Introduction

The regulatory architecture governing outward remittances from India is primarily anchored in the framework of the Foreign Exchange Management Act, 1999 (“FEMA”), read with subordinate rules, regulations, and directions issued by the Reserve Bank of India (“RBI”). Within this framework, two distinct yet interrelated regimes govern outward flows namely, the Liberalised Remittance Scheme (“LRS”) and the Overseas Direct Investment (“ODI”) framework.

The Liberalised Remittance Scheme (LRS), introduced on 4 February 2004, represents a calibrated step towards liberalisation, enabling resident individuals to remit funds outside India for permitted current and capital account transactions, either independently or in combination. The scheme is inherently individual-centric and is not extended to corporates, partnership firms, Hindu Undivided Families (HUFs), trusts, or other juridical entities.

In contrast, the ODI framework covers overseas investment by Indian entities (including Company, body corporate, LLPs, partnership firms), Mutual Funds/ AIFs/VCFs and resident individuals. ODI framework is governed by the Foreign Exchange Management (Overseas Investment) Rules, 2022 and the Foreign Exchange Management (Overseas Investment) Regulations, 2022, regulating investments outside India, including acquisition of equity, financial commitments, and strategic interests in foreign entities. The ODI regime is transaction specific and compliance-driven, prescribing detailed conditions relating to eligibility, permissible activities including reporting.

A clear conceptual distinction therefore emerges: LRS operates as an enabling mechanism prescribing the eligibility and limits for remittances by individuals, whereas ODI operates as a regulatory framework governing the nature, structure, and compliance of overseas investments. The two operate in tandem, particularly in the case of individuals undertaking overseas investments.

Conceptual Interplay Between LRS and ODI

From a legal standpoint, outward remittances may be classified based on their character as current account transactions, capital account transactions, or investment in non-debt instruments. While current account transactions are governed by the Foreign Exchange Management (Current Account Transactions) Rules, 2000, financial commitments by way of ODI/ Overseas Portfolio Investment (OPI) fall within the ambit of the ODI framework.

For resident individuals, the LRS prescribes an overall monetary ceiling, currently USD 2,50,000 per financial year, within which all permissible remittances must be undertaken. However, where such remittances in the nature of Overseas Direct Investment, they are additionally subjected to the substantive discipline of the ODI Rules and Regulations.

Accordingly, LRS may be viewed as the gateway provision, whereas ODI functions as the governing code for financial commitment by way of ODI/ OPI.

Comparative Perspective: Permissible Purposes of Remittances

A nuanced understanding of the distinction between LRS and ODI emerges upon examining the purpose of remittances.

Under LRS, the permissible scope is broad and inclusive, encompassing both personal and investment oriented transactions as per applicable framework. Resident individuals may remit funds for opening foreign currency accounts, acquisition of immovable property abroad, investment in foreign securities (including ODI and Overseas Portfolio Investment), and extending loans to non-resident relatives as defined under the Companies Act, 2013. Additionally, LRS subsumes a wide range of current account transactions such as travel, education, medical treatment, emigration, maintenance of relatives, gifts, and donations.

In contrast, the ODI framework is narrowly tailored to financial commitment by way of ODI/ OPI. It governs transactions involving acquisition of equity capital, subscription to the memorandum of association of foreign entities, and financial commitments in the nature of debt, guarantees, or other forms of support to overseas joint ventures or wholly owned subsidiaries. The emphasis under ODI is not merely on permissibility, but on ensuring that the investment is bona fide, structured within prescribed limits, and compliant with reporting and governance requirements.

Thus, while LRS provides the breadth of permissible remittance purposes, ODI provides the depth of regulatory scrutiny for investments.

Limits: LRS vs ODI

The distinction between LRS and ODI is further accentuated in the context of limits applicable to outward remittances and investments.

Under LRS, the limit is absolute and individual specific, currently fixed at USD 2,50,000 per financial year per resident individual. This limit is aggregate in nature, covering all permissible current and capital account transactions undertaken during the financial year. Any remittance beyond this threshold necessitates prior approval of the RBI.

Conversely, under the ODI framework, the concept of limits is relative and entity linked. For Indian entities, financial commitment in overseas investments is generally permitted up to 400% of their net worth as per the latest audited balance sheet. This limit encompasses equity contributions, loans, guarantees, and other forms of financial exposure.

