MCA’s Rule 9B: A Breakdown for Private Companies

Prior to the enforcement of Rule 9B by the Ministry of Corporate Affairs (MCA), dematerialisation of shares was mostly an optional process for private companies. It was only a mandatory requirement for listed companies and select large private firms. This meant that many private companies in India relied on physical share certificates, leaving them vulnerable to issues such as loss, theft, or fraudulent activities.

With the introduction of Rule 9B, all private companies must now convert their physical share certificates into electronic form by September 30, 2024, and ensure that any new securities issued moving forward are electronic.

Main Aspects of Rule 9B

Rule 9B governs the issue of securities in dematerialised form by private companies and includes the following key points:

  1. Applicability to Private Companies

  • All private companies, except small ones, must:

    • Issue securities only in dematerialised form.
    • Enable the dematerialisation of all existing securities, following the Depositories Act, 1996, and its related regulations.

  • A small private company is defined as having:

    • Paid-up capital under ₹4 crore.
    • Turnover under ₹40 crore.
  1. Compliance Timeline
  • If a private company exceeds the threshold for small company status based on its financials at the end of any financial year after March 31, 2023, it must comply with these rules within 18 months from the close of that financial year.
  1. Issuance and Transfer of Securities
  • Any private company governed by this rule must ensure that:
    • When it plans to issue securities, buy back shares, or offer bonus or rights shares, all shares held by its promoters, directors, and key managerial personnel are dematerialised as required by the Depositories Act, 1996.
    • Any holder of securities who wishes to transfer their shares must dematerialise them before the transfer.
    • Anyone subscribing to securities through private placement, bonus, or rights issues after these rules become applicable must ensure the shares are held in electronic form before subscribing.
  1. Applicability of Rule 9A
  • The provisions from sub-rules (4) to (10) of Rule 9A will be applied accordingly to the dematerialisation of securities under this rule.
  1. Exemption for Government Companies
  • Government-owned companies are exempt from the provisions of Rule 9B.

Impact on Private Companies

The requirement for private companies to dematerialise shares is expected to bring several improvements, including:

  • Increased security by reducing risks like loss or forgery of physical certificates.
  • Smoother administration of shares, making issuance and transfer processes more efficient.
  • Enhanced confidence from investors due to better transparency and more secure ownership records.
  • Potential for improved liquidity within the private securities market.

The transition to electronic shares as mandated by Rule 9B will modernise share management for private companies and foster a safer, more transparent investment environment.

Contact NEXTGEN today to make this transition easier for you. Contact us at info@nextgenregistry.com