Mohit Agarwal
R & A Associates | Company Secretaries, Hyderabad
INTRODUCTION
The introduction of compulsory dematerialisation under Rule 9B has given rise to an important question of corporate law: Can a company refuse to register an otherwise valid transfer of physical shares solely because it has not complied with its own statutory obligation to facilitate dematerialisation? This article examines the Companies Act, 2013, the Companies (Prospectus and Allotment of Securities) Rules, 2014, and the judicial principles governing share transfers to demonstrate that a company’s regulatory default cannot, by itself, defeat a shareholder’s statutory right to transfer shares.
THE STATUTORY FRAMEWORK: SECTIONS 44, 56, 58, 59 AND RULES 9A, 9B
Section 44 – Shares are Movable Property
Section 44 of the Companies Act, 2013 declares that the shares or other interest of a member in a company constitute movable property and are transferable in the manner provided by the Articles of Association of the company. This provision embodies the fundamental principle of company law that ownership of shares carries with it the proprietary right of transfer, subject only to restrictions imposed by the Act or the Articles.
In the case of a public company, transferability of shares is the rule, whereas restrictions on transfer are a characteristic feature of a private company by virtue of Section 2(68). Consequently, unless a restriction is expressly authorised by the Companies Act or contained in the Articles, the company cannot create additional impediments to the transfer of shares.
Section 44 therefore establishes the substantive legal foundation for transferability, while the remaining provisions of the Act regulate the manner in which that right is exercised.
Section 56 – Procedure for Registration of Transfer
Section 56 lays down the statutory procedure governing transfer of securities. It requires that a transfer be effected through a duly executed instrument of transfer together with the relevant share certificate or letter of allotment, subject to the procedural requirements prescribed under the Act.
The purpose of Section 56 is procedural rather than substantive. It regulates the documentation, execution and registration process for transfer of shares. Importantly, Section 56 does not provide that transfer of physical shares is prohibited merely because the company has not completed dematerialisation under Rule 9B. Nor does it authorise a company to reject an otherwise valid transfer solely on the ground that the shares continue to exist in physical form.
Accordingly, where a transfer instrument satisfies the statutory requirements, the company cannot import additional conditions unless such conditions are expressly recognised by the Companies Act or other applicable law.
Section 58 – Refusal to Register Transfer and Right of Appeal
Section 58 governs refusal by a company to register a transfer of securities. Where a company refuses registration, it is required to communicate the reasons for such refusal within the statutory period, and the aggrieved transferor or transferee is entitled to appeal before the National Company Law Tribunal.
The provision serves two important purposes. First, it recognises that a company’s power to refuse registration is not absolute but must be exercised in accordance with law. Secondly, it provides a statutory remedy against arbitrary refusal by vesting jurisdiction in the NCLT to examine whether the refusal is legally justified.
Section 59 – Rectification of Register of Members
Section 59 provides the statutory remedy where the name of a person has been wrongly entered in, omitted from, or retained in the register of members, including cases where a company has wrongfully refused to register a transfer of shares.
Unlike Section 58, Section 59 does not enumerate grounds upon which registration may be refused. Rather, it empowers the Tribunal to order rectification whenever the register does not correctly reflect the legal ownership of shares. While adjudicating such applications, the Tribunal may determine all incidental questions relating to title and transfer of shares.
Accordingly, where a company refuses registration on grounds that are not supported by the Companies Act or applicable law, the Tribunal may direct rectification of the register by recognising the lawful transferee.
Rules 9A and 9B: Dematerialization Framework
Rules 9A and 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 were introduced to modernize the securities issuance framework and promote electronic settlement through dematerialized securities. Rule 9A applies to unlisted public companies and mandates that all new securities be issued in dematerialized form. Rule 9B, however, applies to private companies that are NOT classified as small companies as on March 31, 2023.
Rule 9B read with Rule 9A imposes two primary obligations on non-small private companies: First, all new securities issued on or after March 31, 2023 must be in dematerialized form. Second, the company must facilitate the dematerialization of existing securities. The deadline for compliance with Rule 9B was extended to June 30, 2025. However, Rule 9B(4) contains a critical proviso that is often misinterpreted:
‘Every holder of securities who intends to transfer such securities on or after the date when the company is required to comply with this rule, shall get such securities dematerialised before the transfer.’
This provision places the obligation to dematerialise on the shareholder-transferor, but only on the conditional premise that the company has already established and enabled dematerialization facilities. The rule cannot function as a unilateral transfer-blocking mechanism if the company itself has not created the infrastructure for dematerialization.
THE MYTH THAT TRANSFER CANNOT BE EFFECTED UNLESS SHARES ARE DEMATERIALIZED
A widely held misconception in corporate practice is that, with effect from 30 June 2025, physical shares of a private company covered by Rule 9B have become incapable of being transferred and that companies are entitled to refuse registration of transfer deeds solely because the securities have not been dematerialised. Such an interpretation finds no express support in the Companies Act, 2013 and is inconsistent with the statutory scheme governing the transfer of shares.
