In what will be a major capital market reform, the Securities and Exchange Board of India (SEBI) is planning to come out with a step mandating shares to be compulsorily held in the dematerialized, or electronic, form, Business Standard reported today quoting sources.
The move, which is expected to be rolled out by the end of the financial year, will affect about 21 billion shares worth about Rs 2.3 lakh crore in about 4,000 companies, the newspaper said.
Demat as a concept was introduced in 1996 and did away with the need for keeping and maintaining physical certificates of shares held in companies by having the shares transferred to depositaries that were set up under the Depositary Act.
The move was quickly adapted by Indian investors – currently about 99.9 percent of trading on both BSE and NSE is done in electronic shares – as they found relief from the old system that was riddled with problems such as delayed postal deliveries of shares, inability to sell due to mismatched or forged signatures, the certificates suffering physical damage and so on.
Shares in the A and B group of exchanges now compulsorily trade in demat form though exchanges provide an additional trading window for small investors (up to 500 shares), which gives a one-time facility to sell physical shares that are in compulsory demat list. The buyer of these shares has to demat such shares before further selling.
But even then, many investors have held on to physical shares, either out of disinterest in taking active participation in capital markets, because the physical shares have suffered damage -- and as a result difficult to liquidate – or because they have trouble inheriting shares held in ancestors' names.
For instance, as many as nearly 257 crore shares in tobacco-to-soaps firm ITC (amounting to a total value of about Rs 89,000 crore), or nearly one-third its total float of 793 crore shares are held in physical form. A part of this is likely held by the government, which owns 11.3 percent in the company through the SUUTI and various state-run insurers.
Currently, SEBI has made it compulsory for investors to hold shares in demat form though the move to make it mandatory for non-promoter investors has been put off in the past.
Even as the move would mark the move towards digitization of records and bring down inefficiencies, cases of fraud and troubles faced by investors, it remains to be seen the SEBI will tackle cases of missing records or in cases of disputed inheritances.
At the same time, it will also mean higher costs for investors, who will have to pay more by way of annual depository and other charges even if a depositary-participant account for holding demat shares is not active or does not have any holdings.
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