Erasing Paper, Enhancing Trust: An Analysis of SEBI’s Dematerialization Mandate

[Adwitiya and Akshat are students at Gujarat National Law University.]

In the board meeting dated 18 June 2025, the Securities and Exchange Board of India (SEBI) approved the proposal to amend the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations) with the objective of mandatory dematerialization of existing securities of select shareholders prior to filing the draft red herring prospectus (DRHP).

Historically, the Indian capital markets have grappled with the issuance of physical securities. The issuance of physical share certificates has led to several risks such as loss, theft, forgery, and delays in transfer, making the overall market ecosystem inefficient and uncertain. Previously, with the intent to stop physical shares from entering the market and to curb risks associated with physical certificates, the Ministry of Corporate Affairs (MCA) introduced Rule 9B through the Companies (Prospectus and Allotment of Securities) Second Amendment Rules 2023, mandating all private companies (except small and government companies) to convert existing physical share certificates into electronic form by 30 June 2025. After this date, all share issuances, transfers, and capital changes must be exclusively dematerialized. In line with previous amendments to promote dematerialization, SEBI’s latest amendment extends the mandate to a wider range of shareholders, curbing the entry of physical securities in the listed domain.

Expansion of Dematerialization Requirements Beyond Promoters

The current position of the ICDR Regulations only requires promoters of the company to dematerialize their securities prior to filing of the offer document.

Regulation 7(1)(c) provides:

“all its specified securities held by the promoters are in dematerialized form prior to the filing of the offer document.”

Regulation 230(1)(d) provides:

“all specified securities held by promoters are in dematerialized form.”

The present regulations suggest that physical shares held by classes of shareholders other than promoters still find their way into the listed domain. Post this amendment, the regulatory requirement as provided under Regulation 7(1)(c) and Regulation 230(1)(d) of the ICDR Regulations shall be expanded to include the following categories of shareholders, who must mandatorily dematerialize securities before the filing of the DRHP by the issuer:

1. Promoter group

2. Selling shareholders

3. Key managerial personnel

4. Senior management

5. Qualified institutional buyers

6. Directors

7. Employees

8. Shareholders with special rights

9. All entities regulated by financial sector regulators

10. Any other category of shareholders as may be specified by the board from time to time.

Need for Change

The need for this change stems from risks associated with physical shareholding that has been in practice in the Indian markets for a long time. Physical share certificates are prone to theft, forgery, and misplacement, thereby making them a weak link in the digitizing market today. These vulnerabilities ultimately lead to procedural delays in share transfers and corporate action, making market actions slow. In the past, SEBI has enforced measures to promote dematerialization of shares, such as mandating dematerialization for the transfer of shares since April 2019. The amendment aligns with the continuous efforts of the MCA towards promoting the dematerialization of shares, which include Section 29 of the Companies Act 2013 (mandating public issue of securities in demat form); and insertion of Regulation 31(2) (mandating 100% of promoter shareholding to be in demat form) and Regulation 40(1) (mandating transfer of physical securities in demat form) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015; and continuous mandates to issue and hold securities in demat mode by unlisted public companies and unlisted private companies (excluding small companies).

Additionally, a dematerialized form of securities ensures a reduction in cases of personation of shareholders, defined under Section 57 of the Companies Act 2013, faster and transparent transfers, boosts investor confidence, and ensures market integrity along with easier oversight, which results in efficient and seamless transfer. The proposed amendment would also ensure that SEBI can track and manage the legitimate beneficial owners and the securities that the insiders of a company hold, thereby ensuring a mechanism to tackle benami transactions.

Critical Analysis

The move to mandate dematerialization of securities before an IPO is intended to address systemic vulnerabilities in physical shareholding. A closer look at judicial precedents and enforcement cases demonstrates why SEBI’s push for dematerialization is justified. In a case involving Babu George Valavi, the owner of 3,500 shares of an unlisted company by the name of Mewar Oil and General Mills (now valued at around INR 1,448.5 crores), holding physical shares created problems. Valavi held physical certificates of the shares while the company allegedly transferred the shares held by him to other people and denied his claim on ownership (source).

