The Securities and Exchange Board of India (SEBI) has issued a consultation paper on April 30, 2025, proposing a major amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).Making it mandatory for a wider group of pre-IPO shareholders to convert their physical shares into electronic (demat) form before the company files its offer document for an Initial Public Offering (IPO).<\/p>\n\n\n\n
Background: Why Is This Needed?<\/strong><\/p>\n\n\n\n SEBI and the Ministry of Corporate Affairs (MCA) have long advocated for dematerialization i.e. converting physical share certificates into electronic form, to curb fraud, theft, and delays associated with physical shares. <\/p>\n\n\n\n Over the years, a series of reforms have made demat the standard:<\/p>\n\n\n\n In consultation paper SEBI highlighted the need for review stating that despite these efforts, some stakeholders still hold physical shares, including company directors, senior managers, selling shareholders, and even qualified institutional buyers (QIB). These holdings get carried into the post-IPO environment, undermining market transparency and efficiency.<\/p>\n\n\n\n MCA Rules Back SEBI\u2019s Demat Push<\/strong><\/p>\n\n\n\n SEBI\u2019s proposal aligns closely with the MCA\u2019s amendments to the Companies (Prospectus and Allotment of Securities) Rules, 2014, particularly Rules 9A and 9B. These rules make it mandatory for unlisted public and private companies (excluding small companies) to:<\/p>\n\n\n\n By echoing these provisions in the IPO context, SEBI ensures a smooth regulatory bridge from unlisted to listed space, promoting digital transparency and legal clarity.<\/p>\n\n\n\n The Core Proposal<\/strong><\/strong><\/p>\n\n\n\n SEBI is now suggesting an expansion of the existing dematerialization requirement. Currently, according to Regulation 7(1)(c): SEBI proposes to extend this to a broader list of shareholders:<\/p>\n\n\n\n New categories proposed to be brought under mandatory dematerialization:<\/strong><\/p>\n\n\n\n A Well-Intentioned Move<\/strong><\/strong><\/p>\n\n\n\n While SEBI\u2019s move toward a fully digital IPO ecosystem reflects a forward-thinking regulatory vision, it seems that the onus would be on companies to ensure dematerialization by third-party shareholders such as QIBs and brokers may create unintended compliance hurdles. Without a balanced approach, this could run counter to India\u2019s larger objective of promoting Ease of Doing Business.<\/p>\n\n\n\n A more calibrated approach such as phasing the requirement, limiting it to insiders like promoters and KMPs, or allowing self-declarations from institutional investors could strike the right balance between regulatory transparency and business convenience.<\/p>\n\n\n\n SEBI Wants Your Feedback!<\/strong><\/strong><\/p>\n\n\n\n SEBI has opened the floor for public consultation.<\/p>\n\n\n\n Deadline to Comment:<\/strong> May 20, 2025<\/strong><\/p>\n\n\n\n Submit your views here:<\/strong>Year<\/strong><\/strong><\/td> Reform<\/strong><\/strong><\/td><\/tr> 2000<\/td> Public issues above \u20b910 crore allowed only in demat mode<\/td><\/tr> 2011<\/td> Promoters required to hold shares in demat form<\/td><\/tr> 2014<\/td> IPOs permitted only in demat<\/td><\/tr> 2019<\/td> Transfer of physical shares banned<\/td><\/tr> 2022\u20132023<\/td> Demat mandated for investor service requests, bonus issues, etc.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n \n
\u201cAll securities held by promoters<\/em> must be in demat form before filing the offer document.\u201d<\/p>\n\n\n\n\n
SEBI Public Comments Portal<\/u><\/a><\/p>\n\n\n\n