilitate dematerialisation of all existing securities Companies must enable and support the conversion of all physical securities to dematerialised form.

Timeline for Compliance

The obligation arises when a private company ceases to be a small company based on audited financial statements for any financial year ending on or after 31st March, 2023.

Standard Timeline

18 months from the closure of the financial year in which the company is determined not to be a small company.

Extended Timeline for Producer Companies

Producer companies receive an extended compliance period of 5 years from the closure of the relevant financial year.

Transitional Provision

Private companies (other than Producer companies) that were not small companies as on 31st March, 2023 received a one-time extension to comply by 30th June, 2025.

     2. Mandatory Dematerialisation Before Corporate Actions

Companies required to comply with Rule 9B must ensure complete dematerialisation of securities held by the following persons before undertaking any of the specified corporate actions:

Covered Persons:

• • Promoters
  • Directors
  • Key Managerial Personnel (KMP)

Corporate Actions Requiring Prior Compliance:

• • Offer for issue of any securities
  • Buyback of securities
  • Issue of bonus shares
  • Rights offer

1. 7. Transfer of Securities

Any security holder intending to transfer securities on or after the compliance date must dematerialise those securities before the transfer.

Physical transfer of securities becomes impermissible once the company’s compliance date arrives.

    3. Subscription to New Securities

Any security holder subscribing to new securities (through private placement, bonus shares, or rights offer) on or after the compliance date must ensure all their existing securities are in dematerialised form before such subscription.

A shareholder holding any physical shares cannot subscribe to new securities until their entire holding is dematerialised.

Penalty & Punishment

Consequence of non- dematting: Every Private company can make an offer for issue/buy back/ bonus/ rights on or after 30.09.24  only after getting the securities of its promoters/ directors/ KMP dematted.  For any transfer of shares on or after 30.09.24, the securities to be transfered should have been dematted first. Also for any subscription of securities whether by way of private placement/ bonus/ rights, holder of securities to ensure that his existing holding is in demat form.

Section 450 – company and every officer of the company in default or such other person shall be liable to a penalty of Rs. 10,000, and in case of continuing default, with a further penalty of Rs.1000 for per day of default, subject to a max Rs. 2 lakh in case of a company and Rs.50000 in case of an officer who is in default or any other person.