India is modernizing how company shares are managed. A significant new rule from the Ministry of Corporate Affairs (MCA) now requires most private companies to convert their physical share certificates into an electronic format. This process is called dematerialisation, or “demat” for short.

This change, introduced on October 27, 2023, as Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, has a major impact on Indian subsidiaries of foreign companies.

Here’s a simple guide to understand what this means for your business.

The Core Rule: Mandatory Dematerialisation

The rule states that every private company that is not classified as a “small company” must do the following:

• Convert all existing physical shares into dematerialised (electronic) form.
• Offer a dematerialisation facility to all its shareholders.

Companies affected by this rule have 18 months from the end of the financial year (ending March 31, 2023) to comply. This sets the deadline around September 30, 2024. [ Later extened til 30th June, 2025]

For companies that lose their “small company” status in the future, the 18-month countdown begins at the end of the financial year in which they stopped being small.

Why is this important? After this deadline, any new issuance of shares, bonus shares, rights issues, or share buybacks can only happen if the shares held by the company’s promoters, directors, and key managers are already in demat form. Furthermore, shareholders will not be able to transfer their shares until they are dematerialised.

Who is Exempt? The “Small Company” Definition

The rule provides an exemption for “small companies.” According to the Companies Act, 2013, a private limited company is considered “small” if it meets both of these conditions in its latest audited financial statement:

• Paid-up Share Capital: Does not exceed $₹4$ Crore (INR 40 Million).
• Turnover: Does not exceed $₹40$ Crore (INR 400 Million).

The Big Catch for Foreign Subsidiaries

Here is the most critical point for foreign investors: The definition of a “small company” explicitly excludes holding and subsidiary companies.

A company is a subsidiary if another company (the holding company) controls its Board of Directors or holds more than half of its voting power.

This means that an Indian subsidiary of a foreign company can never be classified as a “small company,” even if its capital and turnover are well below the $₹4$ Crore and $₹40$ Crore thresholds.

Impact on Foreign Subsidiaries:

All Indian subsidiaries of foreign entities, including wholly-owned subsidiaries (WOS), must comply with the mandatory dematerialisation rule, regardless of their size or revenue. This adds an important compliance step for foreign businesses operating in India.

While dematerialisation offers benefits like enhanced security, easier transfers, and better governance, this blanket requirement could be a hurdle for new foreign investors who may not intend to trade or transfer their ownership frequently. The government’s goal is to increase transparency, but an exemption for foreign subsidiaries that otherwise meet the small company criteria could help encourage new investment in India.

How to Dematerialise Shares: The ISIN Generation Process

For a company to dematerialise its securities, it must first obtain an International Securities Identification Number (ISIN). This unique code identifies the company’s shares in the electronic system. The process is managed through depositories like National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Here is the step-by-step process to be followed:

Step 1: Appoint a Registrar and Transfer Agent (RTA)

The first step for the company is to enter into an agreement with a SEBI-registered Registrar and Transfer Agent (RTA). The RTA acts as an intermediary between the company and the depositories (NSDL/CDSL) and manages the dematerialisation process.

Step 2: Application for ISIN

The company, through its appointed RTA, will apply to NSDL and/or CDSL for the allotment of an ISIN. This involves filling out a Master Creation Form and providing necessary supporting documents.

Step 3: Submission of Documents

The company must provide a set of documents to the depository for verification. This typically includes:

• A copy of the Board Resolution authorising the dematerialisation.
• A certified true copy of the Memorandum & Articles of Association (MOA & AOA).
• The company’s Certificate of Incorporation.
• A Net Worth Certificate from a chartered accountant.
• A list of the company’s promoters and directors.
• A reconciliation of the company’s share capital.

Step 4: Verification and ISIN Activation

The depository (NSDL/CDSL) will review the application and documents. Upon successful verification, it will activate the ISIN for the company’s securities. This ISIN is then communicated to the company.

Step 5: Shareholders Open Demat Accounts

Each shareholder who holds physical share certificates must open a demat account with a Depository Participant (DP). DPs are typically banks or brokerage firms.

Step 6: Submit a Dematerialisation Request

The shareholder submits the physical share certificates along with a Dematerialisation Request Form (DRF) to their DP.

Step 7: Processing by DP and RTA

• The DP processes the request and forwards it to the company’s RTA.
• The RTA verifies the authenticity of the certificates and the shareholder’s details.
• After verification, the RTA cancels the physical certificates and confirms the dematerialisation with the depository (NSDL/CDSL).

Step 8: Credit of Shares to Demat Account

Once the depository receives confirmation from the RTA, it credits the equivalent number of electronic shares to the shareholder’s demat account. The process is now complete, and the shares are held in a secure, electronic form.