In the case of resident individuals, however, ODI investments are effectively subsumed within the LRS limit, thereby creating a dual layer restriction on the quantitative cap under LRS and the qualitative compliance requirements under ODI.

This structural distinction reflects a regulatory intent: to allow flexibility in remittances for individuals while maintaining prudential oversight over overseas investments.

Investment by Resident Individuals under LRS and ODI

A critical area of convergence between LRS and ODI lies in financial commitment by resident individuals in foreign entities, where both frameworks operate simultaneously but with distinct roles.

Under LRS, a resident individual is permitted to remit funds for investment in equity shares of overseas entities, subject to the overall monetary ceiling. The scheme, however, does not independently prescribe the conditions governing such investment, nor does it regulate aspects such as control, reporting, or restructuring.

These aspects are comprehensively addressed under the ODI framework. The ODI Rules and Regulations prescribe eligibility criteria, restrict investments in certain prohibited sectors, mandate bona fide business activity, and impose reporting obligations, including filing of prescribed forms and disclosures. Further, ODI introduces the concept of financial commitment, which extends beyond mere equity investment to include debt and contingent liabilities.

Therefore, in the context of individuals:

• LRS confers the ability to invest (subject to limits);
  
• ODI governs the legitimacy, structure, and compliance of such investment.
  This distinction is of particular relevance in professional practice, as non compliance with ODI conditions may render an otherwise permissible LRS remittance legally untenable.

Concluding Observations

The comparative analysis of LRS and ODI underscores a two-tier regulatory framework governing outward remittances from India. While LRS embodies the principle of liberalisation by enabling individuals to remit funds with minimal procedural constraints, the ODI regime ensures regulatory discipline by prescribing conditions for overseas investments.

In essence:

• LRS answers the question: “How much and for which broad purpose can an individual remit?”
  
• ODI answers the question: “How or the manner in which an overseas investment be structured, executed, and reported?”
  The interplay between these frameworks is particularly significant in the case of resident individuals undertaking overseas investments, where compliance must be ensured under both regimes concurrently.

This article is published on the Taxmann link below.

https://www.taxmann.com/research/fema-banking-insurance/top-story/105010000000028172/dual-gate-framework-navigating-the-interplay-between-lrs-and-odi-experts-opinion

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The SEBI Adjudication Order in the matter of Coffee Day Enterprises Limited (CDEL) serves as a stark reminder that internal certifications and affirmations, even those that never leave the organization’s walls, carry immense legal weight.

While certain documents (like financial results) are filed directly with Stock Exchanges, many critical affirmations are addressed internally to the Board of Directors, Audit Committee, or Compliance Officer as per the requirement of law. The CDEL case highlights that these internal “checks” must be handled with the same level of care as public filings, as they form the legal foundation upon which the integrity of the entire reporting system rests.

In the present matter, CDEL failed to recognize interest expenses on its borrowings based on the management’s expectations/ confidence for a future waiver and the assumption that providing for such interest would be misleading. This constituted a failure to adhere to Ind AS requirements for the preparation of financial statements and a failure to fulfil disclosure obligations.

The statutory auditors had highlighted this issue in audit qualifications in the reports for FY 2022-23 and 2023-24.

1. “Expectation” vs. Accrual

The CDEL Order emphasizes that signatories must exercise “utmost care, skill and diligence” when providing these affirmations.

• Accrual Basis (Ind AS 1): Entities must strictly adhere to the accrual basis of accounting.
• Derecognition Criteria (Ind AS 109): A financial liability can only be removed from the balance sheet when it is extinguished, meaning the obligation is legally discharged, cancelled, or expires. Mere “negotiations” for a waiver do not meet this legal threshold.
• The Transparency Myth: CDEL argued that non-recognition of interest was transparently disclosed in the ‘Notes to Accounts’. SEBI clarified that disclosure is not a substitute for compliance. An internal certification stating that financials are compliant cannot be justified by a footnote that simultaneously admits to a departure from accounting standards.

2. List of certifications

Below is the illustrative list where such certifications by CEO/CFO or Board of Directors are required under LODR and Act: 

3. Internal Affirmations: Substantive Obligations, Not Administrative Paperwork

A primary takeaway from the CDEL matter is that internal certifications, for instance those issued by the CEO and CFO to the Board of Directors under Regulation 17(8) of LODR, are not mere procedural formalities.

