To improve efficiency in the securities market, the Securities and Exchange Board of India (SEBI) is considering allowing depositories to distribute cash benefits such as dividends, interest and redemption payments to shareholders, instead of Registrar and Transfer Agents (RTA) of companies. The capital market regulator has issued a discussion paper on this on Monday.
So, what are the present procedures for distribution of cash benefits and what is being proposed? And how is it beneficial to you as a shareholder? Learn all about it here.
How it stands today
While distribution of non-cash benefits such as bonus, rights, amalgamations, demergers, sub-division etc are handled through depositories, cash benefits are handled outside the depository system.
Depositories provide details of shareholders and bondholders including name, address and bank details to the respective issuer companies which, in turn, arrange for distribution of cash benefits.
Under the present system, no information is available in a shareholder’s demat account with respect to entitlement of cash benefits and payment made to the investor. If an investor need information or has to file a complaint on cash benefits, they have to the issuer companies or their RTAs, which SEBI feels may be inconvenient to investors.
What is being proposed
The capital market regulator is now proposing that all cash benefits be distributed by depositories in the case of all securities held in demat form. Issuers may be required to transfer the total amount due to clients of each depository to that depository, which is also the registered holder of such securities. The depository, in turn, will distribute the amount to the beneficiaries.
In respect of securities held in physical form, the issuer company may continue to handle the distribution of cash benefits.
Benefits to Investors
Single record of all cash benefits received: Investors will be able to get a consolidated statement of all cash benefits due to them and credited, along with details such as announcement date, dividend rate, amount due, date of credit to bank account and bank transaction reference. Thus, the demat account statement will become a single record of all details with respect to cash benefits.
Simplified monitoring: Since all details will be available in a single place, monitoring the transfer will become easy for the investor. Thus, in case of non-receipt of some cash benefits, investor will easily be able to identify from his demat account statement. SEBI feels that in fact such missed payments would be minimised as there will be central monitoring by the depository. Investors will also be able to easily view companies in their portfolio that are paying dividend, the rate of dividend and which companies are not paying dividend.
Immediate alerts: Investors can receive directly from the depository SMS or email alerts on cash benefits distributed, just as in the case of other transactions.
Shorter time-frame for receiving benefits: As majority of cash distribution will be carried out in electronic form, investor will get cash benefits in a shorter time. Further, in case of any rejection of electronic credit, the depository partcipant (DP) will also be able to approach investor for updation of bank details so that investor can get credit directly to his bank account electronically.
Better enforcement of fixed pay date: To enhance transparency, SEBI had already mandated companies to have a pre-announced fixed pay date for payment of dividends. With depositories crediting directly, better enforcement of fixed pay date can be achieved. Investors will be able to expect credit of dividend on specified dates.
Doing away with paper trail: As details of cash benefits will become part of demat account statement, investors will not be required to maintain papers related to cash benefits. Investors will be able to view these details as and when required.
Updation of bank details: In case of failure to credit electronically due to invalid or absent bank details, such accounts can be tagged and efforts can be made by the depository to contact the client and get updated details. Information can be provided to DPs to contact the client and update the details. Investors can also be informed through SMS and email alerts. Messages will be included in the Consolidated Account Statement and demat statement. This will facilitate achievement of the goal to eventually have all cash benefits credited electronically.
Investor convenience: As information of cash benefits for all issuers will be available centrally in depository system, for any query related to cash benefits, investor can contact the DP who will able to provide the necessary details instead of approaching various issuers
Benefits to Issuers
Pruing of infrastructure for cash benefit information: Just like shares held in dematerialised form required no infrastructure on part of issuer companies to maintain shareholder data, all information related to cash benefits including paid, unpaid details will be available in the depository system for the companies to download as and when required.
No need for separate communciation to shareholders: At present, each issuer appoints a banker for distribution of cash benefits and sends communication to each shareholder about credit of cash benefits separately. In case cash benefit distribution is carried out by depository, there may be economies of scale. Depositories will also send SMS or email alerts to investors instantaneously. All information of cash benefits will be available in demat account statements which are sent to investors at defined frequency. Therefore, issuers will not be required to send communication to each shareholder separately saving on the costs.
Easier reconciliation of data: With complete data being available in the depository system, reconciliation will be simplified and automated for the issuers. Compliance with obligations of distribution, disclosure of unclaimed cash benefits, and transfer of unclaimed benefits to Investor Education and Protection Fund etc under Companies Act can be automatically ensured through market infrastructure.