Section 44 of the Companies Act, 2013 recognises shares as movable property transferable in the manner provided by the Articles of Association. Section 56 prescribes the statutory procedure for effecting a transfer of securities, while Section 58 regulates refusal to register transfers and provides a statutory right of appeal to the National Company Law Tribunal where such refusal is without sufficient cause. Section 59 further empowers the Tribunal to rectify the register of members where the name of a person has been wrongly omitted or where a company has wrongfully refused to register a transfer. Importantly, Section 59(3) expressly provides that nothing contained in the section shall restrict the right of a holder of securities to transfer such securities except where voting rights have been suspended by an order of the Tribunal.
The statutory framework, preserves the right of a shareholder to transfer shares while regulating only the procedure for registration and providing remedies against wrongful refusal. Neither the Companies Act nor Rule 9B expressly provides that existing physical shares become void or incapable of transfer merely because the company has not completed its dematerialisation compliances.
This principle has consistently been recognised by judicial precedent. In South Indian Bank Ltd. v. Joseph Michael, the Court held that a shareholder possesses the right to transfer shares subject to the Articles of Association, and if that right is to be curtailed, it must be done with “satisfactory clarity.” Likewise, in Smith & Fawcett Ltd., Re and Moodie v. W. & J. Shepherd Ltd., the Courts recognised that although the Articles may impose reasonable restrictions on transfer, such restrictions must be expressly provided and cannot be implied.
The same principle has been reaffirmed by the Supreme Court of India in Luxmi Tea Co. Ltd. v. Pradip Kumar Sarkar, where it was held that a company may refuse registration of a transfer only on grounds recognised by law or validly incorporated in its Articles of Association. A company cannot invent additional grounds of refusal that are neither contemplated by the statute nor authorised by its constitutional documents.
Similarly, in Hemanigiri Finance & Leasing (P.) Ltd. v. Tamilnad Mercantile Bank Ltd., it was held that even where the Articles confer discretion upon the Board to refuse registration of transfers, such discretion is not absolute. The Board must exercise its powers bona fide, for a proper purpose, and in the interests of the company, and its decision remains open to judicial scrutiny.
These authorities establish two settled propositions. First, the right to transfer shares is a statutory incident of share ownership and may be curtailed only by an express statutory provision or by a valid restriction contained in the Articles of Association. Secondly, the Board of Directors cannot rely upon considerations outside the Act or the Articles to refuse registration of an otherwise valid transfer.
Rule 9B does not create an additional ground for refusal. It imposes a statutory obligation upon specified companies to facilitate dematerialisation of their securities and requires shareholders intending to transfer securities to dematerialise them after the company has established the necessary depository infrastructure. The Rule neither declares existing physical shares to be non-transferable nor authorises a company to refuse registration solely because the company itself has failed to comply with its statutory obligation to facilitate dematerialisation
AMREX MARKETING V. HARINAGAR SUGAR MILLS: THE LANDMARK NCLT JUDGMENT
The National Company Law Tribunal (NCLT) Mumbai Bench rendered a landmark decision on December 5, 2023 in Amrex Marketing Pvt. Ltd. v. Harinagar Sugar Mills Ltd. that comprehensively addressed the conflict between Rule 9B dematerialization mandates and shareholder transfer rights. This decision provides important judicial guidance on the interpretation of Rule 9A and Rule 9B and the interaction between the dematerialisation framework and statutory share transfer rights.
4.1 Facts of the Case
Amrex Marketing Pvt. Ltd. and another shareholder executed a duly stamped share transfer deed for the transfer of 1152 shares held in physical form from Amrex to the transferee. The transfer deed was submitted to Harinagar Sugar Mills Ltd., a private company classified as non-small under Rule 9B, for registration. The company rejected the transfer application, citing that the shares had not been dematerialized and that Rule 9B compliance was incomplete. The company asserted that no transfer could be registered until shares were dematerialized and an ISIN (International Securities Identification Number) had been assigned.
The company further contended that the shareholder should have dematerialized the shares before attempting the transfer and that Rule 9B(4) imposed an obligation on the transferor to dematerialize as a precondition to transfer. The transferor, locked out of exit from the investment, filed a petition before the NCLT challenging the refusal as arbitrary and violative of shareholder rights. The petition raised two core issues: (1) Whether a company can refuse to register a physical share transfer solely on the basis of Rule 9B non-compliance, and (2) Whether dematerialization is a precondition to transfer or a separate obligation that coexists with transfer rights.
NCLT’s Key Rulings
- The primary obligation to facilitate dematerialisation rests with the company
The Tribunal held that under Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the issuer company bears the primary obligation to dematerialise its issued share capital by entering into arrangements with a depository. A shareholder cannot be fastened with the obligation to dematerialise shares unless the issuer company has first complied with its statutory duty of facilitating dematerialisation.
- NCLT has jurisdiction to examine the legality of a share transfer
Rejecting the company’s objection on maintainability, the Tribunal held that once it is empowered under Sections 58 and 59 of the Companies Act, 2013 to order rectification of the register of members, it necessarily possesses the jurisdiction to determine the legality and validity of the underlying transfer of shares. Rule 70(5)(a) and (b) of the NCLT Rules further empower the Tribunal to decide all questions necessary for adjudicating a rectification petition.
