SEBI Proposes Changes to Ease Transfer of Physical Shares

 

Introduction

The Securities and Exchange Board of India (SEBI) on 17 October 2025 issued a consultation paper proposing sweeping changes to facilitate the transfer of physical share certificates executed before 1 April 2019. The regulator aims to provide relief to investors who missed earlier deadlines and to streamline the dematerialisation process by eliminating redundant steps. The move underscores SEBI’s commitment to complete dematerialisation while safeguarding investor rights and reducing administrative bottlenecks.

 

Background / Context

In India, shares can be held either physically (paper certificates) or in electronic dematerialised (demat) form. Over recent years, the capital markets environment has steadily moved towards demat holdings owing to their greater transparency, ease of transfer, reduced risk of loss or forgery, and faster settlement.

Under the Listing Obligations and Disclosure Requirements Regulations, 2015 (LODR Regulations) – specifically Regulation 40(1) – from 1 April 2019, the transfer of securities in physical form was discontinued for listed companies. That is: a listed entity is ordinarily not permitted to process a transfer of securities unless they are held in dematerialised form.

However, despite the deadline for re-lodging transfer deeds having expired (earlier re-lodgement window ended 31 March 2021), a significant number of investors remained unable to complete physical share transfers. The reasons include:

• Transfer deeds executed but not lodged or rejected due to missing documentation.
• Transferor (seller) being deceased, untraceable, or dissolved corporate entity.
• Transfer requests sent to wrong Registrar & Transfer Agent (RTA) or company oversight.

To address this backlog and investor grievances, SEBI constituted a Panel of Experts (comprising RTAs, listed companies, legal experts) which recommended that a one-time exception be introduced in Regulation 40(1) for share transfer deeds executed prior to 1 April 2019, subject to due diligence and a sunset clause.

Separately, the process of issuance of a “Letter of Confirmation” (LOC) under Regulation 39(2) (for investor requests like duplicates, transmission, etc.) has also been identified as cumbersome: once an LOC is issued, the investor has to submit it to their Depository Participant (DP) within 120 days; otherwise the shares would go into a Suspense Escrow Demat Account (SEDA). This extra step causes delays and administrative cost.

Given these issues, SEBI is now proposing two major changes:

1. A temporary relaxation/exception for transfers of physical securities executed before 1 April 2019 (subject to verification and demat credit).
2. Abolition of the Letter of Confirmation step so that RTAs/listed companies can directly credit securities to investors’ demat accounts after due-diligence.

In short, SEBI seeks to preserve the ultimate goal of dematerialisation while recognising practical difficulties faced by legacy physical transfers and streamlining current processes.

 

Detailed Explanation of the News

Proposed Amendment to Regulation 40(1)

• SEBI proposes to insert an exception in Regulation 40(1) of the LODR Regulations such that the proviso — which states “requests for effecting transfer of securities shall not be processed unless the securities are held in dematerialised form with a depository” — shall not apply for a specified period only for those investors whose transfer deeds were executed before 1 April 2019.
• The exception will be time-bound, i.e., a sunset clause will apply, after which the entire framework will revert to “demat only”.
• The process mandates that the transferee must have a demat account and submit Client Master List (CML) details. After the RTA/listed company registers the transfer deed, the securities will be credited to the transferee’s demat account (not in physical certificate form).
• Due-diligence by the RTA/listed company is required, including checks for PAN, identity proof, address proof, signature verification, and in cases of name mismatches in transferor/transferee, additional documentation (passport, marriage certificate, gazette notification) may be required.

Scrapping of “Letter of Confirmation” (LOC) Process

• Currently, under Regulation 39(2) of LODR Regulations, when an investor makes service requests (duplicate certificate, transfer, transmission, transposition, etc.), the company issues a Letter of Confirmation valid for 120 days. The investor then goes to the depository participant (DP) and submits this LOC to demat the shares. Failure to do so results in shares being credited to SEDA (Suspense Escrow Demat Account).
• SEBI proposes to dispense with this intermediate LOC issuance altogether. Instead, the investor will submit service requests along with CML of their demat account; RTAs/listed entities will directly credit the shares into the demat account after verification.
• This eliminates dual steps, reduces turnaround time (TAT), removes possibility of shares being parked in SEDA due to non-submission of LOC.

Special Re- lodging Window

• Recognising that many investors missed the earlier deadline (31 March 2021) for re-lodgement of transfer deeds, SEBI has already opened a special window from 7 July 2025 to 6 January 2026 for re-lodgement of transfer deeds for physical securities executed prior to 1 April 2019.
• During the first 45 days of this window, data from the top eight RTAs showed that 66 % of requests related to fresh lodgements of transfers executed pre-1 April 2019.

