For many years, companies in India gave out paper share certificates to show who owned how many shares. These certificates were often lost, torn, forged, or just too much trouble to handle.
To solve this, India introduced Dematerialisation (or Demat). It simply means converting those paper certificates into electronic shares, stored safely in a Demat Account—just like you keep money in a bank account.
At first, demat was only for listed companies (those whose shares trade on NSE or BSE). But now, the government has also made it compulsory for many unlisted companies, including private limited companies.
This is a big change for business owners, promoters, family businesses, and investors. Let’s go step by step and understand what this means.
What is Dematerialisation?
Dematerialisation means turning paper shares into digital shares.
- The shares are held in a Demat Account, just like money is held in a bank account.
- Two organizations in India keep these records:
- NSDL (National Securities Depository Limited)
- CDSL (Central Depository Services Limited)
Once you dematerialise, you will not get or keep paper share certificates anymore. Your ownership is fully shown in electronic records.
Why Did the Government Make It Compulsory?
Earlier, paper shares created a lot of problems:
- Fake or duplicate certificates.
- Loss or theft of certificates.
- Long delays in transferring shares.
- Disputes between shareholders.
To make things safer and more transparent, the Ministry of Corporate Affairs (MCA) made rules:
- 2018 – Unlisted public companies must use demat.
- 2023 – Private companies were also brought under the demat rules.
So now, almost all companies (big or small, listed or unlisted) must move to demat shares, unless they are exempt.
Which Companies Must Follow?
- Unlisted Public Companies
- Since October 2018, they can issue and transfer shares only in demat.
- Private Companies
- Since October 2023, they also must comply.
- But three types are exempt:
- Small companies.
- Government-owned companies.
- Section 8 companies (non-profits).
- Promoters, Directors, and Major Shareholders
- They must convert their shares to demat before the company can issue new shares, buy back shares, or allow transfers.
How Does the Dematerialisation Process Work?
It sounds complex, but it’s actually simple if you break it down.
Step 1: Company Registration
The company has to register with NSDL or CDSL through an RTA (Registrar and Transfer Agent). It then gets a special code called ISIN (International Securities Identification Number)—like an Aadhaar for its shares.
Step 2: Shareholders Open Demat Accounts
Every shareholder (promoter, director, or investor) must open a Demat Account with a bank, stockbroker, or financial institution.
Step 3: Submit Paper Certificates
The shareholder gives their old share certificates to their Depository Participant (DP) along with a Dematerialisation Request Form (DRF).
Step 4: Verification
The DP checks with the company/RTA. Once verified, the paper certificates are cancelled.
Step 5: Digital Shares Credited
The same number of shares is credited into the shareholder’s Demat Account. From this point, no more paper shares.
What are the Benefits?
For both companies and shareholders, dematerialisation brings big advantages:
- Safety – No risk of losing or damaging paper certificates.
- No Frauds – Digital records stop duplication and fake certificates.
- Easy Transfers – No more lengthy paperwork. Share transfer happens online, faster, and easier.
- Good for Investors – Venture capitalists and foreign investors prefer clean electronic records.
- Better Governance – Makes unlisted companies more professional and transparent.
- Helps in Fundraising – Start-ups and growing companies can raise money easily when shares are in demat form.
What are the Challenges?
Of course, not everything is smooth. Some companies face:
- Extra Costs – They must pay for ISIN, RTA, and depository services.
- Lack of Awareness – Many traditional family businesses don’t know how to start.
- Resistance to Change – Some promoters feel safer with paper shares.
- Access Issues – In smaller towns, it may be harder to find RTAs or DPs, though online services are improving.
Important Deadlines
- October 2018 – Rule started for unlisted public companies.
- October 2023 – Rule extended to private companies.
- September 30, 2024 – Last date for private companies (except exempt ones) to complete demat compliance.
From October 2024 onwards, almost all Indian companies must use demat shares.
What Does It Mean for You?
- If you’re a company owner, you must register with NSDL/CDSL, get an ISIN, and help your shareholders shift to demat. You cannot issue or transfer paper shares anymore.
- If you’re a shareholder, you must open a Demat Account and convert your paper certificates. Otherwise, you won’t be able to sell, transfer, or pledge your shares.
- If you run a start-up, demat makes your company look professional and helps attract investors more easily.
- If you’re an investor, your shares are safe, traceable, and easier to transfer.
Conclusion
The shift to dematerialisation for unlisted companies is one of the most important changes in India’s corporate world.
Yes, it may feel like an extra task for small businesses. But in reality, it brings safety, trust, and professionalism. It also makes life easier for investors and reduces disputes.
If you are a promoter, director or shareholder of an unlisted company, then don’t wait until the prescribed deadline. Start the demat process early—open a Demat Account, submit your certificates, and stay compliant.
In the long run, this move will make the Indian companies—big or small—more transparent, modern and investor-friendly.
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FAQs
1. Do all private companies need to dematerialise shares?
No. Small companies, government-owned companies, and Section 8 (non-profit) companies are exempt. All other private companies must shift to demat.
2. What happens if shareholders don’t open a Demat Account?
They won’t be able to sell, transfer, or even pledge their shares. In short, the shares will become “locked” until they are dematerialised.
3. Is dematerialisation costly for small businesses?
There are some charges for ISIN, RTA, and depository services. While it may feel like an extra cost for very small companies, the long-term benefits—like safety, transparency, and easier fundraising—outweigh the cost.
4. Can a shareholder still hold physical share certificates?
No. After the deadline, companies cannot issue or transfer shares in paper form. All existing paper certificates must be converted into demat.
5. How long does dematerialisation take?
The process is fairly quick. Once you submit your request and the company verifies it, shares are usually credited to your Demat Account within 2–3 weeks.