• The Responsibility of Integrity: These internal declarations affirm the integrity of financial systems. In CDEL, officials issued “true and fair” certifications despite a failure to accrue interest expenses exceeding ₹489 crores and statutory auditor’s observations in that regard.

• Personal Liability: SEBI held that these CEO and CFO failed to ensure the integrity of reporting systems, resulting in personal penalties. This underscores that addressing an affirmation internally does not shield an officer from regulatory scrutiny if that affirmation is fundamentally flawed. 

4. Conclusion

The matter clearly emphasised that internal certifications may lose credibility where they are contradicted by explicit observations or qualifications recorded by statutory auditors, potentially raising concerns as to the robustness of the underlying financial reporting framework.

Further, the burden may rest on the CEO and CFO to demonstrate that reasonable care, due diligence, and independent verification were exercised prior to issuing such certifications. Every certification required under LODR or the Act must move beyond a “checkbox” approach. Ensuring exercise of professional scepticism is an essential.

 Abbreviations:

SEBI- The Securities Exchange Board of India

LODR- Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 

CEO- Chief Executive Officer

CFO- Chief Financial Officer

Ind AS- Indian Accounting Standards

FY- Financial Year

CSR- Corporate Social Responsibility

RPT- Related Party Transactions

https://www.sebi.gov.in/enforcement/orders/mar-2026/adjudication-order-in-the-matter-of-financial-mis-statements-of-coffee-day-enterprises-limited_100080.html

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INTRODUCTION

Capital market does a very important function in any economy, that is distributing capital to most deserving enterprises. In journey of India towards Viksit Bharat ensuring that capital is distributed wisely is very vital aspect. Securities and Exchange Board of India [SEBI] has been taking path breaking steps in that direction. And in this journey SEBI has been relying on Company Secretaries as very important stakeholder.

There are following trends –

1. Ease of raising funds
2. Ease of compliance and disclosures
3. Strengthening governance
4. Curb wrong companies getting capital market access
5. Tight enforcement

Ease of raising funds and discovery of market price

Over last four years [‘2021-22 till 2023-24’], SEBI could successfully reduce the time taken for listing in public issue from T+6 days to T+3 days, where ‘T’ denotes date of closures of the issue[1]. Trade settlement days brought down from T+2 to T+0 in phased manner[2]. As a result, total number of companies raising funds via Initial Public Offer [‘IPO’] increased from 55 in 2020-21 to 272 in 2023-24 in last four years[3] and total market capital of Indian listed companies raised from ₹ 29,365,732.90 as on March 2022 to ₹441,83,829.51 as on March 2025[4].

(Image 1: Number of IPOs and Funds Raised from year 2020-21 to 2023-24)

Total number of days for non-fast track rights issue got reduced from 317 days to 23 as a result total 40+ companies came out with rights issue and could raise ₹ 9303 crore in a span of 65 days. This is a record.

In last 7 years number of people penalised under Securities and Exchange Boad of India [Prohibition of Insider Trading] Regulation, 2015 [‘SEBI PIT’] has gone close to 500 out of that around 130+ have been debarred from capital market, levied penalty of ₹ 600 crore + and many CXOs had to compromise their position. These enforcement and changes in law has contributed for improvement in hygiene of secondary market transaction and overall improvement of healthy price discovery mechanism.

Collectively these initiatives contribute eliminating or minimising any undue interference in price discovery and thereby ensuring right distribution of capital to deserving companies. This clearly indicates that capital raise, capital distribution and capital deployment all of it has increased by multi times and it has resulted in wealth creation for 12.5 crore investors in India[5].

This clearly indicates that company secretaries contributing to IPO/ Rights Issue / Employee Stock Option Plan [‘ESOP’] will have great opportunity. Practising Company Secretaries [’PCS’] and company secretaries in employment both will have great area of specialisation in this. Transformation of company from unlisted to listed is a challenging step and therefor professionals helping companies to achieve this seamlessly will have great opportunity to contribute. And helping listed companies to have robust mechanisms to ensure adherence to SEBI PIT regulations is equal opportunity to contribute in this endeavour of SEBI.

