SEBI Proposes Mandatory Dematerialization for Select Shareholders Before IPO – Here’s What You Need to Know
May 3, 2025
SEBI Proposes Mandatory Dematerialization for Select Shareholders Before IPO – Here’s What You Need to Know - MMJC
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).
Background: Why Is This Needed?
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.
Over the years, a series of reforms have made demat the standard:
Year
Reform
2000
Public issues above ₹10 crore allowed only in demat mode
2011
Promoters required to hold shares in demat form
2014
IPOs permitted only in demat
2019
Transfer of physical shares banned
2022–2023
Demat mandated for investor service requests, bonus issues, etc.
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.
MCA Rules Back SEBI’s Demat Push
SEBI’s proposal aligns closely with the MCA’s 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:
Issue securities only in demat form
Facilitate dematerialization of all existing shares
Allow bonus, rights, or buyback only if promoters, directors, and KMPs hold shares in demat
Permit private placements or rights issues only to shareholders with demat holdings
Restrict transfer of shares to demat mode only
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.
The Core Proposal
SEBI is now suggesting an expansion of the existing dematerialization requirement. Currently, according to Regulation 7(1)(c): “All securities held by promoters must be in demat form before filing the offer document.”
SEBI proposes to extend this to a broader list of shareholders:
New categories proposed to be brought under mandatory dematerialization:
Promoter Group
Selling Shareholders
Directors
Key Managerial Personnel (KMPs)
Senior Management
Qualified Institutional Buyers (QIBs)
Domestic Current Employees
Shareholders with special rights
Registered Stock Brokers
Non-Systemically Important NBFCs
Other financial sector regulated entities (as may be identified)
A Well-Intentioned Move
While SEBI’s 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’s larger objective of promoting Ease of Doing Business.
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.
SEBI Wants Your Feedback!
SEBI has opened the floor for public consultation.
Or email your suggestions to: consultationcfd@sebi.gov.in (Subject: “Comments on consultation paper on mandatory dematerialization of existing securities of select shareholders prior to IPO”)
This step by SEBI is part of a broader push to modernize India’s capital markets. Ensuring a clean, demat-only cap table ahead of IPOs can not only improve investor confidence but also enhance the ease of listing and post-listing compliance.