Summary: Private companies in India are required to dematerialise their securities, but the existing demat onboarding process appears to be designed for Indian shareholders only. There is no proper onboarding guidance for foreign body corporates, leaving registrars and share transfer agents (“RTAs”) and depository participants to devise their own, often inconsistent, documentation standards and processes. The result is unnecessary delays, extended timelines, and avoidable uncertainty in cross-border transactions.

Introduction

Dematerialisation has redefined the architecture of the Indian securities market, enhancing transaction speed, transparency and resilience to fraudulent activity, thus placing it among the most sophisticated trading ecosystems in the world. In October 2023, Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, was introduced, which required private companies (except small and government companies) to dematerialise their shares. Shareholders were also required to ensure that their shares were in the demat form before transferring them. However, when this obligation is extended to Indian private companies with foreign body corporates holding the majority or substantial shareholding, the framework’s practical gaps become apparent and difficult to navigate.

Cross-border transactions often involve foreign shareholders in an Indian company transferring their shares. Foreign investment into India is already wrapped in a regulatory perimeter, from pricing guidelines, reporting timelines and sectoral caps to takeover thresholds. Investors generally brace for these hurdles. Rule 9B, however, has now added another layer of complexity — opening demat accounts and dematerialising their shares. Instances such as multiplicity of KYC documents, signature mismatch and the requirement to submit all correspondence in hard/ physical copy often lead to extended processing timelines and practical challenges. Opening a demat account or transferring dematerialised shares often takes longer than the targeted timeline. This blog examines these challenges in depth, tracing the difficulties that Indian companies and their foreign shareholders encounter during the dematerialisation and transfer process.

The existing regulatory framework governing dematerialisation  

Under the current framework, dematerialisation is undertaken in accordance with the provisions of the Depositories Act, 1996[1], and the SEBI (Depositories and Participants) Regulations, 2018[2], read with the relevant SEBI master circulars[3] and by-laws of the depositories (NSDL and CDSL). A private company, whose shares are to be dematerialised, shall, if necessary, amend its articles of association to permit shareholders to hold shares in dematerialised form, engage a SEBI-registered RTA to facilitate the dematerialisation and apply for and obtain an International Securities Identification Number (“ISIN”) for each class of security. The shareholder, in turn, is required to open a demat account by selecting and coordinating with a depository participant (“DP”), satisfying the DP’s know-your-customer (“KYC”) norms, submitting necessary documents, and obtaining and completing the dematerialisation request form before surrendering the share certificate. The DP then forwards the request to the depository, which routes it to the company’s RTA for verification, and once verified, the dematerialised shares are credited to the shareholder’s demat account. Subsequent transfers are then executed electronically through the depository system.

The procedural gaps in the current framework

When the shareholder is a foreign body corporate, the inefficiency of the demat onboarding process becomes apparent from the very first step due to lack of explicit guidance. In practice, foreign shareholder needs to obtain a Permanent Account Number, which is a time-consuming process. Thereafter, they must select and coordinate with a DP, fill the demat request form, satisfy strict KYC norms and submit the extensive documentation as required by the DP. While the process appears straightforward at the outset, it is routinely beset by delays that can extend it by months. This is mainly because Indian RTAs and DPs were built to onboard Indian shareholders, governed by India law documents, as reflected in their internal processes, documentation checklists and training of staff. In the absence of any regulatory guidance, several issues arise when the shareholder involved is a foreign body corporate.

The onus of KYC and related verification rests with the DPs. This is compounded by the fact that DPs carry independent obligations under anti-money laundering norms (including under the PMLA-linked AML/ CFT obligations for securities market intermediaries) and face regulatory exposure for onboarding errors, which pushes them toward defensive, over-inclusive documentation demands in the absence of foreign-specific guidance[4]. Lack of uniformity of approach and documentation requirements even within the departments of a single DP, let alone across different DPs, further exacerbates the issue.

