Sebi proposes activity-based rules, single category for RTAs

Sebi on Thursday proposed introducing activity-based regulation for Registrars and Transfer Agents (RTAs), whereby services provided to listed companies would fall within its regulatory ambit and those for unlisted firms would be overseen by the Ministry of Corporate Affairs (MCA).

RTAs that cater to both listed and unlisted entities will be required to establish a Separate Business Unit (SBU) exclusively for unlisted services. These SBUs should be set up within 18 months from the date of implementation, Sebi said in its consultation paper.

Also, RTAs are required to ensure complete operational separation between the listed and unlisted businesses.

"While registrations shall continue to be granted by Sebi, services provided by RTAs to unlisted companies will be overseen by the MCA. The MCA will handle investor complaints pertaining to unlisted securities," the regulator said.

 

Additionally, Sebi has also proposed merging the two existing categories -- Registrar to an Issue (RTI) and Share Transfer Agent (STA) -- into a single category called 'Registrar & Transfer Agent' with a common, updated definition. A uniform net worth requirement of Rs 50 lakh has been suggested for all RTAs.

Currently, Category I RTAs perform both RTI and STA functions, while Category II handles either. This classification is now seen as outdated, given the near-complete phase-out of physical share transfers.

To prevent frauds, Sebi has proposed an internal control and fraud prevention system within RTAs. This would include CEO/MD accountability, audit committee oversight, surveillance systems for fraud detection, a whistleblower policy with protection for complainants, and KYC-based monitoring of investor identity.

Currently, there is no formal system within RTAs to detect or prevent fraud, and physical shareholding, though limited, still carries fraud risk.

The regulator has also proposed to include securities premium in the net worth calculation for RTAs, aligning with net worth definitions in the Companies Act, 2013.

Currently, only free reserves available for dividends are considered, while securities premium, though previously included under the Companies Act, 1956, is excluded under the existing rules.

As per available data, Sebi-registered RTAs are currently providing services to around 35,000 unlisted companies, whereas they serve only about 4,000 listed companies.

Moreover, Sebi's jurisdiction is limited to securities that are listed or proposed to be listed on a recognized stock exchange, it does not have the authority to oversee RTA activities related to unlisted companies.

RTAs handle back-end operations for companies during IPOs and other share-related activities. Its role includes issuing allotment letters and certificates, managing investor records, and handling share transfers and redemptions.

They act on behalf of companies-- that is, there exists a Principal-Agent relationship-- but companies remain responsible for compliance under the Companies Act, 2013.

With dematerialization of shares becoming the norm, with less than 1 per cent of shares still in physical form, the RTA's role has notably shrunk, especially in the area of share transfers, Sebi noted.

The Securities and Exchange Board of India (Sebi) has sought public comments till August 28 on the proposals.