The Mandate: Rule 9B Dematerialisation of Shares for Indian Private Companies by 2024
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Rule 9B Dematerialisation of Shares for Indian Private Companies
With the aim to enhance security, transparency and the efficiency of shareholding administration, the Indian government has passed a guideline to all private companies.
The companies, apart from government-backed and small companies, have been mandated to dematerialise their shares by 30th September 2024.
Rule 9B, Dematerialisation of Shares, is being considered to be a significant step by the government. Under the Ministry of Corporate Affairs, this could bring a paradigm shift in the ways shares and securities are managed by private companies. Read on as we learn more about this dematerialisation mandate.
Rule 9B Dematerialisation of Shares for Indian Private Companies by 2024
Dematerialisation of shares means almost the same for individuals as well as for companies. It refers to the process of converting the certificates/ physical shares into a digital/ electronic format. These electronic securities are then managed by a depository, chosen by the company. In India, as you would know there are 2 primary depositories:
- Central Depository Services Limited
- National Securities Depository Limited.
In October 2023 the MCA introduced Rule 9B, with an amendment to Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules). As per the amendment all private companies need to dematerialise their share before 30th September 2024. Please note that this mandate does not apply to small companies. Small companies are those that:
- Have a paid-up capital under ₹4 crores
- And, have a turnover under ₹40 crores.
Apart from this, as Rule 9B(6) of PAS Rules government companies are exempted from this mandate. Further, the following are also exempted:
- Wholly owned subsidiaries
- A Nidhi company.
Understanding Rule 9B
Listed below are some of the key aspects of Rule 9B:
- Companies that fall in this bracket should issue securities in demat form only
- It is the company’s responsibility to ensure that all their physical shares are converted into electronic
- At the same time, when a company is issuing securities, it should make sure that the shareholdings of all the parties such as directors, promoters, and all managerial executives are also in dematerialised form
- Subscription, as well as transfer of securities, should be in demat form
- If a small company exceeds the small company criteria, then the ministry gives them 18 months to comply.
Rule 9B Dematerialisation of Shares: Here’s What Companies Need to Do
To comply with Rule 9B, companies can dematerialise their shareholding in the following steps:
- Revise the AoA to permit shareholders to hold shares in dematerialised form.
- Engage a SEBI-registered RTA to oversee the dematerialisation process.
- Secure an International Securities Identification Number (ISIN) for each type of share the company issues.
- Establish a Demat account with a Depository Participant like a bank or brokerage.
- Facilitate the conversion of physical share certificates to electronic format for shareholders.
- Ensure all promoters, directors, and key personnel hold dematerialised shares.
- File half-yearly returns in PAS 6 Form to inform the MCA about the dematerialisation status.
Rule 9B Dematerialisation of Shares: Benefits of Demat Account
Opening a demat account comes with a long list of benefits, here are a few of them:
- Companies can reduce a lot of work as there is minimum documentation required for owning and trading securities
- One of the key benefits of Demat account for companies is the elimination of risk that comes with physical shares. As the shares are held in an electronic form, there is hardly a risk of theft, forgery or loss
- Buying, selling and holding securities becomes quicker and more efficient
- More cost-efficient in the long run.
In Conclusion
The mandatory dematerialisation of private company shares enhances transparency, boosts financial inclusion, reduces fraud, and saves time and costs for investors, institutions, and issuers while improving share bankability and access for retail investors. All these are benefits of a demat account that companies can seek when they follow the dematerialisation of shares rule.