Disclosures By Securities Holders And Transfer of Securities Compulsorily In Dematerialized Form – Why Did The Need Arise? By CS G.Sriram | Partner at Mamta Binani & Associates


Introduction
 
The Investors invest in the Securities of the Listed Companies with an expectation that, they will receive a good return on their investments.
 
The investors get back their return on investments by way of dividend from the profits of the Company as well as bonus shares etc. These corporate action benefits are credited directly to the Demat Account of the respective shareholder if their shares are held in a demat form. But the shareholders who hold the shares in physical form do not receive those benefits immediately.
 
The Depositories Act was passed by the Parliament in the year, 1996 which facilitates the conversion of Physical Shares into electronic form or in a demat form.
 
Even after the advancement in the use of technology in maintaining securities in demat form 2.3 per cent of India’s $2-trillionplus market capitalization is held in the Physical Form.
 
Number of Listed Companies in India
 
There are about 7000 listed Companies in India. Out of these, 5000 Companies are listed in Bombay Stock Exchange and 2000 Companies listed in National Stock Exchange approximately.
 
Retail investors own stocks worth Rs 1.24 lakh crore in physical form, while mutual funds hold Rs 45,760 crore worth of paper stock.
 
Number of Depositories in India
 
There are two depositories registered with Securities and Exchange Board of India at present.
 
  1. National Securities Depository Limited (NSDL) and,
  2. Central Depository Service (India) Limited (CDSL)
 
Notifications by the Ministry of Corporate Affairs:-
 
Considering the importance of dematerialization of shares and Investor Protection the Government of India, Ministry of Corporate Affairs and the Capital Market Regulator SEBI has taken a lot of measures over the years to promote the use of dematerialized shares over physical holdings.
 
In the year 2011, the Ministry of Corporate Affairs issued a Draft Rules as Companies (Dematerialization of Certificates), 2011[1] for mandating the Public Companies and its subsidiaries which have raised money by issue of shares, debentures, by accepting public deposits, stock, bond or any other financial instruments from public, other than from directors of the company, to issue and keep such share certificates, debenture certificates and certificates issued for receipt of deposits, stock, bond or any other financial instruments in dematerialized form only and in the manner prescribed in the Depositories Act, 1996 and regulations made thereunder.
 
But the Draft Companies (Dematerialization of Certificates) Rules, 2011[2] were withdrawn by the Ministry of Corporate Affairs on the 28th of October 2011.
 
Reasons for Withdrawal of Draft Companies (Dematerialization of Certificates) Rules, 2011 by Ministry of Corporate Affairs
 
The Ministry of Corporate affairs has withdrawn the Draft Companies (Dematerialization of Certificates) Rules, 2011 because the similar proposal was included in clause 29 of the Companies Bill 2011[3] then.


Shell Companies
 
Earlier in the month of September 2017, the Ministry had struck off 200,000 Companies that were suspected to be shell companies and directed banks to restrict the operation of bank accounts of such companies by the directors of such companies or their authorized representatives.
 
Shell Companies, though not defined under the Companies Act, are those that adhere to basic company laws and are used to avoid taxes and convert black money into white.
Shell Company is a corporate entity without active business operations or significant assets. They are often created to avoid taxes and many big companies create shell corporations to avoid taxes without attracting legal actions.
But many shell companies park black money, carry out illegal transactions and sometimes act as facilitators of money laundering. Often, shell companies remain untraceable and happen to be the vehicle of choice for money launderers, bribe givers and takers, tax evaders and financiers of terrorism.
 
Usually, these Shell Companies don't file the Income returns or Roc Returns in a proper and timely manner. Many shell companies are manipulating the Accounting transactions before filing their Returns
 
According to the News Paper report, one shell company has been found to have as many as 2,100 bank accounts and there are about 50 companies which had multiple banks accounts ranging around 450, 600, 900 and 2,100 etc.[4]
 
Most of the Benami holdings are held in these shell Companies. It is very difficult to find the real ownership of the Shares and the shareholders are untraceable and there is no transparency in the shareholdings of the Company.
 
Benami
 
The term “Benami” is derived from the Persian language. “Benami” means property without a name. Benami property or assets is a reference to a property or assets whose actual owner is not the person in whose name is the particular asset is registered.
 
 
Instances of Fraud in the Capital Market
 
Parsoli Corporation Limited case:-
 
In this case, the Securities Appellate Tribunal debarred the Company and its promoters from accessing the securities market directly or indirectly for a period of seven years for fraudulently transferring the shares of the shareholders who held their shares in physical form, by forging their signatures and also on the basis of forged/duplicate share certificates.[5]

Recently, there was another instance of fraud done by the share transfer agent with respect to unclaimed dividends.
 
