No Demat, No Deal? How Rule 9B Can Delay a Private-Company Fundraise or Share Sale

Mandatory dematerialisation is no longer only a listed-company concern. For covered private companies, incomplete Rule 9B compliance can prevent a share issue or transfer from closing on schedule.

The issue often appears too late

A founder signs a term sheet for a fundraise. A shareholder agrees to sell. The parties negotiate valuation, conditions precedent and warranties. Only during closing preparation does someone ask whether the company has obtained an International Securities Identification Number (ISIN), whether its depository connectivity is active and whether the relevant securities are already held in dematerialised form.

For a private company covered by Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, those questions can determine whether the proposed issue or transfer can be completed in the intended manner. Dematerialisation is therefore a transaction-readiness issue, not merely a secretarial clean-up exercise.

Which private companies are covered?

Rule 9B applies to every private company other than a small company. Government companies are separately excluded. The analysis must be made by reference to the company's status at the relevant financial-year end and its audited financial statements; it should not be based only on how the company describes itself in ordinary filings or correspondence.

With effect from 1 December 2025, the prescribed financial thresholds for a small company were increased. A private company may now qualify as small if its paid-up share capital does not exceed INR 10 crore and its turnover does not exceed INR 100 crore, subject to the statutory exclusions. Holding companies, subsidiary companies, section 8 companies and companies or bodies corporate governed by a special Act cannot qualify as small companies merely because their financial numbers fall below those limits.

The revised thresholds took effect prospectively. At 31 March 2025, the prescribed financial limits were INR 4 crore of paid-up share capital and INR 40 crore of turnover. A company that was non-small at that date under the thresholds then in force should not assume that the later increase automatically erases a Rule 9B obligation already triggered for FY 2024-25. Companies seeking to rely on the revised thresholds in relation to an earlier year should obtain specific advice.

Which compliance deadline applies?

Rule 9B does not prescribe one permanent deadline for every private company. The ordinary rule is compliance within 18 months from the end of the financial year in which the company is not a small company. The relevant cohorts are therefore:

• Non-small as at 31 March 2023: the special extension for non-Producer Companies expired on 30 June 2025.

• First became non-small as at 31 March 2024: the ordinary 18-month period expired on 30 September 2025.

• First became non-small as at 31 March 2025: the current compliance deadline is 30 September 2026.

• First becomes non-small as at 31 March 2026: the ordinary deadline is 30 September 2027.

• Producer Companies: a separate five-year period applies from the close of the relevant financial year.

These dates should be read as a sequencing guide, not a substitute for reviewing the company's year-by-year status. If the company had already triggered Rule 9B in an earlier year, a later cohort date does not postpone the earlier deadline.

What must the company do?

A covered company must issue securities only in dematerialised form after its applicable compliance date and must facilitate dematerialisation of all its securities in accordance with the Depositories Act, 1996 and applicable regulations. The requirement is not confined to equity shares; each type of security issued by the company must be assessed.

In practical terms, the company must appoint the necessary registrar and transfer agent, establish arrangements with a depository, secure an ISIN for each relevant type of security, inform security holders of the facility and reconcile its issued capital with the depository position. It must also keep depository and registrar fees current, maintain the prescribed security deposit and comply with applicable directions and circulars.

The company must file Form PAS-6 with the Registrar within 60 days from the conclusion of each half-year, duly certified by a practising company secretary or chartered accountant, and must immediately notify the depositories of any difference between its issued capital and the capital held in dematerialised form.

What must security holders do?

Rule 9B does not, by itself, require every holder to convert physical securities immediately merely to continue holding them. The restriction becomes critical when a holder proposes a transfer or subscription after the company's applicable compliance date.

A holder intending to transfer securities must first dematerialise those securities. The buyer cannot cure the problem by accepting a physical certificate and converting it later. A person subscribing to securities by private placement, bonus issue or rights offer must ensure that all securities already held by that person in the company are in dematerialised form before the subscription. A new investor with no existing holding will still need an operational demat account to receive the new securities.

