Context:
The Securities and Exchange Board of India (Sebi) has proposed a new rule mandating dematerialisation of shares held by key pre-IPO stakeholders before the filing of the offer document. This move will apply to promoters, directors, senior management, qualified institutional buyers (QIBs), and other regulated entities such as stock brokers and NBFCs holding securities.
Dematerialization of Shares
Dematerialization of shares is the process of converting physical share certificates into an electronic format, allowing investors to hold their shares in a Demat account. This process eliminates the need for physical certificates and simplifies trading, transfer, and storage of shares, while also reducing costs and enhancing security.
- What it is: Dematerialization is the conversion of physical securities, like share certificates, into electronic form.
- How it works: Investors need a Demat account with a Depository Participant (DP) to hold their dematerialized shares. They submit their physical share certificates to the DP, who then electronically transfers the shares to the Demat account.
Current Regulatory Gap
- Sebi noted a significant volume of physical shareholding continues to exist even among critical shareholders in companies approaching IPO
- This leaves a regulatory loophole, allowing physical shares to remain in the listed ecosystem, which can hamper transparency and settlement efficiency
Objective and Market Impact
- The aim is to tighten governance, enhance market transparency, and reduce risks associated with physical shareholding post-listing
- Sebi will amend existing rules to enforce demat compliance among the specified shareholder categories
