Introduction
Summary: The Ministry of Corporate Affairs has mandated that all private companies (other than small companies) must dematerialise their securities effective July 1, 2025. While the reform is a progressive step towards enhancing transparency, efficiency and investor protection, its implementation has highlighted several procedural and regulatory challenges. Addressing these gaps through regulatory clarity, harmonisation of processes, and simplified documentation, specifically for cross-border investors, will be essential for making the dematerialisation regime more practical and business-friendly, rather than a mere compliance requirement.
A key corporate governance reform, effective July 1, 2025, requires all private companies to mandatorily dematerialise their securities. This shift from physical share certificates to electronic records is aimed at improving efficiency, enhancing transparency, and minimising risks of irregularities in securities’ transactions.
The Ministry of Corporate Affairs (“MCA”), through the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023[i], inserted Rule 9B in the Companies (Prospectus and Allotment of Securities) Rules, 2014[ii], which required private companies (other than small companies[iii]) to:
- Issue all securities only in dematerialised form; and
- Facilitate the dematerialisation of existing securities.
Although this provision was notified on October 27, 2023, the compliance deadline for all private companies was extended to June 30, 2025[iv], due to logistical considerations. The provision also states that any security holder intending to transfer securities of a private company on or after the specified date must dematerialise those securities. Additionally, companies offering to issue securities must also ensure that all their existing securities are dematerialised before making such an offer.
While this reform aims to bring transparency, strengthen the management of securities and safeguard investor’s interests, its implementation has revealed several practical and procedural challenges. This blog examines some of the issues faced by private companies, since the mandatory dematerialisation requirement, and its implications on other stakeholders.
Delays in Creation of ISIN
A private company must obtain an International Securities Identification Number (“ISIN”) before dematerialising its securities. The ISIN creation process involves coordination with depositories, Depository Participants (“DPs”) and registrar and transfer agents (“RTAs”), along with submission of various documents and payment of fees. With a surge in ISIN requests, ahead of the compliance deadline, depositories and RTAs are facing capacity constraints, making ISIN creation a time consuming and documentation heavy process. The resulting delays have also impacted transactions and corporate actions dependent on timely dematerialisation of securities.
Extended Timelines for Opening Demat Accounts
Many mid-sized private companies lack the infrastructure or awareness to transition seamlessly to dematerialised securities. Engaging with depositories and RTAs involves additional administrative and financial burdens, while shareholders accustomed to physical share certificates face difficulties in opening demat accounts. The said process involves undertaking KYC compliance, furnishing updated identification documents, and adapting to digital processes that may be unfamiliar to them. Older companies face the additional challenge of tracing legacy shareholders, some of whom may be unresponsive, difficult to locate, or unaware of the new compliance requirement.
These challenges may be more pronounced in cases involving non-resident or institutional investors, where the documentation requirements are greater, their responsiveness may be lower, and the company is primarily responsible for securing their cooperation. The extensive nature of documents sought is an added challenge. Foreign shareholders may be reluctant to provide sensitive information such as residential address proof, parent’s name, and mobile number, while DPs often insist on a standard checklist of documents that may not always be relevant or applicable. For instance, certain jurisdictions do not require audited accounts, or their audit timelines do not align with Indian law requirements. Such overlapping and, at times, excessive requirements, along with repeated documentation requests have resulted in extended timelines, thereby delaying transfers and issuances of securities.
NSDL Circular and CDSL Silence: A Regulatory Dichotomy
On June 03, 2025, National Securities Depository Limited (“NSDL”) issued a circular[v] (“NSDL Circular dated June 03, 2025”) mandating that off-market transfers of shares of a private company include a company-issued consent letter (in a prescribed format[vi]), certifying compliance with the Companies Act, 2013[vii] (“Act”), confirmation of necessary approvals, along with the delivery instruction slip (“DIS”). This requirement creates a challenge as companies are not always in a position to issue such a consent letter immediately. Where foreign shareholders are involved, filings under the Foreign Exchange Management Act, 1999[viii], read with Foreign Exchange Management (Non-Debt Instruments) Rules, 2019[ix], such as form FC-TRS, must be reported to the authorised dealer bank within 60 days of the transfer of capital instruments or receipt/ remittance of funds, whichever is earlier. This chronology of events creates a practical dilemma for companies as they are required to confirm compliance even while FEMA related obligations are still pending. Notably, the Central Depository Services Limited (“CDSL”) has not issued a similar circular, resulting in inconsistency between the processes followed by the two depositories.