Wrong Companies 

Though we saw some instances like Gensol Engineering Ltd, overall number of such cases have seen decline in numbers. SEBI and stock exchanges have returned many offer documents in last few years to ensure basic hygiene about companies approaching capital market. One should not ignore these efforts which have contributed to overall capital market development and improvement in quality of companies planning for IPO.

In last few years we have also seen eligibility norms for Smal and Medium Enterprises Initial Public Offer [‘SME IPO’] undergoing major change and there by resulting in IPO size of SME IPO getting raised from ₹5 – ₹10 crore to more than ₹25 crore in recent times. On an average, companies making higher profits and more sustainability are approaching for SME IPO. Though this is perceived not the good news for smaller SMEs, it helps market reach equilibrium. Recently SEBI has done lot of changes in Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 [‘SEBI LODR’] to make many governance provisions appliable to even smaller companies. Though this may be perceived as higher compliance norms, it is important in overall scheme of things of building trust of retail investors in capital market.

Company Secretary both in employment or practice [‘CS’] has great opportunity for preparing companies to knock the door of capital market and unlock wealth. CS is a guide for corporates to prepare for IPO, and opportunity in preparing companies is equally valuable as helping companies to go for IPO. CS also shoulders a responsibility to warn promoter and protect them from going in wrong direction.

Strengthening Disclosure Requirements

In last 3 years 26 changes have happened in regulation 30 and schedule III of SEBI LODR. 11 consultation papers got released from SEBI in last three years to listen to ecosystem and market towards strengthening of disclosures under SEBI LODR. Industry Standards Forum [ISF’] released 3 to 4 documents to strengthen disclosure standards followed by Indian inc.

This disclosure requirements might have created information overload for some time, but over a period, probably, it will help to enhance maturity about understanding of company amongst investors and culture of compliance will get deeper, wider. This will be a game changer and also build trust amongst investors about corporates.

In last one-year overall ease towards disclosures has enhanced as a result of single window upload facility to companies [when it comes to disclosure of details on stock exchange is concerned]. Overall consolidation of disclosure timings and curating data about listed companies of regulators portal brings lot of ease both to corporates and investors. It is a role of CS to ensure that this ease is communicated well to the important stakeholders.

Disclosure is a compliance, but it is essentially the tool for investor to take informed decision and opportunity for corporate to get stakeholders alignment. Therefore, disclosure should not be considered as burden but a platform and an opportunity for getting investors alignment and also to distinguish itself with others in market.

Opportunities for CS and PCS

SEBI wide amendment dated December 12, 2024, to SEBI LODR has validated that compliance officer should be at one level below Board of Directors and thereby raising bar of company secretaries who are functioning as compliance officer in listed companies. Same amendment has also placed secretarial auditor at par with statutory auditors in many parameters. This will have far reaching implications and will strengthen the position of CS in corporate and PCS in overall landscape of governance in India. Now it is our responsibility to invest in self and occupy that position to serve best interest of nation.

Conclusion .

Overall, width and depth of capital market is growing. Many investors are betting on Indian capital market and Indian enterprises. Indian enterprises are also coming forward to take them to next orbit and unlock value. Role CS is unique in this value unlocking and good governance journey. Next 25 years are going to be crucial and game changer for this profession. Let’s try to optimise it and contribute fullest

[1] https://www.sebi.gov.in/legal/circulars/aug-2023/reduction-of-timeline-for-listing-of-shares-in-public-issue-from-existing-t-6-days-to-t-3-days_75122.html

[2] https://www.sebi.gov.in/media-and-notifications/press-releases/sep-2024/sebi-board-meeting_87154.html  

[3] https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=4&ssid=80&smid=101

[4] https://www.bseindia.com/markets/equity/EQReports/allindiamktcap.aspx

[5] https://www.moneycontrol.com/news/business/markets/retail-power-retail-holdings-rise-more-than-10x-over-the-last-decade-12901840.html

The post Reflection on Regulatory Changes in Capital Market and Role of Company Secretary first appeared on MMJC.

Introduction

An Initial Public Offering (IPO) is a major milestone in a company’s journey. It marks the shift from being a private business to becoming a publicly listed one, which brings greater visibility, regulatory oversight, and responsibility. While going public is often seen as a moment of success, the process leading up to it, especially if delayed, can be complex and demanding, and calls for careful oversight by the company’s leadership.

