SEBI is asking non-promoter shareholders to get their shares converted in demat form to improve transparency in the dealing of securities. Also, there have been many instances of huge frauds in the past where some fraudsters made forged documents of those shareholders where dividends were unclaimed for several years.
The last date for non-promoter shareholders to get their physical shares converted in demat form is just 6 months away. Why did SEBI tweak Listing Obligations and Disclosure Requirements (LODR) norms? To what extent should you be worried?
I think we have to first look at why SEBI is asking non-promoter shareholders to get their shares converted in demat form after about seven years when it made de-materialization of shares held by promoters compulsory. It is to improve transparency in the dealing of securities. Also, there have been many instances of huge frauds in the past where some fraudsters made forged documents of those shareholders where dividends were unclaimed for several years.
Now, the new regulations become applicable to all other investors, i.e. on 8 June 2018, market regulator SEBI issued a notification that transfer of securities will not be permitted unless they are de-materialized and the deadline for the same is December 5, 2018. The amendment shall come into force on the 180th day from the date of its publication in the Official Gazette, i.e., on December 5, 2018.
Moreover, prior to the amendment, both Listing Regulations and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 required the entire shareholding of promoter (s) and promoter group to be in dematerialized form. However, the same was not required for public shareholders.
The amendment though is an outcome of the SEBI meeting held on March 28, 2018 but the plan was being thought of long back since 2014 and as per the broader sense it would be a good transition for the market. In our 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.
Though the amendment seems to curb the option of holding of the shareholders, the same on the other hand will help to digitalize the holdings, which will not only help in preventing fraudulent transfers but will also reduce the compliance burden on the companies.
Here are some companies where portion of public shares are not yet in demat form:
- TCS – 1,652,824 (public shareholding in physical form)
- Reliance Industries – 94,985,740
- HDFC Bank – 14,175,894
- Hindustan Unilever – 41,263,573
- ITC – 3,784,233,264
- HDFC – 11,450,709
- Infosys – 3,956,547
- Maruti Suzuki – 4,527
- Kotak Mahindra Bank – 8,650,793
- State Bank of India – 97,382,058
- ONGC – 7,545,483
- ICICI Bank – 26,113,598
- Larsen & Toubro – 25,170,775
- Coal India – 8,515
- IOCL – 36,502,143
Though as per SEBI’s action, the amendment claims to improve ease, convenience and safety of transactions for investors, the same may bring some difficulties to the securities holder for whom the electronic system and the demat form does not seem to be user-friendly. Many investors, especially senior citizens, still hold shares in physical form. SEBI ordered 100 per cent dematerialization of the shareholdings. There are some estimates that retail investors own stocks worth Rs 1.24 lakh crore in physical form, while mutual funds hold Rs 45, 760 crore worth of physical form.
As per the regulation, it is clear that in case of physical transfer of the securities, the listed entities after receiving proper documents, shall register the transfer and issue certificates or receipts or advice, 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. Moreover, 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 the security holder to hold the securities in demat form as there is no role that a company or an RTA plays in case of demat transfers.
DK Aggarwal is Chairman & Managing Director of SMC Investments & Advisors.
The opinions expressed in this article are the author’s own.