SEBI Proposes Mandatory Demat Holding for Certain Shareholders Before IPO Filing

The Securities and Exchange Board of India (SEBI) has released a consultation paper proposing that select existing shareholders must hold shares in dematerialised form before a company files its draft offer document for an Initial Public Offering (IPO). This proposal is an expansion of the current regulatory requirements under SEBI’s Issue of Capital and Disclosure Requirements (ICDR) Regulations.

Expansion of Existing Norms

At present, the ICDR regulations only mandate promoters to hold all specified securities in demat form prior to IPO filing. SEBI has proposed broadening this to include other key categories of shareholders. These include members of the promoter group, selling shareholders, directors, key managerial personnel (KMPs), senior management, and employees currently employed by the issuer. The requirement will also apply to shareholders with special rights and Qualified Institutional Buyers (QIBs).

Inclusion of Regulated Entities

In addition to individuals, the proposed rule would also cover certain regulated entities. These include registered stock brokers, non-systemically important non-banking financial companies (NBFCs), and any other SEBI-regulated entities holding specified securities in a pre-IPO company. These entities will also be required to convert their physical shareholdings into demat form before the filing of the IPO offer document.

Reasons for the Proposal

SEBI’s paper states that despite existing regulations, a significant portion of shares held by important stakeholders still remains in physical form. These include shares held by directors, KMPs, senior management, selling shareholders, and even some QIBs. This creates a regulatory gap, as physical shares can continue to exist post-listing. SEBI cites concerns related to delays, loss, theft, and forgery of physical share certificates as part of the rationale behind expanding the scope of demat requirements.

Public Consultation Timeline

SEBI has invited public comments on the proposal. Stakeholders can submit their feedback until May 20, 2025.

Read more: SEBI Imposes ₹50 Lakh Penalty on 3 FPIs for Violating Short-Term Investment Limits 

Conclusion

SEBI wants to close the gap around physical shares before a company goes public. By making demat mandatory for key shareholders, the goal is to make the IPO process smoother and cleaner. Feedback is open till May 20, 2025.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

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