Delays in IPO timelines are more than just setbacks in the scheduling; they create governance challenges that require the Board’s close attention. Whether the delay is due to regulatory comments, market conditions, or the company’s own preparedness, it increases the period during which sensitive information keeps generating within the company. This increases the risk of insider trading and heightens the importance of the Board’s fiduciary duties under the Companies Act, 2013, and compliance responsibilities under SEBI regulations. In such situations, proactive measures like forming an IPO Steering Committee with legal oversight can help maintain control, ensure transparency, and guide the company through the complexities of a prolonged IPO process.

In this article, we explore how directors can navigate their fiduciary responsibilities during IPO delays, manage insider trading risks effectively, and how establishing an IPO Steering Committee can add significant value.

Board’s Fiduciary Responsibilities Amidst IPO Delays

Under Section 166(2)[1] of the Companies Act, 2013, directors are duty bound to act in good faith, promoting the company’s objectives and acting in the best interests of the company, its employees, shareholders, and the community. These duties persist throughout the IPO process, including periods of delay.

During extended IPO timelines, new developments such as financial results, strategic decisions, or regulatory communications may arise. SEBI’s Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018 mandate prompt disclosure of all material developments between the filing of the draft offer document and the allotment of securities[2]. If such information is not disclosed, the company and its officers may face liabilities under Sections 34 and 35 of the Companies Act, 2013, which deal with false or misleading statements in a prospectus. SEBI has also taken enforcement action in the past against companies for providing inaccurate information in their draft offer documents.
Therefore, when an IPO gets delayed, the Board of Directors of such company must not treat it as a passive waiting period it must proactively assess if any new developments have occurred that warrant disclosure and ensure that timely updates are incorporated in the offer documents to avoid regulatory breaches.

For Example: The Quadrant Future Tek Case

A recent settlement order[3] (April 01, 2025) involving Quadrant Future Tek Limited highlights the Board’s continuing responsibility to oversee disclosures even during IPO delays. In this case, a promoter-to-promoter gift of shares occurred after the filing of the DRHP but was disclosed well beyond the 24-hour timeline mandated under Regulation 54[4] of the ICDR Regulations. Although the transaction was non-commercial and did not alter the overall promoter holding, SEBI still pursued enforcement action for delayed disclosure underscoring that all material transactions during the IPO window must be promptly and transparently disclosed. This case serves as a reminder that the Board must stay alert during prolonged IPO processes and ensure that even seemingly routine or internal developments are evaluated for disclosure obligations.

Managing UPSI and Insider Communication Risks Post Draft Offer Document Filing

Once a draft offer document is filed with SEBI, the company comes under the purview of “to be listed company” and the definition of the UPSI inter-alia becomes applicable. Information in the company gets categorized into material information and price sensitive information. As per PIT this price sensitive information has to be ring fenced and person having access UPSI are subject to code of conduct.

Regulation 3(1)[5] of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) clearly prohibits any insider from communicating, providing, or allowing access to UPSI to any person, including other insiders, except where such communication is in furtherance of legitimate purposes, the performance of duties, or the discharge of legal obligations.

In support of this, Regulation 3(5) of PIT Regulations requires companies to maintain a structured digital database (SDD) containing the names of such persons with whom UPSI is shared. This database must be time-stamped and should ensure that any sharing of sensitive information is traceable and auditable.

These safeguards become especially important because Regulation 4(1)[6] of the Insider Trading Regulations assumes that if an insider trades while they are in possession of UPSI, it is presumed that the trade was based on that information. In other words, the insider is considered guilty unless they can prove otherwise.

After filing DRHP the key managerial personnel and board members to merchant bankers, legal advisors, and auditors etc. gain access to a load of Unpublished Price Sensitive Information (UPSI). This includes financials, business strategies, regulatory correspondences, and risk disclosures that are not yet available in the public domain. Hence the board of directors need to be more careful and cautious to avoid violation of the PIT regulations.

During long IPO processes, where new sensitive information keeps coming, up the chances of insider trading, whether intentional or accidental, become much higher. This makes it essential for companies to have strict internal controls and regular monitoring in place and making the designated persons aware of the obligations.

One effective way to institutionalize this vigilance is by establishing an IPO Steering Committee with legal oversight, which can centrally manage disclosures, UPSI tracking, and stakeholder coordination throughout the IPO.

