Monday, September 10, 2018

Open a demat account if you don’t have one Paper shares to be rendered illiquid after December 5

Open a demat account if you don’t have one
Paper shares to be rendered illiquid after December 5

Not too many years ago, stock broking in India was a family business. While those who were good in maths handled the numbers, the families also had a laggard who ended up working as the “Patavat boy.” An extremely responsible position, one had to carry bundles of share certificates to the stock exchange, sit on the floor, and hand over physical share certificates as settlement.

This was how things worked before 1996 when NSDL was set up as the first depository for dematerialised shares. Those were risky times. Someone who bought shares on the stock exchange paid good money as settlement, but could end up with bad delivery of shares. There were too many instances of fraud and manipulation. The idea of converting the equity shares into book entries and doing away with physical certificates was doing rounds. However, it took the scam of 1992 and the opening up of the markets to foreign investors to bring about the much-needed reform to replace physical shares with electronic entries.


In a diverse country like ours, it is tough to introduce legislation that mandates how private citizens hold their assets. So, the law did not preclude investors from holding shares in physical form, while also allowing investors to remat, or reconvert electronic entries into physical shares. However, they cannot transfer or sell such shares on the stock exchange, where the rules of settlement require an electronic transfer of securities. An initial list of highly traded stocks was mandated for demat settlement only, and slowly expanded to include most actively traded stocks. Soon enough, unscrupulous operators began applying for IPOs by opening multiple demat accounts in the names of retail investors. This scam was unearthed and plugged. However, there continues to be instances of fraud and manipulation, especially of physical shares, where the trail of transactions are difficult to trace. While many investors chose to convert to demat, many decided to stay put with physical shares.

Sebi has now mandated that after 5 December 2018, no transaction for transfer of securities of a listed company can happen in physical form. This renders all paper shares held after 5 December 2018 illiquid. New owners will have to convert them to demat if they wish to sell or further transact these shares. This is an opportunity to clean up the paper and unlock their value. Investors can now consolidate the paperwork when they request for dematerialisation, in a twostep process. The first step is to open a demat account if they already do not have one. At this stage, all the KYC verification procedures of the investors will be completed. The second step is to complete the Dematerialisation Request Form (DRF) for each of the physical shares, along with all the required documents. If the company whose shares are being held has not joined the depository, and therefore does not have a unique number (ISIN), such shares cannot be dematerialised. Except these, all other physical shares can be converted into electronic entries.

While many conversations go back to the past and delve in nostalgia. Such indulgence sometimes miss the marvels of mindful progress like the dematerialisation that made stock transactions fair, efficient and qualitatively better.

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