India’s capital markets regulator, the Securities and Exchange Board of India (SEBI), on Wednesday, proposed to mandate that select shareholders, including directors, key managerial personnel and current employees will have to hold shares in demat form before the company files for an initial public offering (IPO). 

If the proposed measures are implemented, this new mandate will aim to reduce the inefficiencies and risks associated with physical share certificates, including loss, theft, forgery, and delays in transfer and settlement.

“In spite of several regulatory mandates and facilitation mechanisms being in place, there remains a significant volume of holding of physical shares even among critical pre-IPO shareholders, such as directors, Key Managerial Personnel (KMPs), senior management, selling shareholders, and even Qualified Institutional Buyers (QIBs). This leaves a regulatory gap that allows a good volume of physical shares to continue existing post-listing,” according to the SEBI consultation paper. 

What is the present norm?

According to the current norms, Sebi’s Issue of Capital and Disclosure Requirements (ICDR) rules mandate that all specific securities which are owned by the promoters must be in a dematerialised form before the company files its draft papers for an IPO.

To address the concern of the high volume of holding of physical shares, Sebi proposed that the existing regulatory requirement should be expanded. 

An issuer entity of an IPO will have to ensure that all its specified securities held by the promoter group, selling shareholders, directors, key managerial personnel, senior management, Qualified Institutional Buyers (QIBs), domestic current employees and shareholders, who have special rights are in dematerialised form prior to the filing of the offer document, suggested Sebi.

The capital markets regulator also suggested that the registered stock brokers, non-systemically important non-banking financial companies (NBFCs), and any other regulated entities that hold specified securities will be mandated to dematerialise and own such holdings before filing the offer document.

The consultation paper will be available for public comments on the proposal till May 20, 2025.