Recalibrating India's Primary Capital Markets: A Critical Appraisal of the SEBI ICDR Amendments 2025-2026
[Harshwardhan and Aarya are students at Gujarat National Law University.]
Groww’s parent company before its intended listing brought the need to revisit India’s capital raising regulations. Despite India being one of three countries with the most initial public offers (IPOs) issued for the period 2023 - 2024, there have not been any significant changes made to the existing Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations). Then, the SEBI ICDR (Amendment) Regulations 2025 and the SEBI (Alternative Investment Funds) (Second Amendment) Regulations 2025 (2025 Amendments) were issued pursuant to the SEBI Board meeting on 17 December 2025 and became effective as of 21 March 2026. The new regulations are also marked to be the biggest reorganisation of the primary market regime in nearly a decade.
While the amended regulations fill in the gaps of digital governance, eligibility criteria for startups, inadequate disclosures, and angel investing reform in a comprehensive way, these amendments' success will depend on reconciling 3 conflicts: the mandatory dematerialisation of the foreign entities, moral hazard created by increased eligibility criteria, and concentration of the capital pool within a thin accreditation base.
Mandatory Dematerialisation: Governance Signal, Enforcement Challenge
Mandatory dematerialisation of 10 different classes of security holders, including selling shareholders, KMP, directors, QIB, and special-right security-holders, as provided under the 2025 Amendments, ensures that a fundamental weakness in corporate governance is dealt with through the use of a digital audit of the entire structure of the shares prior to the regulatory scrutiny of DRHP. The 2025 Amendments are especially important in reverse flips where the company engages in a merger under Section 230-234 of the Companies Act 2013 because complex multiple layers of holdings in Cayman Islands or British Virgin Islands had previously hindered beneficial ownership disclosure. However, mere technical dematerialisation need not result in economic transparency, as foreign trust and nominee systems can hide ownership, and SEBI lacks a robust international enforcement mechanism to trace ownership chains
Eligibility Liberalisation: Removing Barriers, Introducing Risks
Compulsorily convertible securities and reverse flipping
The amendment to Regulation 8 makes it permissible to aggregate the holding period of the compulsory convertible securities (CCS) along with that of the equity obtained after the pre-DRHP conversion of CCS. This measure redresses the imbalance identified by SEBI earlier, wherein offshore CCS holders enjoyed an unfair advantage despite having the same economic exposure as the equity shareholders. The harmony with the minimum promoter contribution requirement prescribed in Regulation 15 adds internal consistency. However, there is always a possibility of exploitation; investors may manipulate the holding period before converting into equity to accelerate their OFS eligibility. In such a scenario, SEBI should release a note explaining whether only commercially valid pre-draft red herring prospectus (DRHP) conversions will be considered.
Founder ESOP retention
Inclusion of Regulation 9A within the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations 2021 allows the retaining and exercising of any ESOP granted at least a year before the filing of the DRHP. In other countries like the United States and Singapore, the practice of retaining founding equity by the IPO process is commonplace; India’s former rule was structurally anomalous, creating an incentive for the founding teams to not become promoters, thus creating an unhealthy promoter-public relationship at the time of listing. The one-year requirement serves as a measure to prevent any last-minute equity issuance to the promoters. It is crucial to point out that the absence of any numerical limits on the promoter’s total ESOP pool can be considered for revision in the coming years.
OFS selling-shareholder caps
The amended Regulation 6(2) sets appropriate offer for sale (OFS) restrictions where the holder of 20% or above of the pre-IPO capital is allowed to sell only up to 50% of their pre-IPO holdings, and those less than 20% will be constrained to 10%. Such a restriction seems reasonable from a theoretical standpoint. Past experience shows that the exit of dominant promoters on listing leads to underperformance, as the market views such sales as a sign of lack of confidence. This relationship has been empirically demonstrated by research conducted in India on IPOs, and similar rules apply to the FCA Listing Rules in the UK in the case of secondary sales.
