SEBI’s New Rules on Physical Share Transfers: A Complete Investor Guide

 

Introduction: A Long-Awaited Relief for Investors

If you’ve been holding on to paper share certificates for years, SEBI’s recent proposal might finally bring some relief. On 17 October 2025, the Securities and Exchange Board of India (SEBI) issued a consultation paper aimed at streamlining the transfer of physical shares executed before 1 April 2019.

For many investors, these “stuck” shares have been a source of frustration. Deadlines have passed, deeds were lost, and administrative errors left physical certificates in limbo. SEBI’s latest initiative seeks to unclog this bottleneck, giving investors a limited window to regularise their holdings while continuing India’s transition to fully dematerialised shares.

At its core, this move reflects SEBI’s dual focus: ensuring complete dematerialisation of shares and providing practical relief to investors caught in legacy processes. In this comprehensive guide, we’ll unpack everything you need to know—from the shift from paper to digital, to SEBI’s proposed exceptions, and practical steps for investors, companies, and advisors.

 

The Shift from Paper to Digital: Why Demat Matters

India’s equity markets have come a long way from the days of paper share certificates. Let’s take a quick trip down memory lane.

Traditional Physical Shares

For decades, investors received physical certificates when they bought shares. While this tangible proof of ownership felt secure, it came with several risks:

• Theft or loss: A misplaced certificate could mean losing your investment.
• Forgery risk: Paper certificates could be tampered with, exposing investors to fraud.
• Delayed transfers: Selling shares required submitting physical deeds, often leading to weeks of administrative delays.

The Rise of Dematerialisation

Dematerialisation—or “demat”—solves these problems by storing shares electronically. Benefits include:

• Instant transfer of ownership without paperwork.
• Enhanced safety, as there’s no physical certificate to lose or forge.
• Improved market efficiency, helping investors trade seamlessly.

Under the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, particularly Regulation 40(1), listed companies were instructed to stop transferring physical securities from 1 April 2019. Since then, share transfers require demat accounts.

But the reality? Not everyone managed to meet this deadline. Investors faced logistical hurdles, administrative errors, or situations like:

• Missing or incomplete transfer deeds.
• The transferor passing away or a company being dissolved.
• Requests sent to the wrong Registrar & Transfer Agent (RTA).

For many, this meant physical shares could neither be sold nor dematerialised—until now.

 

The Core Issues SEBI Aims to Fix

SEBI’s proposal addresses two main challenges in the legacy system:

1. Transfer Deadlines and Legacy Certificates

Although the deadline technically ended in 2021, many investors still couldn’t complete transfers. Without intervention, these certificates remain trapped in paper form, slowing market efficiency.

2. Letter of Confirmation (LOC) Requirement

Regulation 39(2) mandates an LOC when investors request duplicate certificates, transmission, or similar services. This LOC must be submitted to the Depository Participant (DP) within 120 days. Failure to do so pushes shares into a Suspense Escrow Demat Account (SEDA).

This step has caused delays and confusion for investors and companies alike. Many shares remain in suspense accounts for months, frustrating stakeholders and reducing market transparency.

 

SEBI’s Proposed Reforms: Key Changes

SEBI’s consultation paper outlines three major interventions designed to help investors and simplify administrative processes:

1. Temporary Exception for Pre-2019 Transfers

The regulator proposes a time-bound exception to Regulation 40(1). Shares with transfer deeds executed before 1 April 2019 can now be processed even if they are in physical form.

Important details:

• Only pre-2019 deeds qualify; post-2019 transfers still require demat accounts.
• The exception has a sunset clause, after which the demat-only rule resumes.
• Investors must have an active demat account and provide their Client Master List (CML).
• RTAs and listed companies will verify identity, PAN, address proofs, and signatures.
• Name mismatches due to marriage, spelling errors, or legal changes will require supporting documents like a marriage certificate, passport, or gazette notification.

Example:
Mr. Rao inherited 200 shares from his father in 2017. He had the transfer deed but missed submission before 2019. With SEBI’s new exception, he can now lodge the deed, provide his CML, and get the shares credited to his demat account.

 

2. Abolition of the LOC Step

SEBI also proposes removing the LOC process for eligible transfers. Investors will now submit service requests with their CML, and shares will be credited directly after verification.

Benefits:

• Eliminates duplicate steps and reduces turnaround time.
• Prevents shares from being unnecessarily parked in SEDA.
• Aligns with digital-first settlement practices.

Example:
Ms. Kapoor requested a duplicate certificate in 2024 but missed submitting her LOC. Her shares moved to SEDA, delaying access. Under the new system, she submits her CML upfront, and shares are credited directly, saving time and effort.

 

3. Special Re-Lodgement Window

SEBI has opened a special re-lodgement window from 7 July 2025 to 6 January 2026.

• In the first 45 days, top eight RTAs reported that 66% of requests pertained to pre-2019 transfers.
• This demonstrates significant interest among investors in regularising legacy holdings.

 

What These Changes Mean for Investors

If you’ve been holding onto paper certificates, here’s why you should care:

• Opportunity to regularise pre-2019 transfers and move fully into the demat system.
• Retail investors can finally participate seamlessly in equity markets.
• Improved transparency benefits new investors indirectly.