Another example of risks associated with physical ownership of shares is Parsoli Corporation Limited v. SEBI (2011), where over 80,000 shares were fraudulently transferred through forged transfer forms and duplicate certificates, prompting the Securities Appellate Tribunal (SAT) to call it “one of the grossest forms of fraud known to the securities market” (source). In 2017, SEBI launched an investigation into agents who fraudulently acquired physical share certificates from deceased individuals (claims unclaimed by heirs), dematerialized them, and sold them (source).

In 2023, Sharepro Services and its employees were fined INR 33.81 crore in relation to the misappropriation of INR 61.86 crore worth of securities and dividends, where shares of genuine shareholders were transferred into the employees’ bank accounts (source). Similarly, in Pinnacle Shares Registry Private Limited v. SEBI (2010), registrars were held liable for processing transfers based on forged signatures created by promoters, where the SAT affirmed the liability because the forgery was systemic (source).

A case study that illustrates the magnitude of risk posed by physical shareholding is the Titan Industries fraud of 2025. In this instance, physical shares worth more than INR 2.7 crore, jointly held by a government employee and his late father, were illicitly transferred using forged documents, including fake PAN, voter ID, and driver’s licence. The transfer was processed by the registrar in 2018 without adequate due diligence, and the fraud only came to light five years later when the shareholder was contacted about the transfer (source). The ordeal left the shareholder in protracted litigation, underscoring the vulnerability of paper certificates to forgery and the absence of robust safeguards to protect rightful ownership. This case demonstrates that physical securities not only expose investors to financial loss but also erode trust in market infrastructure. Had dematerialization been mandatory for such holdings, the fraud could have been prevented, as electronic records require verification processes that are significantly harder to bypass than forged paper documentation.

These precedents bring to light the risks associated with physical copies of shares. Countries like Sweden adopted alternate methods since the 1990s to deal with such vulnerabilities. Sweden stopped using physical share certificates for shares traded on its stock exchanges since the 1990s, thereby mandating all listed shares to exist only electronically (source). Similarly, since 2006, Japan has its own comprehensive legislation to tackle stock certificates and promote full-fledged dematerialization of securities for market settlement (source). When companies decide to go ahead with dematerialization, the physical certificates become null and the share rights are recorded and managed electronically. Additionally, in most European markets, including France, more than 99% of the securities are held in dematerialized form (source). The Geneva Securities Convention regulates intermediated securities, making intermediaries maintain records matching customer holdings.

What Lies Ahead

Mandatory dematerialization prima facie appears to be a welcome step as far as reducing the vulnerabilities and risks of physical shares are concerned. However, it is important to consider that the transition is not without challenges. The conversion of physical certificates calls for time and cost burdens. These burdens would fall unequally on smaller firms, as such a mandate extended to employees and pre-IPO investors raises practical hurdles due to different levels of digital literacy. Not just the companies, but the regulators also face problems related to the task of monitoring and efficient enforcement for compliance with stakeholders. In 2018, when the MCA required all unlisted public companies to issue and transfer shares only in dematerialised form (source), several unlisted firms in Tier II and III cities faced compliance burdens as elderly or legacy shareholders struggled with incomplete KYC requirements. The cost of maintaining demat accounts was another hurdle faced by companies. Non-compliance led to freezes on transfers, dividends, or inheritances, leaving many shareholders temporarily ineligible for exercising rights.

While the move seems necessary owing to previous instances of fraud and forgery because of physical certificates, it is important to balance enforcement with adequate support mechanisms for vulnerable shareholders. Measures like providing simplified KYC processes, phased compliance timelines, and awareness drives can make the reform a user-friendly move. Only with such calibrated measures can regulators ensure that the reform achieves its goal of enhancing transparency and security without disproportionately burdening those least equipped to adapt.