Dematerialization of Shares in Private Limited Companies

Dematerialization is the process of converting physically held shares and securities (in the form of paper certificates) into a digital or electronic form (stored in a ‘demat’ account). Dematerialization facilitates the smooth process of buying, selling, transferring, and holding securities while making it cost-effective and secure for issuers as well as investors.

The certificates (paper-form securities) are the title documents reflecting ownership of shares and securities. It is often hard to keep track of all paper-based documents. Moreover, the increasing number of papers may lead to missing out on an important document. If the original certificates are somehow misplaced or stolen, it can prove to be a nightmare for an investor.

Having these securities in dematerialized form provides safe custody of title to the ownership.

MCA Notification for Dematerialization of Securities of Private Companies

As per the Companies (Prospectus and Allotment of Securities) Rules, 2014, all unlisted public companies were required to issue and facilitate the dematerialization of all securities in accordance with the provisions of the Depositories Act, 1996 and the regulations made thereunder.

Furthermore, in an endeavor to enhance transparency, protect investor interest by mitigating the risks associated with physical share certificates, and strengthen corporate governance, the Ministry of Corporate Affairs (MCA) issued a notification on 27 October 2023 to dematerialize the securities.