Mandatory Demat Deadline: Convert Physical Shares to Demat by June 30 to Avoid Penalties:

Mandatory Demat Deadline: Convert Physical Shares to Demat by June 30 to Avoid Penalties According to Rules 9A and 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, all private companies, public unlisted companies, and Section 8 companies (except small or government companies) must issue securities such as shares only in electronic form, i.e., demat form, when they are allotted to anyone.

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What is the rule about?

These rules, Rule 9A and Rule 9B, are part of the Companies (Prospectus and Allotment of Securities) Rules, 2014. These rules are specifically about how firms issue securities such as shares, debentures, etc., to their investors or stakeholders. Now, the rule is applicable to private companies owned by a small group of people (like family businesses), public unlisted companies owned by a small group of people (like family businesses), and Section 8 companies. These are non-profit companies that are public but not listed on the stock exchange. However, small companies (companies with lower revenue and assets) and government-owned companies are not required to comply with this rule.

What Does This Rule Say?

The above-stated companies (private, public, unlisted, and Section 8) must issue securities only in demat (dematerialised) form when allotting shares or securities. The meaning of demat form is that securities will not be issued in physical paper certificates. Instead, they will exist only in an electronic form in the investor’s demat account.

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Why This Rule Is Important?

The deadline by which designated companies are needed to comply with Rules 9A and 9B is June 30, 2025. After the due date, companies cannot issue securities in paper form at all. All new allotments must be in demat form, i.e., electronic form. The reason behind the rule is to make the issuance of securities safer, faster, and more transparent. Electronic records are easier to handle and track, reducing the risks of fraud or loss of physical certificates.

What Happens If Companies Don’t Follow the Rule?

If companies don't comply with the rule after the due date, i.e., June 30, 2025, and continue to issue securities in paper form, the company will need to suffer possible consequences. These consequences are mentioned in Section 450 of the Companies Act, 2013. The companies could face penalties, which can be in the form of fines or other legal actions. Not just the company itself, but also the directors and the company secretary may be considered responsible and penalised for not complying with the rule. Specifically, if a company violates the rules stated in Rule 9A(2) & 9A(3)(b), they may face these penalties.