The Centre has given private companies —other than Producer companies—more time to comply with an earlier diktat to dematerialise their shares. As against the earlier specified deadline of September 30, 2024, these companies can now fulfil the dematerialisation requirement by June 30 this year, according to a notification issued by the Corporate Affairs Ministry ( MCA).
MCA also earlier specifically said that no private company can issue securities or buy back its securities after September 30, 2024, until the entire holding of securities of its promoters, directors, and Key Managerial Personnel has been dematerialised. Now, this timeline has been relaxed to June 30, 2025.
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen LLP, said that this extension clears the shadow of non-compliance cast on private companies who are still waiting in queue for their applications to be cleared by the depositories.
“The blanket extension appears to ringfence even those companies who hadn’t filed an application seeking dematerialisation. Such companies seem to have been given an extended window to now file for dematerialisation and still be compliant with the law”, Jhunjhunwala added.
In October 2023, the Ministry of Corporate Affairs (MCA) took a significant step in strengthening corporate governance in India by issuing a notification mandating the dematerialisation of securities for private companies.
September 30, 2024, was prescribed as the cut-off time for dematerialisation for companies mandated with the requirement under the notification.
The enforcement of the notification witnessed a slew of applications for dematerialisation with depositories, NSDL and CDSL, instantaneously increasing their task at hand. “With almost 17 lakh active private companies in India, the implementation ask on effective date being September 30, 2024, was not commensurate with the magnitude of applications requiring the depositories’ attention”, Jhunjhunwala added.
To ease the strained situation, the MCA has now issued another notification extending the timeline for complying with the demat requirement to June 30, 2025.
Manmeet Kaur, Partner – Karanjawala & Co, said, “The amended proviso to the Rules relaxes the timelines for private companies to comply with dematerialisation provisions of Rule 9B by extending the period till June 30 2025. The relaxed timelines will help private companies comply with necessary provisions of the rules”.
Winnie Shekhar, Partner, IndusLaw, said, “Finally, some good news after all the deal fatigue and uncertainty—MCA has extended the demat deadline from September 30, 2024, to June 30, 2025 by amending Rule 9B, which had completely jammed secondary deals because while companies were mandated to demat, neither they nor the depositories were equipped to handle the flood of requests. The result? Long queues, months of backlog, and transactions stuck in limbo”.
This extension gives much-needed breathing space for companies and the ecosystem to catch up, and hopefully, we’ll now see some revived liquidity and movement in the private market, Shekhar added.
The move to facilitate the dematerialisation of shares by certain categories of private companies was seen as a significant step towards ensuring the integrity of financial markets. Apart from enhancing the ease of doing business in India, this move is expected to reduce unscrupulous activities while dealing in physical shares.
Small private companies with a capital of less than ₹ 4 crores and turnover of less than ₹40 crore, and those that are neither holding nor subsidiary companies will be spared from the burden of dematerialisation.
Demat Journey for Public Companies
The dematerialisation of shares of public companies (listed in bourses) took off in 1996 with the establishment of the National Securities Depository Limited (NSDL).
The dematerialisation of shares in Indian equity markets revolutionised the way shares were held and traded, leading to increased efficiency, transparency, and investor participation while reducing the risks and costs associated with physical certificates.
It was a pivotal development in the evolution of India’s capital markets.
This dematerialisation move, which was seen as a game changer, brought several benefits, including the elimination of physical certificates, improved transparency, faster and cheaper transactions, reduction in paperwork, integration with electronic trading, financial inclusion, better retail investor access, reduced frauds and forgeries, and easier ownership transfer.