Enhanced Disclosures: Depth and Limits
The 2026 disclosure changes encapsulate sophisticated thinking in the regulatory field from four perspectives. The contemporaneous filing of a draft abridged prospectus along with the DRHP, with QR codes leading to relevant portions of the RHP, adequately acknowledges the fact that the offer document of over 400 pages is, in practice, unreadable for most retail investors, an approach similar to SEC's plain-English disclosure rule. However, issues around the digital divide should not be overlooked as well, since internet usage and smartphone ownership are much lower in tier-3 and rural India where retail IPO investing is picking up pace. The QR code-driven disclosure systems assume access to technology that may be unavailable to some.
A differentiation of risks factors into sector-specific and issuer-specific, which mirrors SEC Regulation S-K Item 105 and constitutes a structural enhancement compared to the risk sections of existing red herring prospectuses, that consistently list around 80-100 risks with equal prominence, thus burying important disclosures under generic boilerplate language. Asking the issuer to explicitly point out issuer-specific risks based on litigation, management, and capital structure risk effectively counters the issue of information asymmetry that lies at the centre of retail investor harm.
The use of non-transferable shares, that requires the depository to make such shares non-transferable for the duration of the appropriate lock-in period (18 months in case of promoters' minimum contribution and 6 months for excess promoters' shareholding and non-promoter pre-issue shares or three years in the case when majority of issue proceeds (except OFS) will be used for capital expenditure), is realistic, in situations where a regular lock-in is not possible, but its legality still lacks clarity. The effectiveness of this measure in relation to a third-party bona fide transferee or in case of court directives during insolvency proceedings is yet to be seen. A SEBI clarification or better yet, a revision of the Depositories Act 1996, could help.
Rights Issue Simplification and Angel Fund Reform
The rights issue reforms include the removal of the threshold limit of INR 500 million, exemption from mandatory SEBI filing in lieu of direct submission to the exchange under modified Regulation 71, removal of the mandatory merchant banker requirement, and ensuring process completion within 23 working days after board meeting approval according to the SEBI circular. This constitutes reduction of procedural friction to a meaningful extent. The decrease of time frame from the earlier period of 40–55 working days helps in harmonizing the procedure with international standards and benefits the issuers in handling working capital cycle. Uniformity without size-based distinction increases compliance.
With regard to SEBI (Alternative Investment Funds) (Second Amendment) Regulations 2025, the angel fund framework has been altered by categorising them as standalone Category I alternative investment funds (AIFs), making eligibility of only accredited investors, increasing minimum investment amount limit per investee to INR 10 lakh, setting maximum investment amount limit per investee to INR 25 crore, removing 25% limit on concentration, and doing away with per-deal scheme framework. The recognition of accredited investors as qualified institutional buyers, for the purpose of the Section 42 of the Companies Act 2013, thus evading the 200-investors' limit imposed on private placement deals, is an important structural change in executing such early-stage deals.
An important issue relates to accreditation base itself. with around 649 registered accredited investors in India as of mid-2025, limiting the angel funds' access to only this list might narrow the access to funding in comparison with the earlier scenario in which it was not an issue, which might go against the spirit of the reform aimed at providing startup funding. SEBI's proposed relaxation of the accreditation framework needs to be viewed in the light of the AIF amendment itself.
Implementation Challenges and the Way Forward
The 2025 Amendments make up a wise and well thought changes to India's foundational securities law infrastructure. The compulsory dematerialisation makes up for the inadequacies in the digital architecture of the governance structure; the combination of mandatory corporate mandates, retention of ESOPs, and limits on the OFS deal with structural obstacles preventing startups and reverse flips from listing on India's bourses; better disclosures improve protection of small shareholders; the trimming of time required for rights issuance solves procedural challenges; and angel fund reforms are meant to create deep-seated structures within the early stage of fundraising process.
However, there remain 3 implementation issues that need to be addressed to make sure these amendments work as intended. First, there needs to be consistency between SEBI's observation letters regarding DRHPs and its informal guidance during the DRHP review process to avoid inconsistencies. Second, exchange review of rights issue processes must be made faster to actually bring it into compliance with the 23 working day statutory deadline which requires internal operational change rather than a regulatory one. Lastly, accreditation criteria loosening ought to go hand in hand with the angel fund reform to make sure that it actually results in more capital flowing into startups instead of merely re-distributing it.