SEBI proposes mandatory demat holdings for key shareholders ahead of IPOs

The Securities and Exchange Board of India (SEBI) on Wednesday proposed mandating dematerialisation of securities held by a select group of shareholders before an initial public offering (IPO) to reduce the volume of physical shares in the listed domain.

Currently, only securities held by promoters are required to be in dematerialised form prior to filing the offer document.

In a consultation paper released for public feedback, SEBI proposed to include directors, key managerial personnel (KMPs), senior management, qualified institutional buyers (QIBs), selling shareholders, and other key stakeholders in the ambit of the mandatory demat requirement.

In 2014, SEBI mandated the public issue of securities only in demat mode. Five years later, the regulator made demat mode compulsory for the transfer of physical securities and allotment of securities in a rights issue. From May 2023, the allotment of shares in a bonus issue was allowed only in the dematerialised form.

The regulator also referred to recent amendments by the Ministry of Corporate Affairs (MCA), which mandate demat holdings for key company personnel and investors participating in private placements, rights, and bonus issues.

“Despite these regulatory interventions, a good number of physical shares continues to exist, particularly among unlisted entities that are transitioning to listed status,” SEBI said in the paper.

This results in physical shares being carried forward into the listed domain, increasing inefficiencies and risks such as loss, theft, forgery, and delays in transfer, according to the regulator.

"Dematerialisationn of securities has several benefits, which include reduction of frauds and forgery, elimination of loss and damage of securities, faster and more efficient transfers, improved transparency and regulatory oversight, mitigation of legal disputes etc,” it said.

The proposed amendment also seeks to cover promoter groups, domestic current employees, shareholders with special rights, registered stock brokers, and non-systemically important NBFCs, among others.

SEBI has invited public comments on the proposal by May 20, 2025. It has also sought feedback on whether additional financial sector-regulated entities should be brought under the same requirement.