Consultation and Public Comments

• SEBI has invited public comments on the draft proposals (amendments to Regulations 40(1) and 39(2)) up to 7 November 2025.
• The consultation paper emphasises that while the relaxation is welcome for legacy cases, the broader objective remains “maximum dematerialisation”. The paper states: “Since most of the transfer cases pertain to fresh lodgement of transfer deeds for transfers executed prior to 01 April 2019, an exception may be created … such exception must be with a sunset clause in order to ensure that the overall broader objective of SEBI to ensure maximum dematerialisation is fulfilled while also providing an avenue to investors to transfer and dematerialise their securities.”

Key Sections & Framework at a Glance

Regulation	Current Text	Proposed Change
Regulation 40(1) LODR	Transfer not processed unless held in dematerialised form.	Exception for transfer deeds executed pre-1 April 2019 for a limited window; post-approval, credit to demat account.
Regulation 39(2) LODR	Issue of LOC by listed entity within 30 days of request; investor submits LOC to DP within 120 days, else shares go to SEDA.	Abolish LOC step; direct credit to demat post verification; investor to submit CML upfront.

 

Impact Analysis

Who Will Benefit?

• Investors holding physical share certificates with transfer deeds executed before 1 April 2019 but stuck due to administrative or logistical issues (seller deceased, seller entity dissolved, wrong RTA, missing documentation) will finally get a path to regularise their holdings and have them credited in demat form.
• Retail shareholders who may have overlooked deadlines earlier now get another chance via the special window and streamlined process.
• RTAs and listed companies will benefit from a simplified process (no LOC issuance, fewer suspense account issues, faster turnaround), reducing operational burdens.
• Market infrastructure overall strengthens by reducing the tail of legacy physical share transfers and advancing full dematerialisation—improving transparency and settlement efficiency.

Who Might Face Challenges or Costs?

• Shareholders who still hold physical shares but did not execute transfer deeds before 1 April 2019 (i.e., transfers executed after the deadline) will not be eligible for the exception—they remain under the “demat-only” regime.
• RTAs/listed companies must perform stricter due-diligence (PAN, identity proofs, signatures, advertisement in case of non-traceable transferor, etc.). These may increase compliance costs in some cases.
• Investors who fail to meet the new short window or miss providing required documents may lose the opportunity and remain outside the process of regularisation.
• The sunset clause means that the exception is temporary; once it lapses, no further relief may be available, so urgent action may be required.

Practical Implications

• For Businesses/Listed Companies: Need to update internal systems and workflows to handle direct credit of shares into demat accounts. The company’s RTA will need to integrate more closely with the depository system to accept CMLs and bypass LOC issuance. Firms must also track transfer-cum-transmission requests, ensure advertisement/public notice in certain cases (non-traceable transferor) and maintain disclosures (e.g., names, number of securities transferred) for up to six months on the website.
• For Taxpayers/Investors: Investors must ensure they have/obtain a demat account, submit correct and complete documentation, lodge transfer deeds promptly. They must watch the January 6, 2026 deadline for the special window. They should verify their records—whether their transfer deed was executed before 1 April 2019 and lodged. If not lodged previously or rejected, they should act now.
• For Auditors / Chartered Accountants: Audit teams and tax advisors must advise clients holding physical shares on the significance of the change, evaluate whether the shares fall under the pre-2019 category, assess tax implications (capital gains when liquidated, cost basis, etc.), and ensure documentation compliance. Additionally, due diligence must be done to ensure there are no unsettled liabilities or defect in transfer that could cause invalidation later.

Wider Market Implications

• The move promotes financial inclusion by enabling even small investors who held physical shares to convert them into demat form and participate fully in modern share markets.
• It supports SEBI’s long-term goal of a fully dematerialised equity market, which enhances settlement efficiency, reduces risk of certificate loss or forgery, and fosters transparency.
• It may clear a significant regulatory-administrative backlog of legacy physical share transfers, thereby cleansing the system of opaque holdings.
• For the regulatory environment, this sets a precedent: allowing targeted, time-bound relaxation of rules when legacy issues create investor hardship, while keeping the overarching framework intact.

 

Common Misunderstandings

• “My shares are physical and I can transfer them anytime” — Not true. Only transfer deeds executed before 1 April 2019 are eligible for the exception. Transfers executed after that date still require demat form.
• “This means physical shares can continue indefinitely” — No. The exception is time-bound (sunset clause) and does not change the broader demat-only policy.
• “I don’t need a demat account now” — That is incorrect. To avail the benefit, the transferee must submit their Client Master List (CML) of a demat account at the time of request.
• “The old process stays with LOCs” — Wrong. The LOC step is proposed to be abolished for relevant cases; direct credit into demat will follow verification.
• “This relieves all defects in transfer deeds” — Not necessarily. The RTA/listed company must still perform due-diligence (PAN, identity proof, address proof, signature verification, advertisement in certain cases). The defect-free transfer cannot be guaranteed automatically.