Establishing an IPO Steering Committee with Legal Oversight

Given the complexities of the IPO process, forming an IPO Steering Committee may provide structured oversight. While not mandated by law, such a committee can facilitate coordination between various stakeholders, including management, legal advisors, and merchant bankers.

Typically, such a committee should be constituted soon after the IPO process is initiated, ideally at the time of appointing merchant bankers or finalizing the DRHP outline and should remain in place until the allotment of securities and successful listing on the stock exchange. In some cases, it may be advisable to extend the committee’s oversight until post-listing compliances under SEBI LODR Regulations are fulfilled.

The committee’s responsibilities may include:

• Monitoring the progress of IPO documentation and responding to SEBI queries as per Regulation 25(4) and (5)[7] of the ICDR Regulations.
• Ensuring timely disclosure of material developments in line with Schedule IX of ICDR Regulations.
• Overseeing compliance with insider trading regulations, including the maintenance of structured digital databases under PIT Regulations.
• Coordinating updates to financial statements, ensuring compliance with disclosure requirements.

Conclusion Delays in IPO timelines are not merely pauses in the process but periods that test a company’s commitment to governance and compliance. The Board’s active engagement, adherence to fiduciary duties, and proactive risk management are crucial during these times. By establishing an IPO Steering Committee with legal oversight, companies can navigate the complexities of extended IPO processes, maintain regulatory compliance, and uphold investor confidence

[1] Section 166(2) of Companies Act, 2013:  A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.

[2] SCHEDULE IX of ICDR – public communications and publicity materials:  (4) The issuer shall make a prompt, true and fair disclosure of all material developments which take place between the date of filing offer document and the date of allotment of specified securities, which may have a material effect on the issuer, by issuing public notices in all the newspapers in which the issuer had released pre-issue advertisement under applicable provisions of these regulations;

[3] https://www.sebi.gov.in/enforcement/orders/apr-2025/settlement-order-in-respect-of-mr-mohan-krishnan-abrol-quadrant-future-tek-limited-and-mr-vivek-abrol_93200.html

[4] The issuer shall ensure that all transactions in securities by the promoter and promoter group between the date of filing of the draft offer document or offer document, as the case may be, and the date of closure of the issue shall be reported to the stock exchange(s), within twenty four hours of such transactions.

[5] Regulation 3(1) of PIT Regulations : 3. (1) No insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.

[6] No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information……

[7] Regulation 24 of ICDR Regulations:

(4) The lead manager(s) shall call upon the issuer, its promoters and its directors or in case of an offer for sale, also the selling shareholders, to fulfil their obligations as disclosed by them in the draft offer document and the offer document and as required in terms of these regulations.

(5) The lead manager(s) shall ensure that the information contained in the draft offer document and offer document and the particulars as per restated audited financial statements in the offer document are not more than six months old from the issue opening date.

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For years, SEBI has pushed Indian capital markets steadily towards a “demat-only” regime. The journey began with listed company shares, extended to unlisted public companies under the Companies Act, and now reaches a new milestone: the IPO gateway itself. With its September 2025 amendment to Regulation 7(1)(c) of the ICDR Regulations, SEBI has expanded the circle of stakeholders who must hold their securities in demat form before filing of a DRHP.

What once applied only to promoters now covers a far wider group such as promoter group, selling shareholders, directors, key managerial personnel (KMPs), senior management, qualified institutional buyers (QIBs), domestic employees, SR shareholders, and regulated financial entities[1]. A parallel amendment brings SME issuers under the same fold.

On paper, this looks like a compliance refinement. In practice, it raises important challenges that companies and their advisors must confront well before the IPO clock starts ticking.

Why SEBI Did This

The amendment aligns capital market rules with the Companies Act “demat discipline” under Rules 9A and 9B[2], which already cover promoters, directors, and KMPs for corporate actions. SEBI goes further by pulling in additional categories. The policy direction is unmistakable: an IPO-bound issuer must come to market with a fully electronic, auditable cap table.

DRHPs Already Filed: Where Do They Stand?

A common question is what happens to DRHPs filed before this amendment. Technically, the rule applies “prior to filing,” so older filings are not non-compliant. Yet practically, SEBI is unlikely to permit progression to RHP without the broader set of holders being dematerialised. Issuers should therefore treat the expanded demat mandate as a must-complete checkpoint by the RHP stage.

