Mandatory Dematerialisation of Shares for Private Companies: Rule 9B Explained

1. From Listed Companies to Your Pvt Ltd — How We Got Here

Dematerialisation — converting physical share certificates into electronic holdings within a depository — has been mandatory for listed companies for decades, and for unlisted public companies since 2018 under Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Until October 2023, however, private limited companies — by far the most common structure for Indian startups and SMEs — were outside this regime, and continued to issue and transfer shares using physical certificates and a manually maintained register of members.

That changed with the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, notified on 27 October 2023, which inserted a new Rule 9B extending the dematerialisation mandate to private companies — with specific exclusions for small companies and government companies.

2. Who Is Covered — The "Small Company" Test

Rule 9B applies to every private company that, as on the last day of a financial year ending on or after 31 March 2023, is not a "small company" as per its audited financial statements for that year.

Under Section 2(85) of the Companies Act, 2013, a "small company" (for this determination) is one with paid-up share capital not exceeding Rs. 4 crore and turnover not exceeding Rs. 40 crore. A company that is itself a holding company, a subsidiary company, a Section 8 company, or a company governed by a special Act is excluded from the "small company" definition regardless of its size — meaning such companies are covered by Rule 9B even if they would otherwise qualify as small on financial metrics.

The lock-in effect. Once a private company is determined to be covered by Rule 9B based on its financial statements for FY ending on/after 31 March 2023 (i.e., it was NOT a small company in that year), it remains covered going forward — even if its paid-up capital or turnover later falls below the small company threshold. The MCA has clarified that a subsequent change in status does not remove the company from the demat mandate once it has applied.

Producer companies are covered but given a longer compliance window — 5 years from closure of the relevant financial year, instead of 18 months. Government companies are entirely exempt from Rule 9B.

3. What Compliance Actually Requires

A company covered by Rule 9B must, within the prescribed timeline:

Issue securities only in dematerialised form going forward — every fresh issue (private placement, rights issue, bonus issue, ESOP allotment, etc.) made on or after the compliance date must be in demat form
Facilitate dematerialisation of all existing securities — obtain an ISIN for each class of security (equity shares, preference shares, debentures, etc. are each allotted a separate ISIN) and make it possible for every existing holder to convert their physical certificates to electronic form
Appoint a Registrar and Transfer Agent (RTA) registered with SEBI — not strictly mandatory if the company has a robust in-house arrangement, but in practice almost universally outsourced to an RTA given the specialised depository interface required
Enter into a tripartite agreement among the company, the RTA, and the depository (NSDL or CDSL)

Critically, the obligation is to facilitate dematerialisation — the company cannot force every existing shareholder to convert their holdings immediately, but it must make the infrastructure (ISIN, RTA, depository connectivity) available so that any shareholder who wishes to dematerialise, or who needs to transfer/subscribe to further securities, is able to do so.

4. The Compliance Timeline — and the 2025 Extension

For a private company that was not a small company as on 31 March 2023, the original deadline under Rule 9B(2) was 18 months from closure of that financial year — i.e., 30 September 2024.

The MCA subsequently extended this deadline to 30 June 2025 for such companies. Following this extension, the first half-yearly Form PAS-6 filing for newly-covered private companies became due based on the half-year following the revised compliance date — practically, this has meant first PAS-6 filings clustering around late 2025.

PAS-6 — the recurring obligation. Once covered, a private company must file Form PAS-6 (Reconciliation of Share Capital Audit Report) with the Registrar within 60 days of the end of each half-year (i.e., for the half-years ending 30 September and 31 March), certified by a practicing Company Secretary or Chartered Accountant. This form reconciles the company's issued capital with the dematerialised capital held with depositories and any capital still in physical form — making it an ongoing compliance item, not a one-time filing.

