The Early Days: When Shares Were Paper
Until the mid-1990s, investors in India carried their wealth in stacks of paper. Share certificates were exchanged by hand, transfers required endless signatures, and disputes over lost or forged certificates clogged the courts. Settlement cycles dragged on for weeks. The system was not only slow but riddled with risk.
The Depositories Act, 1996 changed that story. It created a legal framework for holding and transferring securities in electronic form. With the arrival of National Depository Services Limited (NSDL) in 1996 and Central Depository Services Limited (CDSL) in 1999, India began its transition to dematerialisation. Investors could now own shares without ever touching a piece of paper. In fact, Section 8(1) of the Depositories Act, 1996 expressly provided that every person subscribing to securities offered by an issuer shall have the option either to receive the security certificates or hold securities with a depository.
The Steady March to Demat
Reform did not come overnight. Through the late 1990s and early 2000s[i][ii], Securities and Exchange Board of India (SEBI) gradually made demat compulsory for larger transactions on stock exchanges. The settlement cycle was shortened from T+5 to T+3, and then to T+2, and now SEBI has proposed instant settlement of the shares.
A bigger leap came with the Companies Act, 2013. Section 29[iii] mandated that public companies issue securities only in demat. Rule 9A and 9B of the Companies (Prospectus and Allotment) Rules, 2014 reinforced this by requiring unlisted public and private companies above certain thresholds to facilitate demat for their shareholders.
SEBI also tightened the screws. In 2019, Regulation 40[iv] of the LODR was amended to prohibit transfers of listed securities in physical form. In July 2020, SEBI clarified that physical shares could only be tendered in specific cases like buybacks, open offers, or delisting exits. In January 2022[v], SEBI mandated that all investor service requests must be processed in demat form. Step by step, physical shares became a relic.
IPOs and the Clean Ownership Rule
When a company goes public, regulators and investors alike demand clarity on who owns what. In 2018, SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) to say that promoters, promoter group, directors, and KMPs must dematerialise their holdings before filing the Draft Red Herring Prospectus (DRHP).
This was a crucial safeguard. It meant that by the time an IPO document hit the regulator’s desk, there was no ambiguity about promoter ownership every share was traceable in the depository system.
September 2025: SEBI Widens the Net
Fast forward to today. At its Board meeting on June 2025, SEBI approved a further expansion of this rule and on September 8, 2025, SEBI amended the ICDR Regulations. Now, As per Regulation 7(1)(c) of ICDR regulations not only promoters but also promoter group entities, directors, Key Managerial Personnel (KMPs), Senior Management Personnel (SMPs), selling shareholders, qualified institutional buyers (QIBs), employees, shareholders holding SR equity shares, entities regulated by Financial Sector Regulators and any other categories of shareholders as maybe specified by the Board from time to time will be required to hold their securities in dematerialised form before filing the DRHP.
The rationale is clear. IPOs often involve a mix of shareholders early investors, employees, family entities, and institutional sellers. If even one of them continues to hold physical shares, it risks creating delays, ownership disputes, or settlement bottlenecks. By bringing all of them into the demat fold, SEBI is closing the last remaining gap.
What This Means in Practice
For companies, the amendment adds a new checkpoint on the IPO roadmap. While the legal responsibility to dematerialise lies with each shareholder, the practical burden falls on the company and its merchant bankers. They will have to chase down every director or employee-shareholder still holding paper certificates, ensure demat accounts are opened, and secure confirmations before the DRHP is filed.
For shareholders, the message is unmistakable: physical shares are no longer acceptable currency in India’s capital markets. Even legacy holdings must be converted.
For intermediaries, especially BRLMs, this reform raises the due-diligence bar. Certification of demat compliance will now extend beyond promoters to a wider circle of stakeholders.
The Balanced View
There is much to welcome in this change. It enhances transparency, strengthens investor confidence, and aligns India more closely with global best practices. It also removes the risk of last-minute IPO delays due to disputes over paper certificates.
Yet, the compliance load is real. Companies with large legacy shareholder bases such as family entities, employee stock options from earlier years may find themselves struggling to complete conversions in time. IPO timelines could be disrupted if even one shareholder lags.
Conclusion: The Last Mile of a Long Journey
The journey from paper certificates in the 1990s to today’s fully digital securities market is one of India’s quiet success stories. Each reform from the Depositories Act to Section 29 of the Companies Act, to SEBI’s circulars and ICDR amendments has nudged the system towards complete dematerialisation.
The September 2025 amendment to the ICDR Regulations is the final mile. By mandating that promoters, directors, KMPs, SMPs, and selling shareholders and other shareholders specified in Regulation 7(1)(c) of ICDR regulations must all dematerialise before an IPO, SEBI is signalling that paper shares have no place in a modern capital market.
For issuers and investors alike, the message is clear: if you want to participate in India’s growth story through the public markets, you must do so in demat. The age of paper is over.
Mr. Animesh Joshi- Associate – animeshjoshi@mmjc.in
[i] https://www.sebi.gov.in/legal/circulars/may-1999/delay-in-processing-dematerialisation-requests_18657.html?QUERY
[ii] https://www.sebi.gov.in/legal/circulars/feb-2001/trading-and-settlement-of-trades-in-dematerialised-securities_18076.html
[iii] Section 29 of Companies Act, 2013.
(1) Notwithstanding anything contained in any other provisions of this Act,—
(a) every company making public offer; and
(b) such other class or classes of 1[public] companies as may be prescribed,
shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.
2[(1A) In case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder.]
(2) Any company, other than a company mentioned in sub-section (1), may convert its securities into dematerialised form or issue its securities in physical form in accordance with the provisions of this Act or in dematerialised form in accordance with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.
[iv]Regulation 40(1) of LODR Regulations: …Provided that requests for effecting transfer of securities shall not be processed unless the securities are held in the dematerialised form with a depository:…
[v] https://www.sebi.gov.in/legal/circulars/jan-2022/issuance-of-securities-in-dematerialized-form-in-case-of-investor-service-requests_55542.html