Sebi proposes mandatory demat before IPO filings to plug regulatory gaps

The Securities and Exchange Board of India (Sebi) has proposed mandating the dematerialisation of securities held by key shareholders, including promoters and directors, before a company files for an initial public offering (IPO).

  Despite multiple regulatory efforts by Sebi and the Ministry of Corporate Affairs (MCA) to promote dematerialisation, a significant portion of shares held by critical pre-IPO shareholders remains in physical form, creating a regulatory gap that persists post-listing.  In a consultation paper released on Wednesday, Sebi proposed that shareholders such as promoters, directors, key managerial personnel (KMPs), senior management, selling shareholders, qualified institutional buyers (QIBs), domestic employees, and those with special rights must mandatorily dematerialise their shares before filing the IPO offer document. Add­itionally, shares held by non-systemically important non-banking financial companies (NBFCs), stockbrokers, and other regulated entities will also need to be dematerialised. 

 

Sebi highlighted that dematerialisation eliminates inefficiencies and risks associated with physical share certificates, such as loss, theft, forgery, and delays in transfer and settlement.

 

Since 2000, Sebi and MCA have introduced nearly 10 regulatory changes to encourage or mandate dematerialisation, yet gaps remain. Currently, Sebi’s Issue of Capital and Disclosure Requirements (ICDR) Regulations require promoters’ securities to be in demat form before an IPO filing. 

To address these issues, Sebi proposes expanding Regulation 7(1)(c) of the ICDR Regulations to include a broader range of shareholders, ensuring a more robust and streamlined process.