Foreign shareholders are rarely provided with a standardised checklist at the outset specifying formats, list of documents need to be notarised, apostilled or self-attested. Further, the requests are made in tranches. There is no clear equivalent checklist for foreign body corporates and what is typically demanded is a notarised and apostilled copy of the entity’s constitutional documents, board resolution and identity and address proof. The underlying documents for identity and address proof, etc., may differ across DPs. Such requests also give rise to more problems, as the format of such documents, given different jurisdictions, may differ from what is generally expected by Indian staff.

The authorised signatories of the foreign companies are expected to share sensitive personal information like copies of passports, address proof, parents’ name, mobile number, etc., which they may not be willing to share. In addition, untrained staff routinely reject apostilled documents because of unfamiliarity or perceived mismatches in stamps. The absence of an internal escalation process then compels the foreign company to re-authenticate and re-submit the same documents at further cost and delay. Even when parties proactively raise queries related to documentation requirement, they are often left unanswered for days, with counsel and clients repeatedly chasing rather than the DP working to a defined service timeline. If a demat account is eventually opened after months of persistence, internal procedural lapses within the DP’s system can still delay the transfer of shares and may jeopardise the transaction’s closing date.

The discussion above points to a single, underlying cause: the absence of a standardised and simplified checklist and formats, along with dedicated regulatory guidance. Neither the MCA portal nor the NSDL/ CDSL portals offer any FAQ, checklist, or reference material clarifying which foreign documents correspond to their Indian equivalents, what notarisation or apostille is required for documents originating in different jurisdictions, how signatory authority is established across varying foreign corporate structures, or how the data privacy concerns of foreign signatories should be addressed. These portals and processes were designed for Indian shareholders, yet the compliance obligation under Rule 9B was extended to companies with foreign shareholders without corresponding institutional support.

The result is a widening gap between the letter of the law and the operational reality of compliance: RTAs and DPs are left to interpret documentation requirements on an ad hoc basis, and each interpretation, however inconsistent, becomes binding on the foreign shareholder in question. Foreign companies and their Indian subsidiaries are consequently forced to work through the process by trial and error, without any authoritative point of reference, and the resulting delays translate directly to missed closing timelines and avoidable transaction costs.

Recommendations and Way Forward

As an immediate interim measure, the MCA and the depositories should issue comprehensive guidelines for foreign body corporate shareholders, provide a standardised checklist for the documents required, formats for certain documents, the form and manner of authentication, and their equivalence across different foreign corporate structures. Such guidance should, at a minimum:

• set out a standardised documentation checklist for foreign body corporate shareholders, specifying which documents require self-attestation, notarisation and apostille;
• clarify for each foreign corporate form (companies, limited liability corporations, partnerships and trusts) the specific documents that constitute valid evidence of the signatory’s authority to act on the entity’s behalf (for example, a board resolution or certificate of incumbency for companies, written consent, a managing member or manager certificate for LLCs, a partnership resolution or deed extract for partnerships, and a trustee resolution or trust deed extract for trusts); and
• provide a clear protocol for handling the personal data of foreign signatories, consistent with the applicable data protection norms.

The DPs should, in turn, be held to a uniform, time-bound service standard, with a defined escalation path for unresolved documentation queries. Until such guidance and standards are put in place, the compliance timeline created by Rule 9B will remain at odds with the operational reality on the ground, and the burden of bridging that gap will continue to fall on the very foreign shareholders the rule was never designed to accommodate.

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[1] The Depositories Act, 1996, s 6-12.

[2] SEBI (Depositories and Participants) Regulations, 2018, reg 40-44, 58-62.

[3] SEBI Master Circular for Depositories, SEBI/HO/MRD/MRD-PoD-1/P/CIR/2024/168 dated December 3, 2024; SEBI Master Circular on KYC Norms for the Securities Market, SEBI/HO/MIRSD/SEC-FATF/P/CIR/2023/169 dated October 12, 2023 and SEBI Master Circular on AML/CFT obligations of securities market intermediaries under the PMLA, SEBI/HO/MIRSD/MIRSD-SEC-FATF/P/CIR/2024/78 dated June 6, 2024.

[4] Ibid.