A private company agrees terms on a funding round, then discovers it cannot legally issue the shares. Not because of the valuation or the paperwork, but because it never dematerialised its share capital and the deadline for doing so passed some time ago. Rule 9B does not fine you into compliance. It stops you allotting or transferring anything at all.
Every private company that is not a small company must hold its shares in electronic form under Rule 9B, and since the compliance deadline of 30 June 2025 passed, a covered company cannot allot or transfer securities in physical form at all.
The bottom line
Who is exempt: small companies only — since 1 December 2025, those with paid-up capital up to ₹10 crore and turnover up to ₹100 crore.
Who can never be exempt: holding and subsidiary companies, Section 8 companies, and companies governed by special Acts, regardless of how small they are.
What it costs to ignore: ₹10,000 plus ₹1,000 per day of continuing default, capped at ₹2,00,000, up to ₹50,000 on officers in default — and a company that cannot issue or transfer shares.
What dematerialisation means
Converting physical share certificates into electronic form, held in a demat account with a depository. Ownership becomes a record in a system rather than a piece of paper in a file, much as money in a bank account replaced cash in a drawer.
Two SEBI-registered depositories hold these securities in India: NSDL and CDSL. Each class of a company's securities gets a unique ISIN, the International Securities Identification Number, which identifies it throughout the depository system.
Why it stopped being optional
Paper certificates get lost, forged and mutilated. They make transfers slow, and in closely held and family companies they are a reliable source of ownership disputes years after the fact, when the person who knew where the file was has died.
Those are the practical arguments. The legal position is now separate from them. A covered company that has not complied cannot issue or transfer shares, which freezes a fundraising round, a buyback or a founder exit at exactly the moment it matters. A shareholder still holding physical certificates cannot sell or transfer them until they dematerialise.
Where the obligation comes from
The Depositories Act, 1996 is the parent law for electronic securities. Section 29 of the Companies Act, 2013 empowers the government to mandate demat for prescribed classes of companies.
Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014 made demat mandatory for unlisted public companies from October 2019. Rule 9B, inserted in October 2023, extended the mandate to private companies that are not small companies. Rule 9B is the one that matters to private company founders.
Its deadline moved once. The original date of 30 September 2024 was extended to 30 June 2025 by a notification dated 12 February 2025. That date has passed.
Whether you are covered
Rule 9B applies to every private company that is not a small company. The small company definition was widened with effect from 1 December 2025 by the Companies (Specification of Definition Details) Amendment Rules, 2025, notified as G.S.R. 880(E). A company is small, and therefore exempt, only if both:
- paid-up share capital does not exceed ₹10 crore, and
- turnover in the immediately preceding financial year does not exceed ₹100 crore.
The earlier limits were ₹4 crore and ₹40 crore, so a large number of companies became small overnight.
The carve-outs matter more than the numbers. Some companies can never be small whatever their size: holding and subsidiary companies, Section 8 companies, and companies governed by special Acts. A subsidiary with ₹50 lakh of capital and no revenue is covered, and its directors are usually the last to realise it. Producer companies and government companies are dealt with separately, and companies that took investment from an Alternative Investment Fund exercising control had their own timeline.
How to comply
- Check applicability properly, against the revised thresholds and against the holding, subsidiary, Section 8 and AIF carve-outs.
- Amend the Articles of Association if they do not already authorise holding shares in dematerialised form.
- Appoint a SEBI-registered Registrar and Transfer Agent, who acts as your bridge to the depository.
- Apply for an ISIN with NSDL or CDSL for each class of security — equity, preference, and so on. Allotment takes weeks, so this is the step to start early.
- Open demat accounts. Promoters, directors and KMP must hold their shares in demat form, and the company must facilitate demat for every other shareholder as well.
- Shareholders submit a Demat Request Form with their physical certificates to their depository participant, who coordinates with the RTA and the depository.
- Issue all new securities only in demat form from then on.
- File Form PAS-6 with the Registrar within 60 days of the end of each half-year, reconciling the share capital.
PAS-6 is the step companies forget. Demat is not a project that finishes; the half-yearly reconciliation continues for as long as the company is covered.
A worked case
A private software company has ₹6 crore of paid-up capital and ₹85 crore of turnover in FY 2024-25. Under the rules as they stood, it was not a small company and had to dematerialise by 30 June 2025.
Under the revised definition from December 2025 it now qualifies as small — but prospectively, on the immediately preceding year's figures. It does not get retrospective absolution for the period it was covered, and it needs to reassess its status every year, because one good year of turnover puts it back inside the rule.
Compare a subsidiary of a larger group holding ₹50 lakh of capital. It cannot claim the small company exemption at all, at any size, and must comply.
Losing the exemption
Exemptions are not permanent. A company that crosses a threshold, or becomes a holding or subsidiary company, loses it. An 18-month compliance window typically runs from the end of the relevant financial year, which sounds generous until you account for ISIN allotment and chasing shareholder KYC.
Common mistakes
- Concluding "we are small, so we are exempt" without checking the holding, subsidiary, Section 8 and AIF carve-outs.
- Starting close to a deadline. ISIN allotment and shareholder KYC take weeks that cannot be compressed.
- Treating demat as a one-off and never filing PAS-6.
- Issuing securities in demat form without first amending the Articles.
- Converting only the promoters' holdings. The company has to facilitate demat for all shareholders.
Frequently asked questions
Is demat mandatory for all private companies? No. Only for private companies that are not small companies, and for those excluded from the small company definition such as holding, subsidiary and Section 8 companies.
What happens if we do not comply? A penalty of ₹10,000 plus ₹1,000 per day of continuing default, capped at ₹2,00,000, with up to ₹50,000 on officers in default — and the company is barred from issuing or transferring securities in physical form.
Do shareholders have to convert their existing shares? To transfer shares or subscribe to a fresh issue after the deadline, yes. The holding must be dematerialised first.
Which depository should we use? Either NSDL or CDSL. Your RTA will recommend one based on cost and process.
We qualified as small under the new definition. Are we in the clear? Prospectively, yes, but the test runs on the preceding year's figures and is reassessed annually. Compliance for the period you were covered does not disappear.
How long does the whole process take? Plan on a few months. ISIN allotment alone runs to several weeks, and collecting KYC and demat requests from every shareholder usually takes longer than the company expects.