Convert physical shares into demat at the earliest: All you need to know

Once Sebi's deadline of December 5 lapses, you will not be able to transfer or sell these securities

Financial planners say there are many clients who keep shares in physical form. These investors believe that having them in bank lockers insulates them from any fraud. They are wrong. There is a big chance that such shares may be duplicated, and fraudsters might claim dividends and other benefits that would have been theirs.

Against this backdrop, the Securities and Exchange Board of India's (Sebi’s) recent directive to shareholders that their share certificates should be converted into dematerialised (demat) form by December 5, 2018, comes at the right time. The regulator has also amended the Listing Obligations and Disclosure Requirement (LODR) regulations, which state that transfers of securities will not be processed unless they are held in demat form with a depository. In other words, investors holding shares in listed companies need to meet the December deadline, or else they will not be able to transfer or sell securities.

Keeping shares in physical form is a major problem. According to a recent Asian equity strategy report by Morgan Stanley, the market capitalisation of Indian equities was at $2.3 trillion in 2017. Around $40 billion is held via physical shares. Experts say this measure will affect senior citizens, especially because most of them still hold shares in physical form. 

Sebi’s step is mainly aimed at reducing fraudulent transfers. A recent investigation by the regulator showed several cases of agents fraudulently transferring shares from the accounts of deceased holders. These shares were in physical form and had not been claimed by the nominee or legal heir. “There have also been several cases where fraudsters have created forged documents to claim dividends that had remained unclaimed for years,” says Rachit Sharma of Taxmann. He adds this change should have been made much earlier. 

Dematerialising shares has many advantages. These shares can be transferred electronically, reducing transaction cost. “Dematerialisation allows for paperless trading where share transactions and transfers are processed electronically without involving any share certificate or transfer deed. Dematerialisation will save time and reduce transaction cost,” says Bharat Anand, partner, Khaitan and Co. Another advantage is that dematerialised share certificates cannot be stolen. 

 

The parties involved in dematerialisation include the issuer company, depository, depository participant, registrar and transfer agent, and shareholders. Depositories are institutions registered under Sebi to maintain accounts of shareholders’ securities (shares, debentures, and mutual funds) held by them in dematerialised form. At present National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) are registered with Sebi and act as depositories. They interface with shareholders through depository participants (DPs), with whom you need to open an account to deal in electronic form. By dematerialising share certificates, investors can also avoid the time-consuming and complex process of getting shares transferred in the buyer’s name.

In another recent circular, Sebi had also simplified the process of notifying name change on securities held in physical form. This move will simplify the procedure for change of name in the individual Beneficial Owner’s (BO’s) account. “Simplifying the name change procedure will make it convenient for investors to change their name in situations such as marriage, divorce or rectification of name,” says Sharma.

How to convert shares to demat

• Open a demat account with a depository such as NSDL or CDSL by filling a demat account form and submitting documents like PAN card and other identity proof
• Fill a demat request form and surrender the share certificates
• The depository will send an electronic request to the registrar and transfer agent (RTA), along with the physical shares
• The RTA will verify the physical shares and, if found in order, it will write “surrendered for demat” on them
• The RTA will approach the company. Once the register of members of the company has been amended, a confirmation will be sent to the depository
• Your demat account with the depository participant (DP) will be credited with the demat shares