SEBI proposes monitoring agency for every issue, with demat freezes
SEBI's 13 October consultation paper would make a monitoring agency mandatory for every share issue and let exchanges freeze promoter demat accounts.
SEBI has asked the public to comment, by 3 November 2026, on a plan that would make an independent "monitoring agency" watch how every company spends money raised from investors, whatever the size of the issue. The consultation paper, dated 13 October 2026, also proposes a Rs 50,000 fine each time a company fails to cooperate with the agency and, in the last resort, a freeze on promoters' demat accounts. It matters to every company that plans an IPO, rights issue or private placement, and to investors who want to know whether the money went where the offer document said.
What the consultation paper proposes
The paper comes out of a working group chaired by V S Sundaresan, a former executive director of SEBI, which is reviewing the listing rules (the LODR Regulations, first published in September 2015). The group's first report has three chapters. SEBI's paper covers only the first, on how the use of issue proceeds is monitored and disclosed.
The headline proposal is that a monitoring agency would be mandatory for all issuances, irrespective of size. The offer-for-sale part of an issue, where existing shareholders sell and the company gets nothing, is left out of the calculation. Today an agency is needed only above a size threshold, so most small raises escape the check.
Other proposals, as set out in SEBI's paper and in an analysis by the compliance firm Vinod Kothari and Company:
- The agency would send its report straight to the stock exchange, not only to the company, even when it finds nothing wrong.
- If the company does not cooperate, the agency would still file a report based on the best available information, with a "statement of non-cooperation".
- Exchanges would show those reports prominently on their websites.
- A new Regulation 32A in the LODR rules would list what the report must contain, and the report format would change.
How monitoring works today
A monitoring agency is a SEBI-registered credit rating agency. Its job is narrow: it checks whether the money raised is being spent on the "objects" stated in the offer document, flags any deviation and reports every quarter until the money is used up. Think of it as an independent auditor holding the receipts for a wedding fund, so that guests who paid in can see the caterer was actually paid.
According to Vinod Kothari's summary of the existing rules, the trigger is an issue size above Rs 100 crore, not counting any offer for sale. That applies to IPOs and follow-on offers, rights issues, preferential issues and qualified institutional placements (QIPs). SME IPOs, the small-company market, have a lower trigger of Rs 50 crore, which SEBI cut from Rs 100 crore in March 2025.
The report now goes to the listed company first. The company must then send it to the exchange, with the board's and management's comments, within 45 days of the end of the quarter, post it on its website and place it before its audit committee. For SME-listed companies the cycle is half-yearly.
The weak spot, in the working group's view, is what happens when the company does not play along. An agency that cannot get information has no direct line to the exchange, so investors may never learn that monitoring broke down.
The penalty ladder for companies that do not cooperate
The most debated part of the paper is the ladder of consequences. Two ideas come from the working group and SEBI adds detail.
The fine is Rs 50,000 for each instance of non-cooperation that the agency reports in a quarter (or half-year for SME companies). The exchange is expected to review compliance and send notices within 30 days of the due date for the agency's report.
If the agency has not been able to file a complete report, or the company has not paid the fine, within 15 days of that notice, the exchange sends a second notice to the promoters. If 10 days after the promoter notice the problem is still not fixed, the exchange tells the depositories to start freezing the promoters' demat accounts under the exchanges' standard operating procedure. That is the sharpest tool in the paper, because a frozen account stops promoters from selling or pledging shares.
Two safeguards are built in. First, SEBI says that not paying the agency's fee should not count as non-cooperation. The agency can instead write into its contract that the whole fee is paid in advance, and if the contract ends before all the money is used, it may have to refund the proportionate part for the unused period. Second, if the company later fixes the problem, the agency must file a complete follow-up report within 15 days of getting full information, stating that the company has rectified its position.
SEBI also proposes that while non-cooperation continues, the company cannot terminate the agency or appoint a new one. That closes a loophole in which a company unhappy with a tough agency could simply replace it.
Who says what, and what is still open
Everything here is a proposal. SEBI has not issued final rules, and its comment window closed on the day of this edition. The Vinod Kothari analysis presents the changes as a way to strengthen accountability and protect investors, and notes that they move the agency's reporting line towards the exchange and the investing public.
It also points to open questions. Extending the framework to small issuers would likely raise their compliance costs, although the analysis does not put a figure on it. Reports reaching the exchange even when nothing is wrong could add routine paperwork. Barring a change of agency during a dispute could leave an issuer tied to an agency it considers unsatisfactory. And a demat freeze is a severe sanction for a reporting lapse, so how a genuinely disputed claim of non-cooperation is resolved matters a great deal. The consultation paper itself does not settle that last point in the text we reviewed.
What is confirmed: the dates, the thresholds in force, the Rs 50,000 fine, the 30, 15 and 10 day steps and the 15-day follow-up report. What is not confirmed: whether SEBI will keep all of them, what the final report format looks like, and when any rule would start.
What it means for companies and investors
For a company planning to raise even a modest amount, the proposal means budgeting for a monitoring agency's fee and for a quarterly information routine: collecting bank statements, invoices and board approvals in a form an outsider can check. Companies that already run clean treasury records lose little. Those that mix issue money with general funds will find it harder.
For promoters, the practical risk is not the Rs 50,000, which is small, but the chain behind it. A reporting dispute left alone for roughly two months could end with trading restrictions on their own holdings. Keeping the agency's requests in a tracked log, answering within the deadline and paying fees on time are the obvious defences.
For ordinary investors, the change would be more visible than most rule changes. Reports would sit on exchange websites with any non-cooperation flagged, so a reader could check whether an IPO's cash is being spent as promised. The reports are only as good as what the agency can verify, and the agency is paid by the company it watches, a tension the paper tries to ease with advance fees and refund rules rather than remove.
Use the simulator below to see how fines and the timeline stack up for a company that does not cooperate over several quarters. It is arithmetic on the proposed numbers, not a prediction of what SEBI will finalise.
What to watch next
The next step is SEBI's review of the comments received by 3 November, after which it may place a final proposal before its board. Watch whether the Rs 50,000 fine is kept, whether the demat freeze stays in, and whether SME issuers get a lighter version. Chapters II and III of the working group's report, on penal action by exchanges and on related-party transactions, are still to come in separate papers.
Key takeaways
- SEBI's 13 October 2026 paper proposes a monitoring agency for every issue regardless of size, replacing today's Rs 100 crore trigger (Rs 50 crore for SME IPOs).
- Agencies would report directly to stock exchanges, with a statement of non-cooperation if a company holds back information.
- The proposed ladder is a Rs 50,000 fine per instance, then notices at 30, 15 and 10 day steps, ending in a request to freeze promoters' demat accounts.
- Non-payment of the agency's fee would not count as non-cooperation, and a company in default could not switch agencies.
- These are proposals open for comment until 3 November 2026, not final rules.
Sources
- [SEBI: Consultation paper on review of framework for monitoring and disclosure of utilization of issue proceeds, 13 October 2026](https://www.sebi.gov.in/sebidata/attachdocs/oct-2026/1791903548127.pdf)
- [Vinod Kothari and Company: Revisiting the Monitoring Agency Framework, SEBI's proposed changes](https://vinodkothari.com/?p=60033)
Tags: SEBI Regulation Monitoring agency IPO Corporate governance