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Home / Blog / Mandatory Dematerialisation of Shares Compliance Guide Mandatory Dematerialisation of Shares for Private Companies: Complete Guide ~18 min read Cardiff Services Rule 9B ESOP SME IPO CCPS NBFC Foreign Investment In This Guide 01What Is Rule 9B? 02How Every Corporate Action Changes 03Getting Demat-Ready: 6-Step Process 04Who Needs a Demat Account? 05ESOP Plans and Mandatory Demat 06SME IPO and Mandatory Demat 07CCPS and Convertible Instruments 08Foreign Shareholders 09Penalties for Non-Compliance The Ministry of Corporate Affairs notification that made demat mandatory for private companies from October 2023 changed the mechanics of every transaction that involves shares — not just transfers, but new allotments, ESOP exercises, preference share conversions, rights issues, and even buy-backs. For a startup that has raised multiple rounds from investors holding shares through holding companies, SPVs, and PE funds, the dematerialisation requirement cascades across an entire cap table structure. Every entity that holds shares needs a demat account. Every future allotment must credit to that account. Every transfer must flow through the depository system. For company secretaries and CFOs managing growing companies, Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 is now woven into every corporate action. Before you process a new ESOP exercise, you must confirm the employee has a functional demat account. Before your PE investor’s CCPS converts to equity, you must verify their custodian account is in place. Before you file for an SME IPO, every share in the company — promoter, investor, employee — must already be dematerialised. The demat requirement is not a post-transaction cleanup activity. It is a pre-transaction prerequisite. This guide explains exactly how Rule 9B changes each type of corporate action, who specifically needs to open a demat account (and what type), and what startups, PE-backed companies, and SME IPO candidates need to do before their next corporate event. What Is Rule 9B and Which Companies Must Comply? Rule 9B was inserted into the Companies (Prospectus and Allotment of Securities) Rules, 2014 by the MCA on 27 October 2023. It imposes two mandatory requirements on covered private companies: All future securities must be issued only in demat form — from 2 October 2023 onwards, no physical share certificate can be issued by a covered private company for any allotment, rights issue, bonus issue, or ESOP exercise. All existing securities must be dematerialised — the company must facilitate and enable demat for all its existing shares by obtaining an ISIN and entering into agreements with a depository and RTA. Transfers restricted post-deadline: After the compliance date, no transfer of shares in a covered company can be registered unless both parties hold their shares in demat form. Exemption — Small Companies Rule 9B does not apply to small companies under Section 2(85) — those with paid-up capital ≤ ₹4 crore AND turnover ≤ ₹40 crore (both conditions simultaneously). If either threshold is exceeded, the company is covered. Status must be reassessed every financial year. How Rule 9B Changes Every Corporate Action — Before and After The most useful way to understand Rule 9B’s practical impact is to see exactly how each corporate action changed after October 2023. The table below maps 8 key corporate events — the old physical-era process against the new Rule 9B compliant process: ← Scroll to see the full table → Corporate Action Pre-October 2023 — Physical Era Post-October 2023 — Rule 9B Compliant Share Transfer (between shareholders) Transferor delivers physical share certificate. Transferee signs SH-4 share transfer form. Stamp duty paid on physical instrument. Company registers transfer after verification. Time-intensive — 15 to 30 days. ✅ Both transferor and transferee must hold shares in demat form. Transfer processed electronically through depository — T+1 settlement. Physical SH-4 and certificate delivery no longer accepted for covered companies. ESOP Exercise and Share Allotment Company issued physical share certificates to employees on ESOP exercise. Certificates signed by two directors, stamped, and posted to the employee. ESOP register updated manually. ✅ Employee must have a personal demat account at a Depository Participant (DP). On exercise, shares are credited directly to the employee’s demat account — no physical certificate issued. ESOP compliance must now include DP account verification for all employees before exercise. CCPS / CCD Conversion to Equity On conversion, new equity shares issued via physical certificate to the converting investor. Board resolution for allotment; fresh certificates prepared and dispatched. ✅ Converted equity shares must be credited to the investor’s demat account. If the investor is an entity (PE fund, family office), they must have a valid demat account for the entity. PAS-3 filed for allotment; ISIN used for credit through the depository. Rights Issue Allotment Shareholders could receive new share certificates by post. Those who applied for shares under rights were issued physical certificates. Rights renunciation was a paper-based process. ✅ All rights issue allotments must be credited to shareholders’ demat accounts. Shareholders who wish to renounce rights must do so through the depository. Shareholders without demat accounts cannot receive rights allotment — their rights lapse if they don’t dematerialise first. Bonus Issue Bonus shares issued as physical certificates to existing shareholders. Delivered by registered post. Added to the share certificate folio in the RoM. ✅ Bonus shares credited directly to shareholders’ existing demat accounts. No physical certificate issued. If a shareholder still holds physical shares at the time of the bonus, their physical holding is not augmented unless they dematerialise first — creating an anomaly in the demat-only system. Private Placement to a New Investor New investor paid for shares; company issued a physical share certificate. Investor received the certificate and the share was entered in the Register of Members. ✅ New investor must provide their demat account details at the time of subscribing. Allotment credited to demat account. PAS-3 filed within 30 days of allotment. No physical certificate issued regardless of investor size or type. Buy-Back of Shares Shareholders tendered physical share certificates to the company for buy-back. Certificates verified, cancelled, and the RoM updated. ✅ Buy-back through demat — shares

