Tax talk: Holding shares in physical form? You need to change them to demat form before April

Published: December 25, 2018 2:17 AM

Investors holding shares of listed companies in physical form, starting April 1, 2019, will be only allowed to transfer or sell them if they have been converted to dematerialised form (Demat Form).

tax collections, tax in india, indian tax, tax, India's tax collections, GDP, tax policy, Economic Survey of 2016 tax collections, tax in india, indian tax, tax, India’s tax collections, GDP, tax policy, Economic Survey of 2016

By Amit Pathak

The Securities Exchange Board of India (Sebi) on June 8, 2018 issued a new set of amendments under the Sebi Regulations 2018. This amendment, starting April 1, 2019, will not allow investors holding shares of listed companies in physical form to transfer them. Initially the date of applicability of this amendment was December 5, 2018, which has now been extended to April 1, 2019. Investors holding shares of listed companies in physical form, starting April 1, 2019, will be only allowed to transfer or sell them if they have been converted to dematerialised form (Demat Form).

Mandatory demating

The number of frauds with respect to physical form of shares have been were high in number; also transfer of these shares were problematic. Further, there used to be unclaimed dividend that accrued on these shares. With this amendment, there shall be a mandatory link between the bank account of the investors and their respective Demat account, which will eliminate fraud or substantially limit it, as it will allow Sebi to have easy and full access to trading information of all investors and their investments in a listed company. Having said that, the physical form of shares does not lose its value post this amendment, as the amendment by Sebi does not take away the value of any physical shares but only restricts the transfer of such shares post April 1, 2019.

So, investors who still want to retain the physical form of shares can surely do so, but Sebi will restrict investors or shareholders from transfering or selling the same unless they have converted them into Demat form. Moreover, these shares will also become illiquid, which means that, while these shares have their intrinsic value linked to the company’s stock price in the market, to realise that value the shareholder will have to convert those shares in the physical form to the Demat Form and then sell in the market and receive money in their bank account.

Limits and procedures

In case physical shares are held in the name of a deceased person, Sebi has ascribed some limits and provided some procedures which must be complied with by the legal heir of such deceased person. Accordingly, if the current value of shares is up to Rs 2 lakh then the legal heir can approach the company whose shares he has, along with death certificate of the deceased and if the value exceeds Rs 2 lakh, then the legal heir needs to appoint a lawyer to get a probate from the court to establish legal ownership.

Read: Move over Flipkart-Walmart deal, these exits also made significant noises in India M&A ecosystem

As a matter of bitter fact, every change takes time for it be internalised, and everyone faces the brunt of it, whether it’s Sebi, investors, registrar, transfer agent or anyone who is directly or indirectly part of this existing channel. A few will be reluctant to accept the new rules, but they need to understand that shifting to Demat mode will be of utmost benefit to them. For instance, when shares held in physical form are lost or damaged, then re-issuing of the same requires time, energy and cost. Therefore, it will be correct to say that introducing compulsory dematerialisation will help run the economy with some ease.

Now looking at the other side of the coin, these steps taken by Sebi may increase the revenue of the government. It may increase in the form of stamp duty, fees or other charges which will be required to be deposited or paid on such transfer of physical shares to Demat form. Moreover, this will lead to ease in collection of tax revenue.

The writer is director, Nangia Advisors LLP

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition