ROC Bangalore Imposes Heavy Penalties for Physical Share Transfer Without Demat Compliance

The Registrar of Companies (ROC) Bangalore has cracked down on a company for failing to dematerialize its shares and conducting physical share transfers, violating key provisions of the Companies Act, 2013. This case underscores the strict enforcement of demat mandates for private companies post the June 30, 2025 deadline.

Background of the Violation and ROC Order

The company, incorporated on July 21, 2023, delayed dematerialization of its securities until June 27, 2025, resulting in a 707-day violation of Section 29(1A) of the Companies Act, 2013. During this non-compliance period, a physical share transfer occurred on March 28, 2025, breaching Rule 9A(3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

The ROC Bangalore adjudicated the matter under Section 450, the residuary penalty provision, as no specific penalty was outlined for this contravention. The company admitted the default due to oversight, without mala fide intent, and later obtained an ISIN from NSDL on June 27, 2025, facilitating dematerialization.

Key Timeline of Non-Compliance

• Incorporation: July 21, 2023
• Physical share transfer: March 28, 2025
• Dematerialization and ISIN issuance: June 27, 2025
• Total delay in demat: 707 days

This primary failure to dematerialize led to the consequential physical transfer, which was deemed inevitable given the circumstances.

Legal Framework: Demat Requirements for Private Companies

Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, mandates dematerialization for private companies (other than small companies) with paid-up capital of Rs. 4 crores or more, or turnover of Rs. 40 crores or more, including Section 8 and holding/subsidiary companies. The deadline was extended to June 30, 2025, after which physical transfers are prohibited.

Section 29(1A) requires securities to be held in dematerialized form, and transfers must occur through depositories. Physical transfers before the deadline were permissible, but post-deadline, shareholders cannot transfer physical shares, issue new ones, or participate in buybacks without demat conversion.

Penalties Under the Act

• Section 450 (residuary): Rs. 10,000 initial penalty on company/officers, plus Rs. 1,000 per day, capped at Rs. 2 lakhs for company and Rs. 50,000 per officer.
• No leniency for non-small companies under Section 446B.
• Payment must be from personal sources for officers; non-payment attracts Section 454(8) consequences.

In this case, maximum penalties were imposed on the company and its directors/officers in default, with a 90-day payment directive.

Implications and Compliance Lessons for Companies

This ROC order serves as a wake-up call for private companies. Non-small entities must prioritize dematerialization to avoid cascading violations like invalid physical transfers. The company was not classified as ‘small’ under Section 2(85), disqualifying it from reduced penalties.

Directors and officers bear personal liability, emphasizing the need for proactive compliance calendars. Post-June 30, 2025, pending physical transfers must be processed before the deadline to avert penalties.

Steps for Compliance

• Assess applicability of Rule 9B based on capital/turnover thresholds.
• Obtain ISIN from NSDL/CDSL and facilitate demat for all shareholders.
• Ensure all transfers, issuances, and buybacks are depository-mediated.
• Process any pre-deadline physical transfers promptly.
• Train board and CS on demat protocols and penalty risks.

Similar cases, like ROC fines of Rs. 5 lakhs for non-demat or penalties on directors for demat failures, highlight MCA’s aggressive stance. Companies should consult experts to audit compliance and mitigate risks.

Adjudication orders from ROC Bangalore, signed by Registrar Manoj Bang, reinforce that ignorance or oversight is no defense. Appeal options exist, but prevention is preferable. As demat becomes standard, integrating it into governance will safeguard against hefty fines and operational disruptions.