Government mandates private companies' shares dematerialization by 2024

The government has mandated that all private companies, except small businesses, dematerialize their shares by September 30, 2024. The Ministry of Corporate Affairs introduced a new clause in the Companies (Prospectus and Allotment of Securities) regulation, requiring private companies, not classified as small companies, to issue securities only in dematerialized form and facilitate the dematerialization of all their securities as per the Depositories Act, 1996.

Under the new rule, private companies falling outside the small company category, as per audited financial statements ending on or after March 31, 2023, must comply within 18 months of the closure of the respective financial year. Once a company ceases to be categorized as 'small,' it has 18 months to dematerialize its shares.

This move, welcomed by industry experts, is expected to bolster the integrity of financial markets and reduce fraudulent activities associated with physical shares. As of January, approximately 95% of active registered companies (1.4 million out of 1.47 million) were private companies, making this regulation applicable to a vast majority of businesses.

Dematerializing shares offers numerous advantages, including minimizing the risk of loss, theft, and fraud for investors, enabling instant transfer and crediting of new shares, reducing companies' expenses related to printing and distributing physical certificates, and aiding regulators in curbing malpractices such as benami transactions and money laundering. Additionally, it will enhance tax collection efficiency and contribute to the formalisation of the economy.

This move is also expected to benefit the country's depositories, specifically Central Depository Services (CDSL) and National Securities Depository (NSDL). As a result, CDSL's shares, exclusively listed on the National Stock Exchange, are anticipated to gain value. Furthermore, NSDL has filed its prospectus for an initial public offering (IPO) with market regulator Sebi, with the IPO expected to hit the market before the end of the current calendar year.

Dematerializing shares

Dematerializing shares requires all private companies to convert their physical shares into electronic or digital form, a process known as dematerialization. This enhances transparency, reduces fraud, and ensures that shares are electronically stored and traded, leading to a more secure and efficient financial market.

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