Private companies have to demat shares by September 2024

New Delhi: The government has directed to compulsorily convert the shares of all private companies into electronic form by September 30, 2024. The initiative is expected to increase transparency in the financial system and improve monitoring. The Corporate Affairs Ministry has introduced a new clause in the Companies (Prospectus and Allotment of Securities) Regulations in the October 27 amendment regarding issuance of shares by private companies in electronic form. All private companies except small companies shall issue shares in demat form only within the period prescribed under sub-rule 2.

It has also been stated that under the provisions of the Depositories Act, 1996, facilities to convert all securities into electronic form have to be provided. If a private company is not a small company as per the audited financial results of the financial year on or after the last day of the financial year i.e. 31st March 2023, it has to comply with the provisions of this rule within the next 18.

Companies whose equity capital is Rs. 4 crores and a total turnover of Rs. 40 crores, they are classified as small private companies. If a company is neither a holding company nor a subsidiary company, it will be exempted from this rule.

This initiative by the Ministry of Corporate Affairs to convert shares of certain categories of private companies into electronic form is an important step towards ensuring transparency in the financial markets. Apart from increasing the ease of doing business in India, this will also help prevent dishonesty during transactions in physical stocks.

Currently, only listed companies regulated by the Ministry of Corporate Affairs and the Securities and Exchange Board of India (SEBI) are required to demat their shares. There is no restriction for an investor to hold paper shares but they have to be converted into electronic form while giving the shares to someone else.

Similarly, unlisted public companies also have to demat their shares for repurchase, bonus or issue of right shares.

The largest number of listed companies are unlisted private companies. As of January 2023, about 1.4 lakh companies registered with the Ministry of Corporate Affairs, or 95 percent of active registered companies, were private companies. Apart from this, about 50,000 companies were present in the category of small companies.