- The company’s own failure cannot make shares legally non-transferable
The Tribunal categorically held:
“Nonetheless, the onus for dematerilisation of shares lies on the issuer company, who has to engage one of Depository to enroll the shares for dematerialization. Only then, a shareholder can submit those shares for dematerialization. The Issuer company for its own failure cannot make the shares as legally non-transferable, which otherwise are freely transferable in terms of the Scheme of Companies Act, 2013 which unequivocally mandates that the shares of a public limited company are transferable.”
- Subordinate legislation cannot override the Companies Act
The Tribunal further observed:
“It is trite law that the Rules & Regulations are subordinate legislation and cannot supersede the substantive law. Accordingly, we do not find any merit in the contention of the Respondents that the subject matter shares could not have been transferred in physical mode.”
- Physical mode of transfer was not barred merely because the company had failed to facilitate dematerialisation
Having rejected the company’s contention that the transfer was invalid solely because the shares continued to exist in physical form, the Tribunal directed the company to complete the dematerialisation process within fifteen days and thereafter recognise the transfer on the basis of the transfer documents, with the transferee’s name being entered in the register of members after completion of dematerialisation formalities.
CONCLUSION: PRESERVING SHAREHOLDER RIGHTS AMID REGULATORY TRANSITION
The introduction of compulsory dematerialisation under Rules 9A and 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 reflects the legislature’s objective of modernising India’s corporate securities framework by promoting transparency, efficiency, and investor protection. However, the regulatory transition to a dematerialised environment cannot be interpreted in a manner that defeats or dilutes the statutory rights conferred upon shareholders under the Companies Act, 2013. The Act and the Rules operate in distinct yet complementary spheres—the former governs the substantive rights relating to ownership and transfer of shares, while the latter prescribes the regulatory mechanism for holding and dealing in securities through the depository system.
A harmonious reading of Sections 44, 56, 58 and 59 of the Companies Act, 2013 with Rule 9B demonstrates that the statutory right to transfer shares continues to subsist unless expressly curtailed by law or by valid restrictions contained in the Articles of Association. Rule 9B does not expressly create an independent statutory ground for refusing registration of a transfer, nor does it declare that existing physical shares cease to be transferable upon the company’s non-compliance with the Rule. To read such a prohibition into the Rule would permit delegated legislation to override the substantive provisions of the parent statute, contrary to settled principles of statutory interpretation.
The decision of the National Company Law Tribunal in Amrex Marketing Pvt. Ltd. v. Harinagar Sugar Mills Ltd. reinforces this interpretation. The Tribunal recognised that the obligation to obtain an ISIN, establish depository arrangements, and facilitate dematerialisation rests primarily upon the issuer company. It further held that a company cannot rely upon its own statutory default to contend that its shares have become legally non-transferable and reaffirmed that subordinate legislation cannot supersede the substantive rights recognised under the Companies Act. These observations provide valuable judicial guidance on the manner in which Rule 9B should be implemented during the transition to compulsory dematerialisation.
For companies, the judgment serves as a reminder that compliance with the dematerialisation framework is not merely a regulatory formality but a continuing statutory obligation that must be discharged proactively and in good faith. For shareholders and practitioners, it underscores that transfer applications must be examined in accordance with the Companies Act, the Articles of Association, and other applicable laws, and not rejected solely because the company has failed to establish the statutory infrastructure necessary for dematerialisation.
As India’s corporate landscape continues its transition towards a fully dematerialised securities regime, regulatory compliance and shareholder protection must be viewed as complementary objectives rather than competing considerations. The transition envisaged under Rule 9B is intended to facilitate a modern securities ecosystem, not to suspend or extinguish existing proprietary rights. Until the statutory framework expressly provides otherwise, a company cannot derive an advantage from its own non-compliance or invoke its regulatory default as a basis to impair a shareholder’s statutory right to transfer shares. Such an approach not only accords with the scheme of the Companies Act, 2013 but also preserves the balance between regulatory reform and the protection of proprietary rights that lies at the heart of Indian company law
Legal References & NCLT Case Law
- Sections 44, 56 of the Companies Act, 2013 (Share Transfer Rights)
- Sections 58, 59 of the Companies Act, 2013 (Refusal & Rectification)
- Rule 9A, 9B, Companies (Prospectus and Allotment of Securities) Rules, 2014
- Amrex Marketing Pvt. Ltd. v. Harinagar Sugar Mills Ltd., NCLT Mumbai, 05.12.2023
- Luxmi Tea Co. Ltd v. Pradip Kumar Sarkar, (1990) 67 Comp. Cas. 518 (SC)
- Hemanigiri Finance & Leasing (P.) Ltd v. Tamilnad Mercantile Bank Ltd.
This article is based on current Indian company law and NCLT precedent as of 2025. It is for informational purposes and does not constitute legal advice. Consult a qualified company secretary or corporate lawyer before making decisions regarding share transfers or Rule 9B compliance.