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On 30 April 2025, the Securities and Exchange Board of India (SEBI) published a consultation paper seeking stakeholder feedback on proposed amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). The proposed changes focus on enhancing the integrity and transparency of India’s public equity markets by extending dematerialisation requirements to a broader set of market participants prior to launching an initial public offering (IPO).

1. Current Requirement

Under the existing ICDR Regulations, only promoters are mandated to hold their specified securities in dematerialised (demat) form before filing the draft offer document with SEBI. This ensures that the share capital attributable to the promoters is fully electronic and readily transferable, reducing risks associated with paper certificates such as forgery, duplication, or delays in transfer.

2. Key Proposal

SEBI proposes expanding the dematerialisation requirement so that additional categories of key stakeholders must also hold their shares in demat form prior to IPO filing. Specifically, the consultation paper recommends that the following groups convert any existing physical share certificates to electronic form before the company submits its draft offer document:

Directors (both executive and non-executive)
Key Managerial Personnel (KMP) (e.g., CEO, CFO, Company Secretary)
Senior Management (as defined by the company’s board or the ICDR Regulations)
Qualified Institutional Buyers (QIBs) who hold pre-IPO shares
Registered Stock Brokers holding pre-IPO shares

These categories are in addition to the existing obligation on promoters.

3. Rationale for the Amendment

Strengthening Market Integrity

1. Broadening the demat requirement reduces the presence of physical certificates in the market, thereby minimising operational risks and malpractices.
2. Electronic holdings improve tracking, monitoring, and governance of share transfers.

Enhancing Investor Confidence

1. Ensures that all significant stakeholders have their pre-IPO shareholdings in a secure and transparent electronic format.
2. Aligns with international best practices, where electronic shareholding is the norm for all substantial market participants.

Facilitating Faster Listing Processes: Demat shares can be swiftly transferred and settled on the stock exchange once the IPO is approved, reducing post-issue administrative delays.
Mitigating Fragmentation Risks: Avoids fragmentation of share certificates across multiple physical instruments, which can complicate record-keeping and reconciliation during the IPO process.

4. Who Will Be Affected

Issuing Companies – Must coordinate with their directors, KMP, senior management, pre-IPO QIBs, and stock brokers to ensure all physical shares are converted in time.
Individual Stakeholders – Directors, executives, and brokers will need to open demat accounts (if not already held) and surrender physical certificates for dematerialisation.
Institutional Investors – QIBs planning to participate in the IPO window must verify that any pre-IPO shareholdings are fully dematerialised.

Issuers should communicate these requirements well in advance of their planned IPO filing date to avoid procedural bottlenecks.

5. Public Consultation Process

Comment Deadline – SEBI invites written comments and suggestions by 20 May 2025.
Submission Details – Stakeholders may submit feedback through SEBI’s online portal or by emailing the relevant department at consultation.sebi@sebi.gov.in, quoting “Consultation Paper on ICDR Demat Amendment” in the subject line.
Areas of Feedback – SEBI has specifically requested views on:

1. The scope of stakeholder categories covered by the proposal
2. Reasonable timelines for compliance (e.g., how many days before filing shares must be dematerialised)
3. Any operational challenges or costs associated with mass dematerialisation
4. Alternative measures to achieve the same objectives

6. Next Steps

Review and Analysis – SEBI will collate and analyse all public comments.
Finalisation of Regulations – Based on stakeholder input, SEBI will issue a formal notification amending the ICDR Regulations, likely specifying the compliance timeline and procedural guidelines.
Implementation Period – Issuers and affected stakeholders will be granted a transition period to complete dematerialisation ahead of their IPO filings.
Monitoring and Enforcement – SEBI will monitor IPO filings to ensure compliance and may impose penalties or delay approvals for non-adherence.

By widening the dematerialisation mandate, SEBI aims to reinforce the robustness of India’s capital markets, streamline the IPO process, and safeguard investor interests through enhanced transparency and operational efficiency.