Whalesbook
India's Unlisted Companies Embrace Digital Shareholding
India is undergoing a profound transformation in its capital markets as unlisted private companies are rapidly embracing dematerialisation. This significant shift, driven by regulatory mandates, is moving shareholding from physical certificates to secure electronic records, mirroring the digital revolution that reshaped listed company shares two decades ago. The move promises enhanced transparency and efficiency but also introduces new considerations for businesses.
The Unlisted Demat Wave
The landscape of Indian corporate finance is changing dramatically. Data from National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL) reveals a surge in companies opting for dematerialised securities. NSDL reported its issuer base growing from approximately 40,000 companies in the 2022-23 financial year to over 100,000 by November 2025. Similarly, CDSL has seen its number of issuers nearly double, increasing from around 20,000 to over 40,000 in the same period. This growth far outpaces the less than 10 per cent rise observed in the listed equity space between FY23 and FY25, underscoring the significant expansion in the unlisted sector's dematerialisation.
Regulatory Mandate and Objectives
This accelerated adoption is largely attributed to a directive from the Ministry of Corporate Affairs. In October 2023, the ministry mandated that private companies must issue securities exclusively in demat form and convert their existing physical securities into electronic ones. While the initial deadline was extended to June this year, the push aims to modernise the private corporate sector. Company secretary Gaurav Pingle highlights that a move towards electronic shareholding serves crucial purposes, including fostering better transparency and improving tax compliance. It also contributes to greater uniformity in stamp duties, which can vary depending on whether shares are held physically or electronically.
Historical Parallels and Benefits
The transition echoes the experience of listed companies in the mid-1990s. At that time, electronic shareholding represented a small fraction of trades, but it rapidly climbed to over 99.5 per cent by 2001. The advent of dematerialisation for listed stocks largely eradicated issues like share forgeries and the non-delivery of physical certificates. K S Ravichandran, a company secretary with decades of experience, noted that frauds and fabrications have been reduced to almost zero since dematerialisation. This digital format for unlisted shares is expected to prevent practices like backdating share transfers, which were previously used to circumvent legal or tax obligations, as transfers will now be processed through depositories.
Challenges and Cost Considerations
Despite the clear advantages, the transition is not without its hurdles. Pingle pointed out that the costs associated with dematerialisation can be substantial. There are initial fees for converting physical shares into electronic form. Furthermore, companies may face recurring annual expenditures for registrar and transfer agents (RTAs), even if no share transfers occur. This could pose a particular challenge for smaller private companies or non-profit entities formed under Section 8 of the Companies Act, 2013. However, a December 2025 notification offers some relief by widening the definition of small companies exempt from the dematerialisation requirement. These exempt companies have a turnover of less than ₹100 crore and paid-up capital below ₹10 crore.
Future Potential and Market Dynamics
The opportunity size for dematerialising unlisted shares is significant. NSDL's Managing Director and Chief Executive Officer Vijay Chandok estimated the potential customer base to be around 1.8 lakh (180,000) companies, with room for growth if regulations become more inclusive. CDSL's Managing Director and Chief Executive Officer Nehal Vora indicated that CDSL holds a 30-32 per cent market share in the unlisted space. Both depositories are working on integrating the ISIN system, which identifies individual securities, to ensure a level playing field.
Impact
This regulatory shift is expected to significantly enhance transparency, accountability, and efficiency within India's vast unlisted corporate sector. It paves the way for better governance, improved investor confidence in private companies, and potentially a smoother path for these companies when they eventually seek public listing. The move could also lead to more streamlined capital raising and easier tracking of ownership, ultimately contributing to a more robust and modern financial ecosystem.
Impact Rating: 8/10
Difficult Terms Explained
- Dematerialisation: The process of converting physical share certificates into electronic records, held in a demat account.
- Unlisted Companies: Companies whose shares are not traded on a public stock exchange.
- Demat Securities: Securities held in electronic form.
- Issuers: Companies that issue shares or other securities.
- Securities and Exchange Board of India (SEBI): The regulatory body for the securities market in India.
- Ministry of Corporate Affairs: The government ministry responsible for regulating companies in India.
- Registrar and Transfer Agents (RTAs): Companies that maintain records of shareholders and handle share transfers.
- International Securities Identification Number (ISIN): A unique code assigned to identify specific securities like stocks, bonds, etc.