Home MCA & Compliance Dematerialisation of Shares

Dematerialisation of Shares

Go paperless. Stay compliant. Grow seamlessly. You know, converting physical shares into electronic form is now a mandatory move for private companies in India! Dematerialisation of shares enhances transparency, simplifies ownership records, and aligns your company with SEBI and MCA regulations. We offer complete support with demat account coordination, shareholder communication, and compliance filings.

1,64,739 Happy Customers

Expert Consultation

99.9% customers satisfaction guaranteed.
No Hidden charges

Dematerialisation of Company Shares in India

Before 2023, shareholders in India held physical share certificates of the company, which were prone to risks such as theft, damage, forgery, and delay in transfer. With the introduction of digitization, the Ministry of Corporate Affairs (MCA) introduced an amendment in the Companies (Prospectus and Allotment of Securities) Rules 2014. The amendment added a new Rule 9B to the act, which now requires all the private limited companies incorporated in India, except for small and government companies, to dematerialise their securities.

In simple terms, dematerialisation (or 'demat') refers to the process by which a company’s shares, which were earlier issued in physical certificate form, are converted and held in electronic form with the help of a depository participant (DP) such as NSDL or CDSL. Today, dematerialisation has become a legal requirement for several classes of companies in India and forms a critical part of modern-day corporate governance and investor protection.

What is the Dematerialisation of Shares?

Dematerialisation, or "demat," is the process of converting physical share certificates into electronic format. The main aim behind the dematerialisation is to eliminate the risks associated with physical certificates.

What is a Depository Participant?

A Depository Participant is an agent of the depository that provides depository services to traders and investors as per the Depositories Act, 1996. In the depository, security accounts can be opened, withdrawn, and sold at any time on behalf of the investors' instructions. In India, there are two depositories registered with the Securities and Exchange Board of India (SEBI):

National Securities Depositories Limited (NSDL)
The Central Depository Services Limited

Legal Framework Governing Dematerialisation in India

Dematerialisation of shares is governed by the following statutes in India:

Depositories Act, 1996
SEBI (Depositories and Participants) Regulations, 2018
Companies Act, 2013
SEBI Circular Dated 24^th January 2022
MCA Notification on 10^th September 2018
SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015
RBI Guidelines for NBFCs and Other Regulated Entities

For non-banking financial companies and financial institutions, the Reserve Bank of India may also issue circulars and notifications prescribing dematerialisation norms where public issues or listings are involved.

Stakeholders Involved in Dematerialisation

Depository (NSDL/CDSL): They maintain ownership records of dematerialised shares and oversee all electronic transactions.
Depository Participant (DP): They act as the intermediary between the investor and the depository. Examples include Zerodha, Angel One, ICICI Bank, etc.
Registrar and Share Transfer Agent (RTA): RTAs process demat requests, maintain shareholder records, and ensure regulatory compliance. The Prominent RTAs are KFin Technologies, Link Intime India Pvt. Ltd., and Cameo Corporate Services.
Shareholder/Investor: The actual holder of shares who initiates the demat request and opens the demat account.
Company (Issuer): Responsible for issuing ISIN, coordinating with RTAs, facilitating shareholder demat, and filing compliance reports.

Benefits of Dematerialisation

Dematerialisation offers wide-ranging practical, legal, and strategic benefits to both companies and investors:

Enhanced Shareholding Security: Physical share certificates are prone to theft, forgery, mutilation, or loss. Demat shares that it eliminates these risks by maintaining electronic records.
Ease of Transfer and Trading: Transfer of shares in physical form requires paperwork and stamp duty. Demat shares are transferred instantly via Depository Participants (DPs) without any physical movement.
Cost-Effective Corporate Actions: Demat accounts allow seamless execution of corporate actions such as bonus issues, rights issues, dividend payments, and stock splits, reducing the administrative burden and cost on the company.
Faster Settlement Cycles: SEBI has moved to a T+1 rolling settlement system in most cases, possible only due to the existence of a dematerialised market. Faster settlement improves liquidity and reduces risks for investors.
Better Access to Capital Markets: Dematerialisation is a prerequisite for companies aiming for an IPO, rights issue, or listing on platforms like BSE or NSE. It ensures easier access to capital and broader participation from investors.

Comparison Between Physical and Dematerialised Shares

Aspect	Physical Shares	Dematerialised Shares
Form	Paper certificate	Electronic entry in the demat account
Storage	Risk of damage, loss, forgery	Securely held in a depository system
Transfer Process	Manual, time-consuming	Quick and seamless via online transfer
Stamp Duty on Transfer	Applicable	Not applicable
Liquidity	Low liquidity due to manual handling	High liquidity with ease of trading
Transparency	Difficult to track ownership movement	Fully traceable and verifiable
Cost to Maintain	Printing, courier, and notary costs	Minimal digital recordkeeping charges
Corporate Benefits	Delays in dividend/bonus allotment	Direct and timely credit
Investor Confidence	Lower due to poor governance visibility	Higher due to streamlined processes

Applicability and Mandatory Demat Requirements of Dematerialisation in India

The scope of mandatory dematerialisation has been steadily increasing under various SEBI circulars, MCA amendments, and depository regulations. Here’s a clear breakdown:

1. Mandatory Demat for Public Listed Companies

As per SEBI (LODR) Regulations, 2015, all listed companies must issue and transfer securities only in dematerialised form.
From April 1, 2019, SEBI prohibited the transfer of shares in physical form for listed companies, except in case of transmission or transposition.

2. Compulsory Demat for Unlisted Public Companies

As per Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014, unlisted public companies are also mandated to dematerialise their securities.

Every unlisted public company must issue and transfer shares only in dematerialised form.

