SEBI proposes mandatory demat accounts for directors, shareholders before IPO filing

Securities and Exchange Board of India (SEBI) has proposed a new mandate requiring directors, shareholders, and key personnel of a company to hold shares in demat form before filing for an Initial Public Offering (IPO). The proposal, announced on April 30, 2025, aims to address inefficiencies and risks associated with physical share certificates, such as theft, loss, and delays in transfer and settlement.

Currently, SEBI's Issue of Capital and Disclosure Requirements (ICDR) rules mandate that promoters’ shares must be in dematerialized form before filing IPO draft papers. However, a significant volume of shares, even among critical pre-IPO shareholders like directors, key managerial personnel (KMPs), senior management, and Qualified Institutional Buyers (QIBs), are still held in physical form. This creates a regulatory gap, leaving physical shares in circulation even after the listing.

To tackle this issue, SEBI has proposed extending the existing requirement. The new regulations would require that all specified securities held by promoters, selling shareholders, directors, KMPs, senior management, QIBs, domestic employees, and shareholders with special rights be in demat form prior to filing the IPO offer document.

Furthermore, SEBI suggests that registered stock brokers, non-systemically important non-banking financial companies (NBFCs), and other regulated entities holding such securities must also dematerialize their holdings before the IPO filing.

The consultation paper on the proposal will be open for public comment until May 20, 2025.