The Pressing Issues Practitioners Must Watch

1. The Foreign Employee Blind Spot

The regulation expressly covers only employees exclusively working in India. Foreign employees, therefore, are not included under the “employee” limb. On paper this looks like a carve-out. In practice, it creates a grey area:

• Many Indian companies and services have overseas ESOP pools.
• Indian depositories cannot easily service foreign resident accounts without FEMA and custodial compliance.
• Even if foreign employees are technically exempt, investors and underwriters may demand their holdings be dematerialised for cap-table hygiene.

If a foreign employee is also a director, KMP, or senior manager, they are automatically brought under the demat requirement. For others, the law is silent, but market expectation will not be.

Insight: Companies should plan early for foreign ESOP regularisation, whether through custodial structures, trust arrangements, or advance demat conversions. Leaving this until the RHP stage is an invitation for delays.

2. The “Moving Target” Between DRHP and RHP

Requiring full demat at DRHP sounds clear-cut. But IPOs are dynamic journeys, and cap tables rarely remain static.

• New hires may join senior management after DRHP.
• ESOP exercises often occur in the DRHP–RHP window.
• Corporate actions like bonuses or splits can alter the shareholding.

Each event can introduce new holdings that need dematerialisation, creating a “moving target” problem. For instance, if an employee exercises stock options after DRHP, the shares must be allotted directly in demat form. If a director joins post-DRHP, their shareholding must also be regularised before RHP.

Insight: This transforms Regulation 7(1)(c) from a one-time pre-filing hurdle into an ongoing compliance obligation throughout the IPO process. Companies must design safeguards mandating all post-DRHP issuances to be demat-only, maintaining real-time cap-table trackers, and disallowing any physical share movement until RHP.

Other Practical Implications

• Widening scope beyond Companies Act: SEBI’s regime now goes beyond Rule 9A/9B, raising the compliance bar higher for IPO candidates.
• Disclosure quality: With cap tables fully electronic, DRHP disclosures will be cleaner, reducing SEBI’s observation cycles and boosting investor confidence.

Conclusion

The September 2025 amendment to Regulation 7(1)(c) is more than just a procedural tweak. It forces issuers to confront two pressing realities: the treatment of foreign employees and the management of a moving cap table between DRHP and RHP. Both issues require advance planning, not reactive fixes. For companies, the message is straightforward: an IPO is not only about raising capital it is about arriving at the market with a transparent, reconciled, and dematerialised ownership structure

[1]Regulation 7 of SEBI ICDR Regulations, 2018 (1) An issuer making an initial public offer shall ensure that: 33[(c) all its specified securities held by –

(i) the promoters,

(ii) the promoter group,

(iii) the selling shareholder(s),

(iv) the directors,

(v) the key managerial personnel,

(vi) the senior management,

(vii) qualified institutional buyer(s),

(viii) employees,

(ix) shareholders holding SR equity shares,

(x) entities regulated by Financial Sector Regulators,

(xi) any other categories of shareholders as maybe specified by the Board from time to time,

are in the dematerialised form prior to the filing of the draft offer document;…

[2]Rule 9A and 9B of Companies (Prospectus and Allotment of Securities) Rules, 2014

The post SEBI’s Demat Mandate Expanded: What the ICDR Amendment Means for IPO-Bound Companies first appeared on MMJC.

Introduction

SEBI has amended the ICDR Regulations, 2018, with effect from 16 March 2026, addressing key gaps in the IPO framework. The amendments primarily focus on :

(i) strengthening the enforceability of lock-in provisions in respect of pledged shares, and (ii) improving the timing and accessibility of abridged prospectus disclosures.

1. The Lock-in Challenge

1.1 Lock-in requirements are central to maintaining discipline in capital raising. However, under the earlier framework, a practical limitation existed. When shares were pledged, the depository system did not have the capability to technically enforce transfer restrictions.

This created a situation where:

• Lock-in obligations existed in law
• But their enforcement depended on contractual arrangements
• And in certain cases, pledge-related events introduced ambiguity

In essence, there was a disconnect between regulatory intent and system capability.

