What does ban on transfer of physical shares mean for investors?

On July 08th 2018, SEBI issued regulations pertaining to Mandatory Dematerialization for transfer of securities. Please note that these regulations only pertain to transfer of securities. The guidelines will be effective from December 05th 2018 post which all requests for transfer of shares will have to be in Demat format only. Currently, you are permitted to send physical certificates for transfer to the registrar and get new certificates issued in your name.

The dematerialization can be done after the transfer of physical certificates into your name. That will only be permitted till December 04th 2018, wherein an investor can transfer shares into her name in physical form purely on the basis of the Transfer Deed (TD). Effective 05th December, only demat transfer requests will be considered by the registrar. Physical requests will be rejected right away. That means; if you are holding physical certificates then it will not be possible to sell these shares, unless you first dematerialize these shares.

Here are 6 key implications of this announcement.

You can still hold shares in physical form

There is some confusion in this regards. Quite a few investors are worried that all their physical shares may become worthless after this announcement. That is hardly the case. You are still free to hold the shares in physical form. It is just that you cannot sell the shares or transfer the shares if they are in physical form. Currently, you can send a physical certificate with the Transfer Deed (TD) and the registrar will send you the fresh certificates with your name as the registered owner on the certificate itself. That will not be possible any longer after December 05th.

You cannot send physical shares for transfer to the registrar

This is the most logical corollary to the ban on transfer of physical shares. If you are having physical shares then you have to get them dematerialized and only then you can either sell these shares in the market or transfer these shares to another DP account. After December 05th if you send physical certificates to the registrar, they will be rejected and sent back to you as an invalid request.

You have to first get the physical shares dematerialized

In case you are holding physical shares there are two options in front of you. You can look to transfer it physically into your name before the 05th of December or you can open a demat account and get these shares dematerialized right away. In case you already have a demat account, you can dematerialize these shares into the same demat account. Just ensure that the name on the share certificate and the demat account match. In case of joint accounts, the order of names should also be the same. It is better you initiate the process right away because the process of dematerialization itself takes up to 1 month. Once the shares are dematerialized you are free to either transfer the shares or even sell the shares.

The limited physical shares window will eventually be wound up

As you are aware, there is currently, a limited physical market wherein you can sell up to 500 shares in physical form. This window may not be required once all transfers are made compulsory in demat form only. Once the compulsory demat transfer is introduced then this segment would be largely redundant and may be eventually wound up.

Emphasises the difference between transfer and transmission

One question that investors have about this announcement is what happens in case of transmission of shares. For example, what happens if your father is holding physical shares and they get transmitted to you by operation of law on his death? In case, you are already the nominee then the job is simpler but even in the absence of a nomination, you can use a copy of the registered will and the death certificate to claim these share certificates.

Please note that this rule will only apply to transfer of shares, which is a voluntary action. It will not apply to transmission of shares which happens by operation of law. You can still send the physical certificates to the registrar for transmission and get the fresh certificates issued in your name. The restrictions on physical transfers will not apply in this case. But once the shares are transmitted into your name in physical form, you will have to first get it dematerialized into your demat account and only then can you sell the shares. This is an exception with respect to transmission that you need to be aware of.

Will this rule also apply to unlisted shares of companies?

Another area of confusion is whether this rule will also apply to shares of unlisted companies that are not listed on a recognized stock exchange. To begin with, this rule for transfer will not apply to unlisted shares and will only apply to listed shares. However, with a view to making share owners also dematerialize their unlisted shares, it is planned to extend this rule to unlisted shares also. That will happen at a subsequent date.

=========================================

Sameet Chavan is the chief analyst – Technical & Derivatives at Angel Broking