Dematerialisation of Securities: Legal Framework, Applicability, and Compliance Obligations Under the Companies Act, 2013
Background and Legislative Context
For several decades, share ownership in Indian companies — both Public Limited and Private Limited — was evidenced through physical share certificates issued at the time of allotment. This physical system, however, proved increasingly problematic over time. Instances of forged, counterfeit, and duplicate share certificates were widely reported, giving rise to ownership disputes and a general lack of reliability in the system of shareholding verification. Establishing genuine and undisputed ownership of shares became a persistent challenge for shareholders, companies, and regulators alike.
To address these systemic vulnerabilities and introduce a more secure, transparent mechanism for holding and transferring securities, the concept of dematerialisation (commonly referred to as "Demat") was brought into the Indian legal framework through the Depositories Act, 1996. Under this electronic system, ownership is no longer represented by a physical document. Instead, it is recorded electronically in a Depository's system, which is accessed by shareholders through a Depository Participant ("DP"). The shareholder's holdings are reflected as electronic entries in the demat account — conceptually similar to how a bank balance is reflected in an account statement. Crucially, even though no physical certificate exists, the shareholder retains the status of beneficial owner of the securities.
The shift to dematerialisation eliminated risks of physical loss, theft, forgery, and transfer delays — bringing Indian capital markets in line with global standards.
Governing Legal Provisions
The legal architecture governing dematerialisation of securities in India rests primarily on:
Section 29of the Companies Act, 2013Rule 9,Rule 9A, andRule 9Bof the Companies (Prospectus and Allotment of Securities) Rules, 2014- The Depositories Act, 1996
- Regulations framed by the Securities and Exchange Board of India ("SEBI")
Section 29 of the Companies Act, 2013 — The Foundation
Section 29 of the Companies Act, 2013 lays down the fundamental obligation regarding issuance of securities in dematerialised form. Its scope can be understood through three distinct categories:
Category A: Companies Making a Public Offer
Every company — whether a Public Company or a Private Company — that proposes to make a public offer is mandatorily required to issue securities exclusively in dematerialised form. Such issuance must be in compliance with the provisions of the Depositories Act, 1996 and the regulations framed thereunder.
Category B: Prescribed Classes of Companies
Certain classes of companies, as prescribed under the rules, are required not only to issue securities in dematerialised form but also to ensure that their existing securities are held and transferred only in dematerialised form. This obligation extends to both issuance and secondary transfer — creating a comprehensive demat regime for such entities.
Category C: Companies Outside Categories A and B
For companies not falling within either of the above categories, dematerialisation remains optional. Such companies may either:
- Voluntarily convert existing securities into dematerialised form, or
- Continue to issue securities in physical form under the Companies Act, 2013, or alternatively opt for dematerialised issuance under the Depositories Act, 1996
Statutory Text of Section 29
Section 29 – Public offer of securities to be in dematerialised form.
(1) Notwithstanding anything contained in any other provisions of this Act,—
(a) every company making public offer; and
(b) such other class or classes of companies as may be prescribed,
shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.(1A) In case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder.
(2) Any company, other than a company mentioned in sub-section (1), may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.
Rules Under the Companies (Prospectus and Allotment of Securities) Rules, 2014
While Section 29 provides the overarching mandate, the Companies (Prospectus and Allotment of Securities) Rules, 2014 operationalise its implementation and carve out exemptions for specific company categories, including Small Companies, Producer Companies, Nidhi Companies, Government Companies, and wholly owned subsidiaries of Public Companies.
Rule 9 — Promoters' Holdings in Dematerialised Form
Rule 9 specifically addresses promoter-level compliance in the context of public offers of convertible securities. Where a Public Company proposes to make such an offer, the promoters of the company are required to hold all convertible securities exclusively in dematerialised form.
Additionally, any convertible securities held by promoters in physical form prior to an Initial Public Offer ("IPO") must be converted into demat form before the public offer is launched. Post-conversion, promoters are obligated to maintain their holdings only in dematerialised form on a continuing basis.
Purpose: This provision is designed to ensure regulatory transparency and traceability of promoter shareholding at one of the most critical junctures in a company's life — its entry into the public market.