1.2 SEBI has now addressed this gap by introducing a clear mechanism within Regulation 17 of ICDR.

Under the revised framework:

• The issuer is empowered to instruct the depository to restrict transfer of shares subject to lock-in[i]
• The depository marks such shares as non-transferable at a system level
• This restriction operates irrespective of whether the shares are pledged

Importantly, even where:

• the pledge is invoked, or
• the pledged shares are released

the lock-in restriction continues uninterrupted for the entire prescribed period.

This marks a significant shift from contractual enforcement to technological enforcement, ensuring that the lock-in requirement is not merely theoretical but operationally binding.

1.3 Impact on the stakeholders

The amendment ensures that lock-in is now enforced directly through the depository system, making shares non-transferable even if they are pledged. As a result, issuers, depositories, and intermediaries need to coordinate to implement and monitor this properly, lenders will have limited flexibility in dealing with pledged shares during the lock-in period, and advisors must carefully structure and review such transactions under this stricter and clearly enforceable framework.

2. Reworking the Abridged Prospectus: From Late Disclosure to Early Insight

2.1 The second major reform relates to investor disclosures.

Earlier, the abridged prospectus was intended to provide a concise snapshot of the offer. It was made available only at the application stage. By that point, investors had already navigated the decision-making process, often relying on lengthy and complex offer documents.

This approach limited the effectiveness of the abridged prospectus as a decision-support tool.

2.2 The revised framework fundamentally repositions the role of the abridged prospectus.

Now:

• A Draft Abridged Prospectus (DAP) is required to be prepared and filed along with the DRHP[ii]
• It follows a standardised structure, ensuring uniformity across issuers[iii]

Further, the mode of dissemination has been modernised:

• Physical copies are replaced with QR codes and hyperlinks[iv]
• Application forms act as access points, not carriers of documents

2.3 Standardisation of Disclosure : A Structured Investor Summary

The amendment introduces a clearly defined 12 part  structure for the abridged prospectus, requiring disclosure of key investor-relevant information, including:

• Overview of the issue and business
• Industry summary
• Promoter details
• Objects of the issue
• Pre- and post-issue shareholding
• Financial highlights
• Key performance indicators
• Top risk factors
• Cost of acquisition
• Board and KMP details
• Auditor qualifications
• Outstanding litigations

Additionally, disclosures relating to Contingent Liabilities and Related Party Transactions[v] are now elevated as standalone sections in the offer document, indicating a shift in regulatory emphasis.

2.4 Before and After : A Structural Comparison

Lock-in Framework

Abridged Prospectus Framework

2.5 Impact of the amendment

The introduction of the Draft Abridged Prospectus (DAP) impacts issuers, merchant bankers, and legal advisors, as it becomes a mandatory part of the DRHP filing process and must be prepared in a standardised format at an earlier stage. For companies that have already filed their DRHP prior to the amendment, the requirement would generally apply at the stage of updating or refiling the DRHP/RHP, meaning they may need to prepare and align the DAP before proceeding further in the issue process. From an implementation perspective, while QR code–based access simplifies investor outreach, practical challenges may arise in ensuring correct linkage, version control (especially when documents are updated), seamless accessibility across devices, and maintaining consistency between the DRHP, abridged prospectus, and linked disclosures, thereby requiring careful coordination and verification before circulation.[vi]

Conclusion

The 2026 amendments reflect a clear regulatory direction, the one that prioritises enforceability and accessibility.

On one hand, SEBI has ensured that lock-in provisions are backed by system-level controls, eliminating operational loopholes. On the other, it has transformed the abridged prospectus from a procedural requirement into a meaningful disclosure tool.

Together, these changes signal a move towards a more integrated, technology-driven and investor-focused IPO framework; where compliance is not only mandated, but effectively delivered.

[i] Regulation 17 (2) of ICDR: Subject to sub-regulation (1), where lock-in of the specified securities cannot be created, the depositories shall, upon receipt of instructions from the issuer, record such securities as “non-transferable” for the duration of the applicable lock-in period

[ii] Regulation 25(2) of ICDR The lead manager(s) shall submit the following to the Board along with the draft offer document:

…

(d) a draft abridged prospectus as per Part E of Schedule VI.

…

[iii] Schedule VI, Part E, of ICDR Regulations

[iv] Regulation 34(2), 131(2), 255(2), Schedule VI, Part E (VI), of ICDR Regulations

[v] Schedule VI, Part A, Clause (6), ICDR Regulations

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