Demat of Shares: A Crucial Update for Private and Public Companies

If your company falls under the category of Private, Listed, Unlisted, Holding, Subsidiary, or Section 8 Company, it’s essential to be aware of the latest provisions related to the dematerialization (Demat) of shares. Understanding these changes is crucial for compliance and avoiding penalties.

What is Demat?

Dematerialization, commonly referred to as Demat, is the process of converting physical shares and securities into digital or electronic form. This shift from paper-based certificates to digital records streamlines the management of shares and enhances security.

Who Needs to Comply?

The requirement to hold and issue shares in demat form has now been extended beyond listed companies. Here’s who needs to pay attention:

• All Private Limited Companies
• All Public Limited Companies

Exemptions:

• Small Companies: Defined under Section 2(85) of the Companies Act, 2013.
• Government Companies

Why Demat is Now Essential for Companies

Initially, only listed companies were required to have their shares in demat form to facilitate smooth trading on stock exchanges. However, a significant change occurred with the Ministry of Corporate Affairs (MCA) notification on September 10, 2018. This notification introduced Rule 9A in the Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules), which mandated that every unlisted public company must hold and issue securities exclusively in demat form.

In 2023, the MCA further extended this requirement to private companies through amendments to the Companies (Prospectus & Allotment of Securities) Second Amendment Rules. As a result, private companies must now also transition to demat for their shares.

Deadline for Compliance

Private companies must ensure compliance with these demat requirements by a specific deadline. If your company is not classified as a small company as of the last day of the financial year ending on or after March 31, 2023, you have until September 30, 2024, to dematerialize your securities. This 18-month window is crucial to avoid penalties.

Consequences of Non-Compliance

Failure to comply with the demat requirements can result in severe penalties under Section 450 of the Companies Act:

• Initial Penalty: The company and every officer in default will face a penalty of ₹10,000.
• Continuing Offenses: An additional penalty of ₹1,000 per day will apply for each day the violation continues, up to a maximum of ₹2,50,000 for the company and ₹50,000 for each officer in default.

Conclusion

The shift towards dematerialization is a significant step for private and public companies in India. It enhances transparency, security, and ease of trading shares. However, the deadlines and penalties associated with non-compliance make it essential for companies to act promptly. If you’re unsure how to proceed, consult with Laabdhi, a corporate compliance consultant. Ensuring your company’s shares are in demat form by the required deadline is not just about compliance—it’s about staying ahead in a digital-first world.