5. Restrictions on Non-Compliant Companies

The provisions of sub-rules (4) to (10) of Rule 9A apply mutatis mutandis to private companies under Rule 9B — and this carries over one of the most operationally significant restrictions:

No further issuances or buybacks until promoter/KMP holdings are dematerialised. A private company covered by Rule 9B cannot make any offer for issue of securities — whether by private placement, bonus issue, or rights issue — or carry out a buyback of its securities, unless all existing securities held by its promoters, directors, and Key Managerial Personnel (KMP) have been dematerialised before such offer or buyback.

This means that even if a company has obtained its ISIN and made the demat facility available to all shareholders generally, a pending fundraise, ESOP issuance, or buyback can be blocked if the promoters' or directors' own shareholding has not yet been converted to demat form — making this one of the first things to check before initiating any capital-raising or buyback transaction for a covered company.

Transfers also require demat. Any holder of securities of a covered company who intends to transfer securities on or after the compliance date must first get those securities dematerialised before the transfer. Similarly, anyone subscribing to new securities (private placement, bonus, or rights) on or after the compliance date must ensure all their existing holdings in the company are in demat form before such subscription — not just the new securities being subscribed.

The 2025 NCLT ruling. In 2025, the NCLT Mumbai bench, in Amrex Marketing Pvt. Ltd. v. Harinagar Sugar Mills Ltd., held that share issuances or transfers carried out by a covered company in non-compliance with the mandatory dematerialisation regime are void ab initio — meaning such transactions are treated as if they never legally occurred. This significantly raises the stakes: a transaction structured without checking Rule 9B compliance status could be unwound entirely, with all the downstream complications (tax, regulatory filings, cap table) that implies.

6. Penalties for Non-Compliance

Beyond the transactional restrictions above, non-compliance with Rule 9B (including failure to file Form PAS-6 on time) attracts penalties under the general penalty provisions of the Companies Act, 2013 — specifically Section 450, which applies where no specific penalty is prescribed for a contravention.

Under Section 450, where a company and any officer of the company who is in default contravenes any provision of the Act for which no specific penalty is provided, the company and every officer in default are liable to a penalty of Rs. 10,000, and in case of a continuing contravention, a further penalty of Rs. 1,000 for each day the contravention continues, subject to a maximum of Rs. 2 lakh in the case of a company and Rs. 50,000 in the case of an officer in default or any other person.

While these monetary amounts may appear modest relative to the scale of transactions a growth-stage company undertakes, the practical consequence — the inability to issue securities, conduct a buyback, or have transfers recognised, combined with the risk of transactions being treated as void — is what makes Rule 9B compliance a priority well beyond the headline penalty amount.

7. Practical Action Plan for Covered Companies

For a private company that has not yet started this process, the practical steps are:

Step 1 — Confirm applicability. Check paid-up capital and turnover as per the audited financial statements for FY ending on/after 31 March 2023 against the small company thresholds (Rs. 4 crore / Rs. 40 crore for the relevant determination), and check whether the company falls into any of the categories (holding/subsidiary/Section 8/special Act company) that are excluded from the small company definition regardless of size.

Step 2 — Appoint an RTA and execute the tripartite agreement. Most RTAs (Link Intime, KFin Technologies, Bigshare, Skyline, Cameo, etc.) have a standard onboarding process for unlisted/private companies and can guide the choice between NSDL and CDSL (see our companion article on this).

Step 3 — Apply for ISIN(s). A separate ISIN is required for each class of security — equity shares, each series of CCPS, debentures, etc. — so a startup with multiple funding rounds and instrument types should map out its full security-class list before applying.

Step 4 — Prioritise promoter, director, and KMP holdings. Given the restriction on further issuances/buybacks until these specific holdings are dematerialised, this should be sequenced early — ideally before any anticipated fundraise, ESOP exercise, or buyback.

Step 5 — Communicate to all shareholders and set up PAS-6 filing cadence. Once ISIN is obtained, notify all shareholders that the demat facility is available, and build the half-yearly PAS-6 filing (with CS/CA certification) into the company's compliance calendar going forward.