There is a further sequencing condition for corporate actions. Before a covered company makes an offer for any issue of securities, buy-back, bonus issue or rights offer after its compliance date, the entire holdings of its promoters, directors and key managerial personnel must be dematerialised. One uncooperative promoter or an unresolved mismatch can therefore delay an otherwise agreed financing.

Why transactions get stuck

Obtaining an ISIN is necessary, but it is not the end of the exercise. The register of members, physical certificates, allotment and transfer records, depository data and beneficial ownership must align. Historic private companies frequently have gaps: unsigned or missing transfer documents, certificates that were never surrendered, name or address differences, deceased holders, old pledges, duplicate certificates or allotments that were not properly recorded.

Each selling holder must also have an active demat account and complete the depository participant's know-your-client process. Overseas holders may face additional constitutional-document, notarisation, apostille, tax-registration and authorised-signatory requirements. If securities are pledged, release and re-creation of the encumbrance must be coordinated through the depository system. These steps often depend on third parties and should not be left to the final week before closing.

How should an SPA or investment agreement address Rule 9B?

The buyer or investor should determine Rule 9B applicability during legal due diligence. Evidence should include the basis for the small-company analysis, the applicable compliance date, ISIN details for each security class, depository and registrar arrangements, proof of current fees and security deposits, PAS-6 filings, capital reconciliation and the dematerialisation status of all persons relevant to the transaction.

The transaction agreement should use specific conditions precedent and closing deliverables rather than relying only on a general warranty of legal compliance. Depending on the transaction, these may require:

• dematerialisation of all securities proposed to be sold;

• an active demat account for every seller and proposed allottee;

• dematerialisation of promoter, director and KMP holdings before a fresh issue or other covered corporate action;

• correction of differences between the register of members, certificates, RTA records and depository records;

• release or migration of existing encumbrances through the depository system; and

• written confirmation from the registrar, depository participant or other relevant intermediary that the transfer or corporate-action instructions are ready for closing.

The long-stop date should accommodate processes outside the company's direct control. The agreement should also allocate responsibility and cost for correcting historic discrepancies, and should state what happens if dematerialisation cannot be completed by the long-stop date.

Is non-compliance merely procedural?

No. After the applicable date, a covered company cannot validly proceed on the basis that a new issue or physical transfer can simply be regularised later. Non-compliance may prevent completion through the prescribed mechanism, qualify the legal due-diligence report, trigger specific indemnity or warranty concerns and affect a lender's or investor's willingness to fund.

Contravention may also attract the general penalty under section 450 of the Companies Act, 2013 where no specific penalty is provided. The company and its officers should therefore treat a missed deadline as a remediation matter, not as a reason to ignore the rule until the next transaction.

A company that currently qualifies as small should continue to monitor its position at each financial-year end. Growth may push it above the thresholds, while a restructuring that makes it a holding or subsidiary company can remove the small-company exclusion regardless of capital or turnover.

A pre-transaction checklist

• Determine the company's status for each relevant financial year and identify the earliest Rule 9B trigger date.

• Confirm whether the company is exempt as a small company or Government company, and whether any statutory exclusion prevents small-company status.

• Obtain the ISIN for each relevant security class and test depository and RTA connectivity well before signing or closing.

• Reconcile the register of members, physical certificates, paid-up capital, allotment records and depository position.

• Identify every holder who must dematerialise and begin demat-account and KYC work early, particularly for overseas holders.

• Check PAS-6 filings, intermediary fees, security deposits and unresolved discrepancies.

• Build specific conditions precedent, electronic closing mechanics and a realistic long-stop date into the transaction documents.

Conclusion

Rule 9B is not simply a secretarial compliance topic. It affects whether legal title can move through the prescribed system and whether new securities can be issued on the proposed closing date. For covered companies, dematerialisation should be treated like a regulatory approval or third-party consent: identified at the outset, assigned to an owner and completed before it can threaten the transaction timetable.