Say bye to share certificates: Part-1
As per a newspaper item, The Securities and Exchange Board of India (Sebi) has made it mandatory for all classes of investors to convert their shareholding in listed companies into demat format by December this year. The Listing Obligation and Disclosure Requirement was notified on June 8, 2018 by Sebi proclaiming that any requests for the transfer of stocks shall not be processed unless the securities are held in the demat format. The government is wisely focusing on travelling to digitisation of Indian currency transactions; and demat happens to be a part and parcel of it.
It is reported that even after two decades of introduction of demat in India, it is estimated that out of about 21 billion shares in about 4,000 listed companies, 5 per cent continue to be in paper format. In other words, shares worth around Rs 2.3 lakh crore are still in paper format.
The reason why such a large number of investors have not yet joined the bandwagon is not difficult to fathom. They have not understood the advantage of demat and are afraid to hold the investment in a format which is invisible to them. This piece is addressed to such persons.
Investors in stocks were saddled with outdated systems and procedures dealing with transactions in stocks. Bad deliveries, objections, loss, theft or mutilation of share certificates, not to speak of forgery were only some of the traumas that an investor had to face in his treacherous journey through the stock market. Transfer of shares simply took ages. Destruction due to fire, floods and cyclone meant financial disaster for shareholders. We are told that some unscrupulous elements in the delivery chain have become millionaires by laying their hands on shares as well as dividends in transit.
The most ironic thing in this entire scenario is that there existed a solution — a panacea, which could put an end to all these problems in one fell swoop. Though most of the countries in the world over had successfully gone in for demat and reaped its benefits, yet India delayed its implementation.
Demat, in simple terms, means converting the physical securities in an electronic (invisible) form. These securities are held on behalf of the investors by an organisation called a depository. The National Securities Depository Ltd (NSDL) started its operations in October ’96 and the Central Depository Services (India) Ltd (CDSL) in July ’99 under the Depository Act, 1996.
Stock exchanges connected to the Depositories are NSE, BSE, OTCE, Ahmedabad, Kolkata, Delhi, Ludhiana, Bangalore, Madras and the recently established Interconnected Stock Exchange.
A Depository interfaces with its investors through its agents called the Depository Participants (DPs). The DP maintains his account and intimates its position to him periodically. Shares, scrips, stocks, bonds debentures, debenture stock or other marketable securities of similar nature of any incorporated company or body corporate including underlying shares of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securitised debt, money market instruments and unlisted securities can be dematerialised.
To draw an analogy, a depository is just like a bank head office and a DP is like its branch. Taking the analogy further, when you say that you have Rs 5 lakh in a bank account, what you actually mean is that your account has Rs 5 lakh as evinced by your passbook. Similarly, DP issues an account statement periodically reflecting your holding along with any purchases or sales effected by you.
A depository is not merely a custodian, but is in fact also the registered owner of the share or security and it is the depository whose name is entered in the register of the issuing company. The investor becomes the beneficial owner, whose name is recorded in the books of the depository. In other words, Depository is like a bank for your shares. The only difference is that the bank uses your money to earn its income, a part of which is passed on to you by way of interest whereas a DP merely maintains account of your securities against a small fee charged to you.
When you open an account, the DP supplies you with a debit instruction booklet (= cheque book). In place of signing the transfer deed and delivering the physical share certificates to your broker, you will issue debit instructions to the DP via your broker.
When you purchase shares, you pay cash to your broker and get credit of the shares (=delivery of shares with transfer deeds) in your DP account and vice versa. Benefits like dividends, rights, bonuses, etc., are disbursed on the basis of inputs from the company.
The benefits of participation in a depository
Immediate transfer of securities; no need to fill up transfer deeds and lodging shares with the company
No heavy stamp duty on transfer of securities.
Elimination of bad delivery, fake securities, theft, mutilation, fire and floods, loss in transit, etc.
Reduction in paperwork and consequential transaction costs.
Changes in nomination, address, etc., across the board.
Convenient method of consolidation of folios/accounts.
Holding investments in all securities in a single account.
Automatic credit into demat account arising out of all the corporate actions such as payment of dividends, bonus, split or consolidation or merger, buy back etc.
Next time we shall deal with some more nitty-gritties of the demat regime.