It must facilitate demat connectivity through a Depository (NSDL/CDSL) by entering into a tripartite agreement with a Registrar and Share Transfer Agent (RTA).
The company must ensure that shareholders dematerialise their entire existing shareholding before any further issue or transfer.

3. Dematerialisation for Private Limited Companies

Traditionally, demat was not mandatory for private limited companies. However, from the notification released by the MCA in 2023, all the private companies except small companies have to dematerialise their securities.

4. For Shareholders: Mandatory Demat for Transfer

Even if a company is exempt, shareholders themselves cannot transfer physical shares unless they convert them into dematerialized shares. This mandate protects the securities market against paper-based risks.

Step-by-Step Process for Converting Physical Shares into Demat

Dematerialising physical shares is a standardised process regulated by the Depositories Act, SEBI regulations, and respective depositories (NSDL/CDSL). Below is a practical guide outlining how both companies and shareholders can convert physical shares into electronic form:

For Shareholders (Individual Investors)

Step 1: Open a Demat Account

The first step is to open a demat account with a Depository Participant (DP), which may be a bank, broker, or financial services company.
Both NSDL and CDSL have a vast network of registered DPs.

Step 2: Fill the Dematerialisation Request Form (DRF)

Obtain the DRF from your DP.
Fill in the required details like folio number, ISIN (International Securities Identification Number), and certificate details.

Step 3: Submit Physical Certificates

Along with the DRF, submit the original physical share certificates.
Mark “Surrendered for Dematerialisation” on each certificate.

Step 4: DP Verification and Forwarding to Issuer/RTA

The DP verifies the form and documents.
Then, they forward the request to the company’s Registrar and Share Transfer Agent (RTA) and the depository (NSDL/CDSL).

Step 5: Confirmation and Conversion to Electronic Form

After successful verification by the RTA, the physical shares are destroyed, and equivalent electronic shares are credited to the investor’s demat account.

Consequences of Non-Compliance for a Private Limited Company

Private companies in India are mandated to dematerialise their shares under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, as amended by the Ministry of Corporate Affairs (MCA) in 2023. Any failure to comply with the dematerialisation mandate attracts penalties under Section 450 of the Companies Act, 2013.

1. Initial Penalty: ₹10,000 for the company and each officer in default.

2. Continuing Default: An additional ₹1,000 per day for each day the default continues.

3. Maximum Penalty:

Company: Up to ₹2,00,000.
Individual Officer: Up to ₹50,000.

Compliance Deadline

The MCA has extended the deadline for private companies to dematerialise their shares to June 30, 2025.

Challenges Faced During the Dematerialisation Process

Dematerialization of shares has several benefits, and despite such benefits, the companies, shareholders, and investors may face some challenges, such as:

Costs Involved: Initial demat setup, registrar charges, and annual maintenance fees may be considered burdensome by smaller companies.
Resistance from Old Shareholders: Long-term shareholders with physical certificates may be reluctant or unaware of dematerialisation processes.
Operational Bottlenecks: Coordination between the company, depository participants, and RTA (Registrar and Transfer Agents) can be complex.
Documentation Gaps: Improper or incomplete historical records of share allotment and transfer may delay the demat process.
Data Reconciliation Issues: Matching physical share records with electronic data may result in discrepancies, requiring reconciliation and legal validation.

Why Choose Kanakkupillai for Dematerialisation of Shares?

Managing the dematerialisation of shares involves complex regulatory compliance and procedures. Kanakkupillai can support you through this process:

Expertise in Compliance: Our team of professionals is well-versed in the latest MCA and SEBI regulations, ensuring accurate and timely compliance.
Tailored Solutions: We understand that each company is different and has different needs. Our services are customised to align with your specific requirements, ensuring a smooth dematerialisation process.
End-to-End Support: From obtaining ISINs to liaising with depositories and RTAs, we provide comprehensive support throughout the dematerialisation journey.
Proven Track Record: We are trusted by numerous professionals across sectors, and our commitment to excellence has made us a preferred partner for dematerialisation services across India.

Frequently Asked Questions

What is the dematerialisation of shares? +

Dematerialisation is the process of converting physical share certificates into electronic format, enabling easier and safer trading, transfer, and holding of securities.

Is dematerialisation mandatory for all shareholders? +

Yes, as per SEBI guidelines and MCA rules, all companies (except small private companies under certain conditions) are required to dematerialise their securities, and shareholders must hold shares in demat form to transfer or sell them.

Can I still hold physical share certificates in India? +

You can hold them, but you won’t be able to sell, transfer, or pledge them unless they are first dematerialised. Regulatory authorities have virtually barred the use of physical shares for transactions.

What documents are required for dematerialising my physical shares? +

You will need the following: • A Demat Account with a DP • Filled and signed Dematerialisation Request Form (DRF) • Original share certificates • PAN card copy • Aadhaar or address proof • Passport-size photograph

Can I dematerialise shares of an unlisted company? +

Yes, unlisted public and private companies can dematerialise their shares through NSDL or CDSL by entering into agreements with depositories and appointing a Registrar and Transfer Agent (RTA).

Are there any charges for dematerialisation? +

Yes, DPs may charge a nominal fee per certificate for dematerialisation, and your demat account could also have an annual maintenance fee. Charges vary between service providers.

What happens if my name is misspelled or my signature mismatches on the share certificate? +

Any discrepancy such as name mismatch, spelling error, or signature mismatch must be rectified with the company/RTA before initiating the dematerialisation request.

How can I verify that my shares are successfully dematerialised? +

Once the process is complete, the shares will reflect in your demat account. You’ll also receive an SMS or email alert from your Depository Participant confirming the credit.

What if I lose my physical share certificates before dematerialisation? +

In such a case, you must immediately inform the company or its RTA, file a FIR, and apply for duplicate share certificates before proceeding with the dematerialisation process.