SECP Mandates Dematerialization of Shares for Unlisted Companies: SRO 328(I)/2026, Compliance Deadlines, and Penalties

Overview of SRO 328(I)/2026

On 23 February 2026, the Securities and Exchange Commission of Pakistan issued Statutory Regulatory Order No. 328(I)/2026, fundamentally reshaping the way unlisted companies manage share ownership in Pakistan. This directive mandates the conversion of all physical share certificates into electronic book-entry form through the Central Depository System operated by the Central Depository Company. The change represents a watershed moment in Pakistan's corporate governance framework, moving away from traditional paper-based share certificates toward a digitised, transparent system of share ownership.

The order applies to all unlisted companies with share capital registered under the Companies Act 2017. This includes family-held enterprises, close corporations, and larger private companies. The scope is broad and the compliance requirement is not optional. Companies that fail to meet the deadline face significant penalties under the existing legal framework.

What is Dematerialization of Shares?

Dematerialization is the process of converting physical share certificates into electronic records maintained in a digital depository. Rather than holding a paper certificate showing ownership, shareholders have their shares recorded in an electronic account at the Central Depository. This account reflects the shareholder's holdings in book-entry form.

Under the previous system, share transfers required physical delivery of certificates, signatures on multiple documents, and manual entry in the company's register of members. The process was cumbersome, time-consuming, and vulnerable to fraud. A shareholder could claim loss of a certificate and potentially create duplicate certificates. Forged documents could be difficult to detect.

Electronic book-entry shares eliminate these inefficiencies. When a shareholder wishes to sell shares, the transaction occurs through the depository system with instantaneous transfer of ownership. There is no physical delivery, no lost certificates, no forgeries. The transaction is irreversible and transparent.

Scope of the Mandate

SRO 328(I)/2026 requires all unlisted companies to maintain shares in book-entry form for several key transactions. The order covers share transfers between parties, newly allotted shares issued by the company, bonus shares distributed to existing shareholders, rights issues and new share subscriptions, and share buy-back programs. The requirement is mandatory, not discretionary.

This is not limited to large corporations. The requirement applies equally to small and medium-sized companies. A family business with paid-up capital of Rs. 5 million must comply. There is no exemption based on company size or market capitalisation.

Compliance Timeline

The compliance deadline is 30 days from the date of notification. Since the order was issued on 23 February 2026, the deadline falls on 25 March 2026. This is a fixed, non-extendable deadline. Companies must act quickly. Those that waited until the last week to begin conversion risked missing the deadline due to administrative delays or technical problems.

The 30-day period covers opening accounts at the Central Depository, dematerializing existing physical shares, and implementing systems to issue all future shares in electronic form.

Role of the Central Depository System

The Central Depository Company operates the Central Depository System on behalf of the SECP. The CDS is Pakistan's sole authorised depository for dematerialized shares. All electronic shares must be recorded in the CDS. Companies cannot maintain their own private electronic share registers as an alternative.

When a company converts its shares, it must submit the physical certificates to the CDS along with a list of shareholders and their respective holdings. The CDS verifies the information and creates electronic accounts for each shareholder. From that point forward, the CDS is the official record of share ownership.

Fee Waivers for First Year

The SECP has announced substantial fee relief to ease the burden of conversion. For companies with paid-up capital of up to Rs. 25 million, annual depository fees are waived for the first year. Additionally, the security deposit fee, initial conversion deposit, and security deposit processing fee are all waived for all unlisted companies during the first year.

Companies should calculate the cost implications after the waiver period expires and ensure they budget for ongoing depository fees.

Penalties for Non-Compliance

Non-compliance with SRO 328(I)/2026 falls under Section 510(2) of the Companies Act 2017, which provides for Level 3 penalties. A Level 3 penalty can reach up to Rs. 2 million per violation. The SECP actively pursues enforcement actions against companies that violate regulatory orders. Directors and senior management may face personal liability if the company fails to comply.

Beyond financial penalties, non-compliance can result in regulatory sanctions, suspension of the company's ability to issue new shares, and reputational damage. Lenders and investors view SECP enforcement actions as serious red flags.

Objectives Behind the Reform

The dematerialization mandate serves several important policy objectives. It reduces fraud in share transfers by making forged certificates impossible. It attracts foreign investment by signalling modern, transparent ownership systems. It improves regulatory oversight by giving regulators visibility into corporate ownership patterns, strengthening AML enforcement. And it boosts investor confidence by ensuring accurate, unchallengeable ownership records.

Legal Basis: Section 72 of the Companies Act 2017

The power to mandate dematerialization is rooted in Section 72 of the Companies Act 2017. This section grants authority to issue shares in book-entry form. The SECP has interpreted this authority to include the power to require dematerialization of all outstanding shares. The order framework is well-established and has survived legal challenge.

Steps for Companies to Achieve Compliance

Companies should designate a point person (company secretary or CFO), contact the Central Depository Company for instructions, compile a complete shareholder list, gather all original share certificates, submit the dematerialization application to the CDS, confirm successful dematerialization, and implement internal procedures for all future electronic share issuances.

Conclusion

SRO 328(I)/2026 represents a significant modernisation of Pakistan's corporate governance system. The mandatory dematerialization of shares for unlisted companies will improve transparency, reduce fraud, and attract investment. The penalties for non-compliance are severe. The fee waivers offered by the SECP ease the financial burden during the first year. While the implementation timeline was compressed, the ultimate objective of creating a modern, secure system of share ownership is sound and in the best interests of Pakistani companies and their investors.