Stamp Duty Conundrum Across States
The Finance Act, 2019[x], introduced a uniform stamp duty of 0.005% on the total value of shares issued. However, Delhi, in practice, continued to apply a higher stamp duty as per the state stamp duty rates (e.g. 0.1% of the value of shares) on physical share certificates, while for dematerialised shares, the central stamp duty value was being levied since 2019. However, recently, the Revenue Department of Delhi, through a circular dated July 29, 2025[xi], directed that the stamp duty on both physical and dematerialised shares, issued by companies having registered offices in Delhi, will be payable at 0.1% of the value of shares. The Revenue Department of Delhi relied on Item 63[xii] of the State list of the constitution, stating that it empowers states to determine stamp duty rates for documents not covered under Union list, i.e. stamp duty rates in respect of certificates or other documents that evidence the right or title to shares of any company. However, dematerialised shares may not fall within the ambit of the term “document”. This disparity raises questions on whether states have the legislative power to regulate applicable stamp duty rates on dematerialised shares, thereby making a constitutional challenge possible.
This circular has also created a disparity between the rates prescribed by the Union and the state for issuance of shares, leaving companies uncertain — whether to pay the automatically calculated duty on the concerned depository’s portal or the higher state-prescribed rate. As other states have not yet issued any similar circulars, there remains the possibility of divergent approaches, including the imposition of higher stamp duty rates in several cases.
The Challenge of Physical DIS Slips
Despite digitisation, some DPs continue to require physical DIS slips or they ask for physical copies even when scanned copies are initially accepted by them. For companies with geographically dispersed or foreign shareholders, this requirement leads to logistical hurdles and unavoidable delays. Where multiple signatories are involved and located in different places, coordinating physical signatures or couriers can significantly delay the process. Such reliance on manual documentation undermines the objective of dematerialisation, which seeks to simplify and expedite securities transfers. Such delays particularly affect time-bound transactions and strategic investments, often disrupting deal timelines.
Conclusion and Way Forward
While mandatory dematerialisation of securities of private companies is a progressive reform, its success will depend on how effectively the procedural and regulatory challenges are addressed. To navigate this transition, companies should engage closely with depositories and DPs to understand documentation requirements and factor in additional time for completion of dematerialisation related compliances when structuring transaction timelines. At a regulatory level, clarity through legislative amendment or judicial interpretation on whether states can levy separate stamp duty on dematerialised securities would help ensure uniformity.
Further, introducing a streamlined framework for foreign investors, while addressing duplicative and jurisdiction-specific documentation requirements, would significantly ease cross-border investments. Collectively, these measures would ensure that dematerialisation operates not just as a regulatory measure, but to promote transparency, efficiency, and investor confidence in private companies.
For further information, please contact:
Sreetama Sen, Partner, Cyril Amarchand Mangaldas
sreetama.sen@cyrilshroff.com
[i] Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023.
[ii] Companies (Prospectus and Allotment of Securities) Rules, 2014, Rule 9B.
[iii] Companies Act, 2013, Section 2(85): “small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:
Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act.
[iv] Companies (Prospectus and Allotment of Securities) Amendment Rules, 2025.
[v] Circular No.: NSDL/POLICY/2025/0071 dated June 03, 2025 issued by National Securities Depository Limited (Available at: NSDL circular dated June 03, 2025).
[vi] Circular No.: NSDL/POLICY/2025/0071 dated June 03, 2025 issued by National Securities Depository Limited (Available at: NSDL circular dated June 03, 2025).
[vii] Companies Act, 2013.
[viii] Foreign Exchange Management Act, 1999.
[ix] Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
[x] Finance Act, 2019.
[xi] Circular No. F10(166)/COS(HQ)/STAMP.BR/2025/93 dated July 29, 2025, issued by Office of the Divisional Commissioner, Revenue Department Stamp and Registration Branch, Delhi.
[xii] Constitution of India, 1950, Item 63.
