Animesh Joshi
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.
Reference
[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
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