 

Expert Commentary

From my vantage as a finance and taxation professional with over two decades of experience, the SEBI proposal is a welcome and pragmatic intervention. The legacy of paper share certificates has long been a source of friction — missed deadlines, untraceable sellers, dissolved transferors — which has left many investors “stuck” in limbo. Allowing a one-time exception for pre-April 2019 transfers strikes the right balance: it addresses genuine investor hardship while preserving the ultimate policy of dematerialisation.

At the same time, abolishing the LOC process is a sensible simplification of the value chain. Many investors viewed the LOC as an unnecessary intermediate step — issuing a document, submitting it, waiting again — that delayed demat credit and sometimes forced transfers into suspense accounts (SEDA). Direct electronic credit, with upfront CML submission, aligns with modern digital settlement practices and should reduce operational friction.

However, the success of this initiative will depend on implementation — the RTAs and listed companies must update procedures quickly, investors need adequate communication and guidance, and the sunset clause must be well-publicised to avoid leaving stakeholders behind. Auditors and tax professionals must proactively identify clients who qualify and guide them through the documentation maze. From a tax-compliance perspective, any investor converting physical shares must also assess cost‐basis records, holding period for capital gains, and ensure no hidden pending liabilities or liens on the certificate.

 

Conclusion / Action Steps

In conclusion, SEBI’s proposed reforms mark an important milestone in India’s journey toward a fully dematerialised securities market. By carving out a temporary exception for legacy physical share transfers and streamlining the demat process (notably by removing the LOC step), the regulator addresses real-world investor pain points without diluting the long-term policy. Investors in physical shares with transfer deeds executed before 1 April 2019 have a one-time opportunity to regularise their holdings — provided they act within the special window ending 6 January 2026.

Action steps for stakeholders:

• Investors should immediately verify whether their physical share certificate falls under the pre-2019 category and if the transfer deed was lodged or rejected. If eligible, open or ensure you have a demat account and submit your Client Master List (CML) along with the transfer request.
• RTAs/List-eds must update internal processes to accept upfront demat account details (CML), eliminate the LOC issuance step for eligible cases, and complete due-diligence checklist as per the proposed Annexure.
• Auditors/Tax Advisors should flag clients holding physical shares for pre-2019 transfers, assess eligibility, guide on documentation, and evaluate tax implications (capital gains, holding period, cost basis).
• Regulators/Market Participants must monitor the uptake, assess whether the backlog of physical transfers is cleared efficiently, and ensure the sunset clause is adhered to and communicated.

Looking ahead, the market can anticipate further narrowing of physical issuance, increasing digital settlement sophistication, and more emphasis on electronic holdings. The focus will likely shift to improving other legacy market frictions (such as transmission, nominee to legal heir transfers) and strengthening investor-friendly infrastructure. The message is clear: physical share certificates are becoming a legacy artefact — and this reform is a key step in converting them to digital records and unlocking trapped shareholder value.

 

FAQs

Q1: Who is eligible for this proposed exception?
Eligibility is for transfers of securities where the transfer deed was executed before 1 April 2019 (i.e., the date the physical-transfer ban for listed companies became effective). Only these cases may avail the exception once the amendment is finalised.

Q2: Does this mean physical shares can still be transferred permanently?
No. The exception is temporary and subject to a sunset clause. After the specified period lapses, the demat-only rule stands in full force. The broader objective remains full dematerialisation of share holdings.

Q3: What documentation will the investor need to submit?
Key documentation includes:

• Client Master List (CML) of the demat account of the transferee.
• Identity proof (such as PAN card, Aadhaar, passport) and address proof of transferee (and transferor where applicable).
• In case of name mismatch in transferor or transferee, additional documents such as marriage certificate, gazette notification, or passport may be required.
• Orig­inal share certificates, transfer deed form, earlier correspondence/objection memos if any (depending on RTA/list company process).
• Undertaking or indemnity bond in case the transferor is not traceable, as specified in Annexure.

Q4: What happens if an investor misses the January 6, 2026 deadline?
If the investor fails to avail the special window or meet documentation requirements, they may lose the benefit of this exception. The shares may remain ineligible for transfer under the legacy process and may remain locked in physical form or may be moved to SEDA or treated per company policy. It is imperative to act before the sunset period ends.

Q5: Will this affect tax implications or holding-period for capital gains?
While the regulatory change pertains to transfer and demat, tax implications such as cost‐basis, holding period, and capital gains remain governed by Income Tax law. Investors should review whether their physical shares were acquired long ago, check cost records, and ensure demat conversion does not inadvertently reset any tax timeline. Advisors should assess each case individually.

 

References / Source Links

• “SEBI Proposes Changes to Ease Transfer of Physical Shares,” TaxGuru.
• “SEBI mulls measure to ease dematerialize & transfer physical shares,” Money control.
• “SEBI proposes easing transfer, demat norms for pre-2019 securities,” Business Standard.
• “SEBI Proposes Simplified Process for Old Physical Share Transfers; Plans to Scrap ‘Letter of Confirmation’ System,” Elite Wealth.