On April 30, 2025, the Securities and Exchange Board of India (SEBI) released a consultation paper proposing a significant amendment to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). This proposed change aims to mandate the dematerialization of existing securities held by select shareholders prior to a company’s Initial Public Offering (IPO).
SEBI has invited comments, suggestions, and views from the public and stakeholders, underlining the consultative nature of its regulatory process and its commitment to creating a more transparent and efficient capital market.
What is Dematerialization and Why Does It Matter?
Dematerialization, or “demat,” refers to converting physical share certificates into electronic form. This shift eliminates several risks associated with physical documents, such as loss, theft, forgery, and manual errors during transfer. Over the past two decades, both SEBI and the Ministry of Corporate Affairs (MCA) have progressively promoted the use of demat securities to improve transparency and reduce operational inefficiencies.
The New Proposal: Demat for Select Shareholders Pre-IPO
SEBI now proposes to extend this requirement further. Specifically, it aims to mandate that select shareholders convert their existing physical securities into dematerialized form before the IPO of the company. This move is expected to:
- Enhance transparency in shareholding before listing.
- Reduce post-IPO complications related to share transfers and settlement.
- Prevent delays in the trading of securities post-listing due to physical certificate issues.
Though the consultation paper doesn’t yet define who these “select shareholders” are, it is expected that the rule may apply to significant non-promoter shareholders, pre-IPO investors, and possibly employees holding physical ESOP shares.
Benefits for the Market
- Streamlined IPO process: Demat holdings ensure quicker verification and smoother allotment and trading.
- Improved investor confidence: Electronic record-keeping increases trust and reduces the chances of fraudulent practices.
- Regulatory efficiency: Easier monitoring of shareholding patterns and compliance with disclosure norms.