Home / Blog / SBO Compliance Under Section 90 Compliance Guide SBO Compliance Under Section 90: Who Must File and How ~19 min read Cardiff Services Section 90 SBO BEN Forms PE/VC NBFC M&A In This Guide 01What Is Section 90? 02When the 10% Threshold Applies 03Member Type Decision Matrix 04The Four BEN Forms 05Step-by-Step Compliance Process 06SBO Across Business Stages 07SBO and PE/VC Fund Structures 08NBFC Dual Compliance (SBO + UBO) 09Penalties for Non-Compliance 10Common Compliance Mistakes 11Frequently Asked Questions Every time a startup raises a funding round from an angel investor who subscribes through a personal holding company — or receives a Series A from a PE fund investing via a Mauritius SPV — two compliance obligations arise simultaneously: FEMA and RBI on one side, and Section 90 of the Companies Act on the other. The FEMA side gets attention. The Section 90 Significant Beneficial Owner (SBO) compliance is frequently overlooked until a secretarial audit, a pre-IPO due diligence, or an MCA inspection surfaces the gap. Section 90 requires companies to look through entity layers to identify the ultimate individual natural person who beneficially owns or controls 10% or more of the company’s shares. For a company whose shareholders are entirely individuals holding shares in their own names, there is nothing to do. But the moment a corporate entity, trust, HUF, LLP, or foreign SPV appears in the Register of Members, the SBO analysis begins — and it must be documented with the right BEN forms filed with both the company and the Registrar of Companies. This guide is written for CS professionals, startup founders, CFOs, and compliance teams managing companies with layered ownership structures — PE-backed startups, NBFC groups, foreign-invested Indian companies, and pre-IPO entities. It maps the SBO obligation by member type, by business stage, and by the specific challenges that arise at each stage of a company’s growth. What Is Section 90 and Why Was It Introduced? Section 90 of the Companies Act, 2013 was introduced as part of India’s commitment to corporate transparency and anti-money-laundering norms under FATF (Financial Action Task Force) recommendations. The section operationalized the concept of beneficial ownership disclosure — requiring companies to look through nominee holders and shell structures to identify and register the ultimate natural persons who control or benefit from the company’s shares. Notified under: Companies (Significant Beneficial Owners) Rules, 2018 (June 2018), significantly amended by Companies (Significant Beneficial Owners) Amendment Rules, 2019 (July 2019). Applies to: All companies incorporated under the Companies Act, 2013 — private limited, public limited, OPC, small company — with any non-individual member. Threshold: 10% beneficial interest — in shares, voting rights, or distributable dividend — held directly or indirectly through one or more entity layers. Who is an SBO: Only an individual (natural person) can be an SBO — companies, trusts, HUFs, and LLPs are intermediaries, not SBOs themselves. What must be filed: Form BEN-1 by the SBO with the company → Form BEN-2 by the company with the ROC → Form BEN-3 register maintained at the company → Form BEN-4 notice issued by company to potential SBOs. Legal Reference Section 90 of the Companies Act, 2013 read with Companies (Significant Beneficial Owners) Rules, 2018 and Amendment Rules, 2019. MCA has also issued FAQs and clarifications on specific applicability scenarios. When Does the 10% SBO Threshold Apply — What Counts? An individual meets the SBO threshold if they hold or are entitled to any of the following at 10% or more level, directly or indirectly through one or more entities: Shares or voting rights: 10% or more of the total shares or voting rights in the company. Distributable dividend: 10% or more right to receive or participate in distributable dividends or any other distribution. Significant influence or control: Right to exercise, or actually exercises, significant influence or control — even if equity ownership is below 10%. This is the catch-all provision covering veto rights in SHA, board appointment rights, and reserved matter controls. For indirect holdings, the calculation is proportionate: an individual owning 60% of Company A, which holds 20% in Company B, has an indirect beneficial interest of 12% in Company B (60% × 20%) — exceeding the 10% threshold and making them an SBO of Company B. Member Type → SBO Analysis: Complete Decision Matrix The starting point for every SBO compliance exercise is the Register of Members. For each member, the question is: is this member a natural individual holding directly (no SBO analysis needed) or is it an entity through which an individual may hold beneficial interest (SBO analysis required)? The table below maps every common member type: ← Scroll to see the full table → Member Type in Register SBO Analysis Needed? Who to Identify as SBO Common Business Context in India Individual (natural person) ❌ No N/A — individual is already the beneficial owner Founder/promoter holds shares in their own name. Angel investor subscribes directly. No entity layer — no look-through required. Indian Holding / Parent Company ✅ Yes Individual(s) holding ≥10% in the holding company OR who control/exercise significant influence over it Promoter group holds the operating company through a promoter holding company. Very common in family businesses and structured startup groups. Foreign Company / Foreign Holding Entity ✅ Yes Ultimate individual foreign promoter or owner of the foreign entity with ≥10% indirect interest in the Indian company FDI received from a Mauritius/Singapore/Cayman SPV. The individual behind the SPV must be identified. This is the most common SBO scenario in foreign-invested Indian companies. HUF (Hindu Undivided Family) ✅ Yes Karta of the HUF — the individual who manages and controls the HUF’s affairs and assets Family business where the patriarch’s HUF holds shares in the family company. The Karta files BEN-1 as the SBO. Partnership Firm or LLP ✅ Yes Partner(s) whose indirect beneficial interest in the company is ≥10% (computed proportionately) Professional services firms or legacy partnerships that hold equity in portfolio companies. Each partner’s proportionate indirect share is calculated. Listed Indian Company