A private limited company is an organisation carried on by a small group of individuals, called founders, their family members, or private investors, and it is not listed on any stock exchange. It is commonly called a Private Limited in India and governed by the Companies Act 2013. Restrictions on the transfer of shares are imposed; the number of shareholders cannot exceed 200, and the company cannot offer securities to the public for subscription. This type of organisational structure provides greater control over the affairs of the company by maintaining privacy and giving options in governance and ownership.
Equity means ownership in a company that is not publicly traded. A private company is usually owned by a limited number of persons, such as the founders, families, or private investors, with no public opportunity to purchase shares. The sale or transfer of these shares is governed by the Articles of Association of the company, which normally contains transfer restrictions requiring the approval of other shareholders or the board of directors. Some of the benefits of an investment in the shares of a private company can include greater control over corporate governance, a possibility of high returns, and the ability to build wealth over the long term. However, due to the private nature and less accessibility to these markets, the shares will be much less liquid when compared with shares from public companies and will carry a higher risk. Another challenge is coming up with a value for these shares, which often requires an expert analysis and must fulfill various regulatory requirements, especially in the process of transfer, generational succession, or during the working of investment rounds. Private company shares generally get distributed to founders, employees (via an Employee Stock Ownership Plan), or early-stage investors, and the process of share issuance is a vital function of attracting investment and maintaining control within a small group. Hence, it is essential that all parties involved understand all the legal, financial, and tax ramifications associated with such shares.
What is Dematerialisation and What are Dematerialised Shares?
Dematerialisation is the conversion of physical share certificates into an electronic form to facilitate easier handling, sale, and storage. In doing so, the shares cease to exist in paper form and are instead held and traded in digital form through a Demat account set up with a DP registered with NSDL or CDSL in India. Dematerialised shares exist only in the electronic form; these are credited in an investor’s Demat account and retain all ownership rights and values as that of the original physical shares, besides giving more convenience, safety, and transparency to the investor. Thus, dematerialised shares eliminate the risk of theft, fraud, loss, or destruction of paper certificates and also facilitate easier transfer of shares, trade settlements, and portfolio management.
To begin dematerialising physical shares, a shareholder would submit a Dematerialisation Request Form (DRF), together with the original share certificates, to his DP. Upon acceptance and processing of the request, the shares would be credited to his Demat account, while his physical certificates would cease to exist. Mostly in India, trades must be demat, thereby shaping an environment for securities markets that is safe, transparent, and paperless.
Dematerialised Shares of a Private Company
Dematerialised shares of a private company mean equity shares held in dematerialised form, in contrast to the conventional physical share certificates. While the idea of dematerialisation has been less often associated with private companies’ shares, it is indeed possible for private company shares to be dematerialised by registering with a depository such as NSDL or CDSL through a Registrar and Transfer Agent (RTA), thereby linking the shareholding with Demat accounts. It helps in building transparency in shareholding, easy transfer of shares, and reduces the chances of loss of share certificates, forgery, or physical destruction. Under the Companies (Prospectus and Allotment of Securities) Rules, 2014, most unlisted public companies (Rule 9A) and private companies that are not small companies (Rule 9B) must issue securities only in demat form and dematerialise their existing shares. For small companies, it remains optional, and many choose to dematerialise voluntarily to make transfers easier and to attract institutional investors. Once dematerialised, the shares are held under the Depositories Act, 1996 and the bye-laws of NSDL or CDSL. This does not make the company a listed company, and SEBI’s listing rules do not apply to it. Companies planning to dematerialise their shares should ensure their incorporation documents are in order starting with online private limited company registration so that all subsequent shareholding and compliance processes are built on a strong legal foundation.
When Is Dematerialisation Mandatory for a Private Company?
Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, inserted by the MCA in October 2023, requires every private company that is not a small company to:
- issue all new securities only in demat form; and
- facilitate the dematerialisation of all its existing securities through a depository.
Which private companies are exempt?
Small companies are exempt. Since 1 December 2025, a private company is a small company if its paid-up capital is up to ₹10 crore and its turnover is up to ₹100 crore. Both conditions must be met; a company that exceeds either limit is not a small company.
A holding company or a subsidiary company cannot be a small company, whatever its size. So a private company that is part of a group is covered by Rule 9B even if its own capital and turnover are low.
Check your company’s status at the end of every financial year. A company that crosses either limit ceases to be a small company and comes under Rule 9B, with a transition period to complete dematerialisation.
What changes once Rule 9B applies?
- Every new issue of shares, whether by private placement, rights issue or bonus issue, must be in demat form only.
- Before the company makes any issue of securities, buyback, bonus issue or rights offer, the entire shareholding of its promoters, directors and key managerial personnel must be in demat form.
- A shareholder who wants to transfer shares must first get them dematerialised.
- A shareholder who subscribes to new shares must first hold all existing shares in demat form.
- The company must keep its statutory registers in line with the depository records and update its filings with the Registrar of Companies.
Small companies can still dematerialise voluntarily, and many do so before raising funds from institutional investors.
Dematerialising the Physical Shares in a Private Company
In dematerialising shares of a private company, it is essential to outline several steps, including consideration of their legal aspects, to incorporate all about compliance and the implementation of this concept. This approach probably changes the framework of shareholding in the company, thus giving more security, transferability, and regulatory compliance to it. These considerations, when incorporated in the action plan, ensure smooth implementation of the dematerialisation process and create more transparency and compliance, resulting in augmented investor trust. Understanding the complete process of dematerialisation of shares before initiating it is essential for private companies to avoid procedural errors and ensure a seamless transition from physical to electronic shareholding.
