SEBI Proposes Mandatory Dematerialisation of Shares for Key Stakeholders Ahead of IPOs

The Securities and Exchange Board of India (SEBI) has proposed a new set of rules that would require certain shareholders—such as directors, key managerial personnel (KMPs), and current employees—to hold their shares in dematerialized form prior to the submission of an initial public offering (IPO) document.

According to SEBI, the move aims to reduce inefficiencies and risks tied to physical share certificates, including potential issues like loss, fraud, and delays in processing and settlement.

Also Read: Not Regulated': SEBI's Stern Warning To Investors Against Opinion Trading Platforms | Republic World

Currently, SEBI's Issue of Capital and Disclosure Requirements (ICDR) regulations mandate that promoters must hold their shares in demat form before filing an IPO document.

However, the market regulator noted that a substantial number of crucial pre-IPO shareholders still maintain physical shareholdings despite existing regulations and facilitation processes. These include KMPs, senior leadership, selling stakeholders, and Qualified Institutional Buyers (QIBs).

SEBI pointed out in its consultation paper that this gap leaves room for a significant quantity of physical shares to persist even after a company goes public. To close this loophole, SEBI has recommended broadening the current dematerialization requirement.

Under the proposal, companies planning an IPO would need to ensure that all specified securities held by promoters, directors, KMPs, senior management, QIBs, and current domestic employees or shareholders with special rights are converted into electronic form before the offer document is filed.

In addition, SEBI has suggested extending this mandate to include registered stockbrokers, non-systemically important non-banking financial companies (NBFCs), and other regulated entities that hold such securities, making dematerialization a precondition for participation in the IPO process.