Practical Steps for Investors

1. Verify if your transfer deed is pre-1 April 2019.
2. Ensure you have an active demat account.
3. Submit all required documentation, including your CML.
4. Lodge the transfer deed within the special window ending 6 January 2026.

Example:
Mr. Sharma bought 500 shares in 2018. The RTA lost his transfer deed. Now, he can submit the deed with his CML and have the shares credited to his demat account.

 

Benefits for Companies and Market Infrastructure

For RTAs and Listed Companies

• Reduced operational burden by eliminating LOC issuance and SEDA complications.
• Simplified workflow with direct demat credit.
• Stronger compliance tracking and reporting for legacy transfers.

For the Broader Market

• Supports SEBI’s goal of full dematerialisation.
• Reduces risks of certificate loss or forgery.
• Cleans the market of legacy physical certificates, improving settlement efficiency.

Example:
A listed company previously juggling hundreds of pending LOCs can now process shares directly, reducing staff workload and preventing mistakes.

 

Challenges and Considerations

While the reforms are welcomed, some challenges remain:

• Eligibility Restriction: Only pre-2019 deeds qualify.
• Due-Diligence Burden: RTAs and companies must verify PAN, identity, and signatures, increasing compliance costs.
• Time-Sensitive Action: Investors who miss the window may lose the opportunity.

Example:
Ms. Verma has a pre-2019 transfer deed but delays submission until February 2026. The window closes in January, so her shares cannot be regularised.

 

Expert Commentary

Experts largely view SEBI’s proposals as practical and necessary.

“The legacy of paper share certificates has long frustrated investors,” says Ravi Menon, a finance and taxation expert with 20+ years of experience.
“This temporary exception addresses genuine hardships without undermining the demat policy. Simplifying the LOC process is equally critical. It aligns India with global digital settlement standards.”

Experts stress the importance of clear communication:

• Investors must know deadlines, documentation requirements, and eligibility.
• RTAs and companies need to update systems and workflows.
• Auditors and tax advisors should flag clients holding pre-2019 physical shares.

 

Regulatory and Market Implications

• Promotes financial inclusion: Allows small investors to participate in modern equity markets.
• Supports transparency: Reduces untraceable or opaque physical holdings.
• Sets a precedent: Shows regulators can create targeted, time-bound exceptions for legacy issues.

Example:
Mr. Das had 100 physical shares frozen due to a missing deed. Post-reform, he can join the demat ecosystem, sell, or pledge his shares like any other digital investor.

 

Common Misunderstandings

• “I can transfer physical shares anytime.” False—only pre-2019 deeds qualify.
• “Physical shares are permanent.” False—the exception is temporary.
• “I don’t need a demat account.” Wrong—a demat account is mandatory.
• “The LOC process still exists.” No, it is removed for eligible transfers.
• “Defective deeds are automatically regularised.” RTAs still perform full due diligence.

 

Action Steps for Stakeholders

Investors:

• Verify eligibility and lodge deeds promptly.
• Open a demat account and submit your CML.
• Prepare identity, address, and supporting documents.

RTAs / Listed Companies:

• Update systems to accept CML upfront.
• Eliminate LOC step for eligible cases.
• Conduct full due diligence.

Auditors / Tax Advisors:

• Flag clients with pre-2019 shares.
• Guide on documentation and tax implications, including capital gains and holding period rules.

Regulators:

• Monitor uptake and compliance with the sunset clause.
• Ensure the legacy backlog is cleared efficiently.

 

Looking Ahead

SEBI’s reforms signal a digital-first future for India’s equity markets.

Future reforms may address:

• Transmission to legal heirs
• Nominee transfers
• Streamlining dividend payouts and other investor services

The key takeaway for investors: treat this as a one-time opportunity to digitise legacy holdings and join the modern market ecosystem.

 

FAQs

Q1: Who qualifies?
Transfers with deeds executed before 1 April 2019.

Q2: Can physical shares be transferred indefinitely?
No. The exception is temporary.

Q3: What documents are required?
CML, identity proof, address proof, supporting documents for name mismatches, original certificates, indemnity/undertakings if the transferor is not traceable.

Q4: What if the deadline is missed?
Shares remain ineligible for transfer under the legacy process.

Q5: Are there tax implications?
Yes. Cost basis, holding period, and capital gains rules apply. Consult a tax advisor for guidance.

 

Conclusion: Don’t Delay—Act Now

SEBI’s proposed reforms are a pragmatic solution for clearing legacy obstacles and advancing digital markets. Investors with pre-2019 deeds have a limited opportunity to regularise shares, companies can reduce administrative friction, and the market becomes more transparent.

The message is clear: check your deeds, act within the window, and embrace the demat ecosystem. With these steps, you can secure your legacy shares, simplify future transactions, and participate fully in modern equity markets.

For expert guidance on compliance, demat transfers, and related tax implications, you can trust Manika TaxWise—helping investors navigate complex financial regulations with clarity and ease.

 

References

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