- Board Resolution – The Board of Directors passes a resolution to dematerialise the company’s securities, appoint an RTA and authorise a director or officer to sign the agreements with the depository and the RTA.
- Revision of the Articles of Association – The Articles of Association must check if they allow dematerialisation of shares and electronic recordkeeping. If they do not, the articles must be altered by a special resolution of the shareholders under Section 14 of the Companies Act, 2013.
- Selection of Depository and RTA – The company appoints a SEBI-registered Registrar and Transfer Agent (RTA) and signs a tripartite agreement with the depository (NSDL or CDSL) and the RTA. The RTA handles dematerialisation requests and acts as the interface between the company, the depository and the shareholders.
- Obtaining the International Securities Identification Number (ISIN) – The company must obtain an ISIN for its securities from the depository. This distinct identification number is necessary for the shares to be held and traded in a dematerialised format. Companies that are unsure about how to obtain an ISIN for your company shares can refer to detailed guidance on the application process, eligibility criteria, and depository requirements before proceeding with dematerialisation.
- Shareholder Dematerialisation Account – Every shareholder must open a Demat Account with a DP. The company must advise shareholders on the procedure for opening and operating these accounts, especially if the shareholders are unaware of the procedure.
- Dematerialisation Request Procedure – To get their securities dematerialised, the shareholders have to submit their Dematerialisation Request Form (DRF) and the original certificates to their DP. The Registrar and Transfer Agent (RTA) is involved in the verification and processing of such requests, along with the depository. Companies that are unclear about how to issue share certificates in a private company should resolve this before initiating dematerialisation, as valid physical certificates are a prerequisite for the DRF submission process.
- Regulatory Compliance – Under Section 88 of the Companies Act, 2013, the register and index of beneficial owners maintained by the depository under the Depositories Act, 1996 is treated as the company’s register of members for shares held in demat form. Section 29 of the Companies Act, 2013 and Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 set out when a private company must hold its securities in demat form. Following the MCA guidelines is of utmost importance, especially those private companies for whom dematerialisation is mandatory.
- Internal Record Keeping – They should be maintaining electronic Registers of Members which shall always be kept updated and shall correspond with the records maintained by the depository, for enforcing the statutory provisions.
- Expenses and Infrastructure – There are initial charges involved in the whole process of dematerialisation, which includes the depository agreements, RTA fees, and annual maintenance charges. These should be duly considered by the company while planning their financings.
- Transfer Restrictions – Very often, restrictions are placed on the transfer of shares by private companies. Such restrictions should be carefully watched, and the depository system must contain a proper reflection thereof to avoid any instances of fraud.
- Communication and Help – There has to be good communication with the shareholders. The company should be able to guide shareholders during the dematerialisation process and in addressing issues or opposition by older or less technologically savvy investors.
Consequences of Non-Compliance
Failure to comply with the dematerialisation system in a private company in India may result in legal and operational consequences. Under the Companies (Prospectus and Allotment of Securities) Rules, 2014, private companies that are not small companies, and most unlisted public companies, must issue and transfer shares only in demat form. A shareholder of a covered company cannot transfer shares that are still in physical form; the shares must be dematerialised before the transfer is made. Also, the companies may incur penalties under the Companies Act of 2013, with fines imposed on both the company and its officers. Besides non-compliance hindering capital raising activities, private placements, and shareholder restructuring, investors prefer compliance related to dematerialisation for transparency and ease of transactions. Proper electronic records also simplify corporate restructuring exercises, including the conversion of private company into opc, where ownership and shareholding patterns may undergo significant changes. Hence, from the company’s side, it impairs the corporate image and attracts regulatory scrutiny from the Registrar of Companies and the Ministry of Corporate Affairs. Furthermore, all shares that are not dematerialised cannot be listed, restricting growth opportunities. Therefore, timely dematerialisation is vital for regulatory compliance and smooth corporate operation.
Conclusion
The conversion of shares from physical to electronic in a private company can be considered the second most important step towards modernising corporate financial and compliance structure. This conversion is necessary for transparent share transfer processes, ease of transfer, reduction of loss and forgery risk, and regulation under the changing legal environment. With the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs moving further towards digitisation and investor protection, the need to dematerialise is growing, and for private companies that are not small companies it is now a legal requirement. Not only does it smooth transactions and provide better records, but that in itself inculcates greater confidence in the company’s investors and enhances the corporate reputation. Also, it is easier to raise money and do due diligence for shares that are dematerialised, should the company decide to go for an initial public offering (IPO) in the future. For the shareholders, it provides safety and convenience, where they can immediately access their investments. For private companies that are not small companies, dematerialisation is a legal requirement under Rule 9B. For small companies, it is a sound choice that prepares the company for investment and growth.
Frequently Asked Questions
Is dematerialisation of shares mandatory for every private limited company?
No. Under Rule 9B, it is mandatory only for private companies that are not small companies. A small company, with paid-up capital up to ₹10 crore and turnover up to ₹100 crore, can choose to dematerialise voluntarily.
Is a subsidiary private company exempt as a small company?
No. A holding or subsidiary company cannot be a small company under the Companies Act, 2013. It must dematerialise its shares under Rule 9B even if its capital and turnover are low.
Can a shareholder transfer physical shares after Rule 9B applies to the company?
No. The shareholder must first get the shares dematerialised through a depository participant and then transfer them.
What is needed to start dematerialisation?
A board resolution, a tripartite agreement with NSDL or CDSL and an RTA, and an ISIN for the company’s shares. Each shareholder also needs a demat account with a depository participant.
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