[Nikita Snehil is a Manager at Vinod Kothari & Co, and can be reached at corplaw@vinodkothari.com]
In its meeting held on March 28, 2018, the Securities and Exchange Board of India (‘SEBI’) has decided to amend regulation 40 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’), which deals with transfer or transmission or transposition of securities. According to this amendment, the requests for effecting the transfer of listed securities shall not be processed unless the securities are held in the dematerialized form with a depository. Therefore, for effecting any transfer, the securities shall mandatorily be in demat form. SEBI would in due course notify the date for the effectiveness of this amendment.
Benefits of the Amendment
According to SEBI, this amendment will bring the following benefits:
(a) It shall curb fraud and manipulation risk in physical transfer of securities by unscrupulous entities.
(b) Transfer of securities only in demat form will improve the ease, convenience and safety of transactions for investors.
Consequences of the Amendment
It is pertinent to note that there are several security holders who hold or prefer to hold their securities in physical form and who do not wish to hold their securities in electronic mode. The amendment will deprive such security holders of their essential right of holding their securities in their desired form.
This is another instance of reactive law making. Certain instance of fraudulent transfers that came to the fore, including in the case of Sharepro, will lead to the elimination of the option of holding securities in physical form.
Current Scenario
Both the Listing Regulations and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 mandate that the entire shareholding of promoter(s) and promoter group ought to be in dematerialized form. However, the same is not required for public shareholders.
Progress of Dematerialisation at NSDL and CDSL
Followings are the details* of progress of dematerialisation at NSDL and CDSL:
| FOR NSDL | FOR CDSL | ||||||
| Year | No. of Companies |
Demat value (in crores) |
Demat quantity of securities (in crores) |
Year | No. of Companies |
Demat value (in crores) |
Demat quantity of securities (in crores) |
| DEC’ 14 | 13470 | 1,12,20,526 | 89,073 | DEC’ 14 | 13470 | 1,12,20,526 | 89,073 |
| DEC’15 | 15115 | 1,19,29,978 | 1,03,690 | DEC’15 | 15115 | 1,19,29,978 | 1,03,690 |
| DEC’16 | 17085 | 1,29,97,457 | 1,23,305 | DEC’16 | 17085 | 1,29,97,457 | 1,23,305 |
*the details have been taken from SEBI’s Handbook of Statistics 2016
Result of a Long Plan
Though the amendment is an outcome of the meeting held on March 28, 2018, the plan for the same emanated as early as 2014. In July 2014, T S Reddy, the Managing Director and CEO of CDSL, said: “It will be good transition for the market. I doubt if any section of the market will be opposed to the idea. In my opinion, the transition will be smooth; the only hurdle will be in the case of companies that no longer function or have no trading activity.” Further, in the same article, Mr. Nageswara Rao, Managing Director and CEO of NSDL, was quoted saying: “Earlier (in 1996), the challenge was to convince investors holding shares in electronic form was a good idea. Now, this is no longer the issue. Investors have matured and have adapted to the demat mode adequately”.
Therefore, SEBI with the support of various experts, had decided a while ago in 2014 to introduce the said amendment.
SEBI’s Reactive Approach
Regulation 40(3) provides the following
On receipt of proper documentation, the listed entity shall register transfers of its securities in the name of the transferee(s) and issue certificates or receipts or advices, as applicable, of transfers; or issue any valid objection or intimation to the transferee or transferor, as the case may be, within a period of fifteen days from the date of such receipt of request for transfer:
Provided that the listed entity shall ensure that transmission requests are processed for securities held in dematerialized mode and physical mode within seven days and twenty-one days respectively, after receipt of the specified documents:
Provided further that proper verifiable dated records of all correspondence with the investor shall be maintained by the listed entity.
From the above provision, it is clear that in case of physical transfer of the securities, the listed entities shall register the transfer after receiving proper documents and issue certificates or receipts or advices, as applicable, of transfers; or issue any valid objection or intimation to the transferee or transferor, as the case may be, within a period of fifteen days from the date of such receipt of request for transfer.
Therefore, as per the regulation, it is the responsibility of the listed entity and its registrar and transfer agent (‘RTA’) to facilitate the registration of the transfer and issue the share certificate accordingly. However, the proposed amendment relieves the company from its responsibility and mandates that the security holder hold the securities in demat form as there is no role that a company or an RTA plays in case of demat transfers.
Conclusion
Although the amendment claims to improve the ease, convenience and safety of transactions for investors, the same also brings in various difficulties to security holders for whom the electronic system and the demat form does not seem to be user-friendly. The bonafide securities holder, holding shares in physical form, will be largely affected by such compulsion and will be left with only two options i.e., either to convert their securities in demat form, which shall be against their will, or to refrain from transferring their securities ever; in both the circumstances, it is the interest of the securities holder which ends up being inhibited by the law makers.
– Nikita Snehil