Dematerialised Form Of Shares: Hotbed Of Scams In The Making

New Delhi/Mumbai, July 30: | Updated: Jul 31 2002, 05:30am hrs
It is another stock market scam in the making — this time through misuse of dematerialised form of shares. The modus operandi involves injection of unlisted shares in demat form into circulation, after which they are freely purchased and sold in the market.

The Securities & Exchange Board of India (Sebi) came across first such case in February but its efforts to dig the transactions in unlisted shares have come a cropper so far.

Sebi directed Mumbai, Ahmedabad and Madhya Pradesh stock exchanges in May to reverse the transactions in the shares of Design Auto Systems Limited in May, but the exchanges are yet to do so.

The reason: since demat shares are fungible (there is no share certificate in demat system), it is almost impossible to differentiate between existing, genuine shares and those which were not admitted for trading by Bombay Stock Exchange (BSE) but still found their way into the market.

A top Sebi official told FE that the matter would be resolved soon but declined to comment further.

But while only one such case has come to light after a large investor (HB Stockholdings) pursued the matter with Sebi and BSE, market insiders say there could be several other such instances where new shares, not permitted for trading by the stock exchanges, may have been put into circulation in connivance with officials of depositories and registrars.

That would mean a scary situation: a scam that may well run into hundreds of crores of rupees. For instance, if 5 lakh shares of a high market capitalisation company, whose share price is around Rs 1,000, are put into circulation in a surreptitious manner, it would mean that illegal shares worth Rs 50 crore have been sold and purchased in the market.

The main role in the case of Design Auto scrip was of Central Depository Services Ltd which permitted dematerialisation of 10 crore fresh shares on November 10, 2001. They were allotted on a preferential basis to another company — Bonanza Biotech — even though BSE had not permitted listing of the new shares. Within two months of this, more than 1.50 crore shares were traded and delivered.

BSE suspended trading in the scrip with effect from January 14, 2002. Since then, Sebi, BSE and some investors who detected this gross irregularity, have been exchanging letters with no concrete action. Trading in the scrip continues to be suspended, leaving the investors in a no man’s land.

BSE, on its part, expressed helplessness way back in May.

In a letter dated May 15, BSE had stated, “Sebi had advised the exchange to reverse these trades which have resulted in delivery being given out of unlisted 10 crore preferential shares of Design Auto Systems.”

Accordingly, we had requested both the depositories to provide the details of the unlisted shares. NSDL expressed their inability to give the details of the unlisted shares as the shares in demat form are fungible. In the absence of any relevant data required to identify and reverse the transaction, the exchange is unable to take any action in this regard. The exchange, vide letter dated May 3, had referred this matter to Sebi and requested them to advise the exchange in this matter. On receiving instructions from Sebi, the exchange will take the necessary action in the matter.”

When FE tried to probe the issue with various players involved, it met with standard replies. Each agency involved is now apparently passing the buck on to the other. A BSE spokesperson said: “The investigation in this matter is on and it will be made public as soon as it is completed.”

CDSL executive director BG Daga said BSE has not even taken up the matter with them. “The matter at present is resting with BSE. As all the shares are pari-passu at present, the issue of whether these shares are normal equity or preferential shares is very difficult to ascertain. The issuer (the compay) and registrar will be in a better position to know the status of these shares. Sebi is examining the matter. However, BSE has not approached us in this regard. If they approach us, we will look into it,” he told FE.

The company says it has done nothing wrong and it adhered to all statutory and legal requirements of stock exchanges, Sebi and the Companies Act.

Interestingly, BSE seems to have taken up the matter only with National Securities Depository Ltd (NSDL) where the original shares were dematerialised while the shares in question were dematerialised by CDSL. NSDL executive director, Gangan Rai said, “It is not our depository but the CDSL where these transactions have taken place. It is up to the CDSL and the exchange (BSE) where the shares of company are listed to respond to Sebi.”

But marketmen argue that since the whole trading system is computerised now, of which BSE keep a complete record, it should not be difficult to segregate the two set of shares.

According to HB Porfolio’s managing director Anil Goel, the fresh shares were injected into the system on November 5, 2001. The details of the shareholders as on that date would be available with the registrar, the company and BSE. The exchange would also have details of all transactions that take place on the trading screen as well as the buyers and sellers. “Why can’t they simple match these transactions and restore the position which was there as on Nov 5,” he said.