Why Private Companies Must Dematerialise Shares Now

Physical share certificates are steadily becoming a thing of the past as corporate compliance moves fully digital.

A few years ago, share certificates kept in physical form were a normal part of corporate functioning for most private limited companies. Promoters maintained share records in files, transfers were executed through signed transfer deeds, and many companies rarely considered shifting to electronic holdings unless they planned to list publicly. That position has now changed significantly.

With the Ministry of Corporate Affairs extending mandatory dematerialisation requirements to specified private companies, physical share certificates are no longer just outdated. They can affect a company's ability to raise investments, transfer shares, and remain compliant with the law.

In practice, many promoters still underestimate the seriousness of this requirement. Dematerialisation is often treated as a procedural formality that can be completed later. However, companies usually realise the importance of compliance only when a transaction is delayed during due diligence or when a shareholder intends to transfer shares and discovers that physical holdings are no longer acceptable.

Why the Requirement Matters

The objective behind mandatory dematerialisation is clear: improving transparency, strengthening corporate governance, and reducing disputes relating to ownership and transfers of securities.

Under the present framework, eligible private limited companies are required to facilitate holding and transfer of securities only in dematerialised form through depositories such as NSDL and CDSL. Once applicable, companies cannot freely continue operating with paper-based share certificates as they did earlier.

The practical impact is substantial. A company that has not completed dematerialisation may face restrictions while issuing fresh shares, undertaking rights or bonus issues, or processing transfers of existing holdings.

For investors, lenders, and due diligence teams, non-dematerialised shareholding structures also raise immediate compliance concerns. In many transactions today, electronic security records are treated as a basic governance expectation rather than an optional compliance measure.

Practical Challenges

In professional practice, one common issue is that companies begin the dematerialisation process only after an urgent transaction arises. By that stage, delays become difficult to avoid because the process involves coordination between the company, shareholders, depositories, and intermediaries.

Companies that postpone dematerialisation often encounter problems when they need it the most. Funding rounds and investment transactions can slow down because investors and financial institutions increasingly expect clean, verifiable electronic shareholding records. During due diligence, incomplete dematerialisation may raise compliance concerns and delay approvals.

Share transfers can also become more complicated. Promoters, family shareholders and early investors holding physical certificates may face procedural hurdles when transferring shares. Transactions that were once handled internally now need to comply with depository requirements, adding time and administrative effort to the process.

Compliance Concerns

Where dematerialisation provisions are applicable, continued reliance on physical certificates may create adverse observations during secretarial review, audit processes, or investor scrutiny.

At the same time, companies that complete the transition benefit from a more transparent and organised ownership structure. Risks associated with loss, forgery, duplication, or improper maintenance of physical certificates are also significantly reduced.

While the process involves multiple stages, timely planning makes implementation considerably smoother.

Review the Articles of Association: The company should first verify whether its Articles of Association permit holding and transfer of securities in dematerialised form. If required, suitable amendments should be approved through shareholder resolutions.

Appointment of Registrar and Share Transfer Agent (RTA): The company is required to appoint a SEBI-registered Registrar and Share Transfer Agent to coordinate connectivity with the depositories and manage the dematerialisation process.

Obtaining ISIN: An application must be made for obtaining an International Securities Identification Number (ISIN) for each class of securities. The ISIN serves as the unique identification for electronic holdings of the company’s shares.

Connectivity with Depositories: The company must establish connectivity with depositories such as NSDL or CDSL and complete the required agreements and compliance formalities.

Dematerialisation of Existing Shares: Thereafter, shareholders are required to open demat accounts and surrender physical share certificates for conversion into electronic form.

The shift towards dematerialised securities reflects the broader movement towards transparency and digitisation in corporate regulation. For private limited companies, this is no longer a matter of convenience but an important compliance requirement with direct business implications.

Companies that delay implementation may encounter avoidable obstacles during investments, restructuring exercises, shareholder exits, or regulatory reviews. On the other hand, timely compliance not only reduces operational risks but also strengthens the company’s governance profile in the eyes of investors and stakeholders.

As corporate transactions increasingly move towards fully digital compliance frameworks, physical share certificates are steadily becoming a thing of the past.

(The writer is a Practicing Company Secretary and founder of Sheetal Chanchlani and Associates, specialising in corporate compliance, secretarial audits, and governance advisory.)