According to the News Paper report, last year Sharepro Services, a share transfer agent, was alleged to have defrauded several companies. The Unclaimed dividends worth crores of rupees were illegally withdrawn by a few Sharepro employees. Instead of crediting or sending dividends to their rightful owners, Sharepro executives conned the banks into transferring the dividends into other accounts held by them.[6]
 
How this Fraud had taken place:-
 
The Companies are required to publish a list of people whose dividends are unclaimed. The fraudsters use this data and mostly target those accounts in which the dividend is unclaimed for several years.
 
Once they get information about unclaimed securities, mostly of a deceased holder, they use fraudulent methods to make forged documents, such as a voter ID or PAN card in the name of the deceased holder. With this ID proof, they open a bank and demat accounts.
 
These kinds of frauds are taking place because the shares are held in the physical form. If the shares are held in a demat form then the benefits from corporate actions such as Dividends, share warrants, Issue of Bonus shares will be credited directly into the demat account. There will be fewer chances for fraud.
 
Steps taken by The Government of India to curb tax evasion, Black Money, Money Laundering and Securities Market Related Frauds
 
The Government of India, Ministry of Corporate Affairs, SEBI, and Ministry of Finance has taken a lot of steps to curb tax evasion, Black Money and Money Laundering.
 
1. Companies (Significant Beneficial Owners ) Rules, 2018
 
To identify the real owner of a corporate entity, the Ministry of corporate affairs has notified rules on ‘beneficial owners’.
Section 90 of the Companies Act 2013 which deals with Investigation of Beneficial Ownership of shares which was amended in the year 2017 and the corresponding rules relating to this section was issued by MCA on 13th of June 2018[7]:-
 
According to these Rules, an entity or an individual holding not less than 10 per cent stake in a company, either alone or with persons acting in concert, will be considered as significant beneficial owner. They have to file a declaration in Form BEN-1 to the Company within 90 days from the date of commencement of this rules and within 30 days from the date of changes in their beneficial ownership and the Company has to file that declaration to the Registrar in form BEN-2 within 30 days of receipt of such declaration from the significant Beneficial Owner.
 
The Company has to maintain the register of such significant beneficial owners in form BEN-3.
 
If any person fails to make a declaration as required under this section 90, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.
 
If a company fails to maintain register under this section 90 then the company and every officer of the company who is in default shall be punishable with fine which shall not be less than ten lakh rupees but which may extend to fifty lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.
 
If any person wilfully furnishes any false or incorrect information or suppresses any material information of which he is aware in the declaration made under this section, he shall be liable to action under section 447 which deals with punishment for committal of fraud.
 
Benami Transactions (Prohibition) Amendment Act, 2016
 
The Benami Transactions (Prohibition) Amendment Act, 2016 which was passed in the Lok Sabha and Rajya Sabha on 27th of July, 2016 and the 2nd of August, 2016 respectively came into force with effect from the 1st of November, 2016.
The primary object of this Act is to curb benami transactions and confiscate Benami Properties. Under the 2016 Act, the scope of benami transaction has been widened, and the punishment and penalties have been made more stringent.
 
Benami Transactions Informants Reward Scheme, 2018
 
Benami Transactions Informants Reward Scheme, 2018 has been issued by the Income Tax Department with the objective of obtaining people's participation in the Income Tax Department's efforts to unearth black money and to reduce tax evasion.[8]
 
Under the Benami Transactions Informants Reward Scheme, 2018, a person can get reward up to Rs. one crore for giving specific information in prescribed manner to the Joint or Additional Commissioners of Benami Prohibition Units (BPUs) in Investigation Directorates of Income Tax Department about benami transactions and properties as well as proceeds from such properties which are actionable under Benami Property Transactions Act, 1988, as amended by Benami Transactions (Prohibition) Amendment Act, 2016.
 
With regard to information shared with the I-T authorities on any undisclosed black money held overseas under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, the informer will be rewarded up to Rs. 5 crores.
Under this Scheme, a person can get the reward for giving specific information in the prescribed manner about substantial tax evasion on income and assets abroad which are actionable under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
 
SEBI Circular Strengthening the Guidelines and Raising Industry standards for RTA, Issuer Companies and Banker to an Issue)
 
On the 20th of April, 2018 SEBI had sent a circular to all Issuer Companies, RTA ordering them to seek the PAN and bank details of the Securities holders holding securities in physical mode.[9]
 
Purpose of this circular
 
  1. To keep a check on the wrong payment or return of dividend, interest, warrants etc.
  1. To eliminate fraud and manipulation in payment of dividend, warrant, interest etc. to holders holding securities in physical form.
  1. To restrain benami transaction.
2. What is the duty of the Registrar and Share Transfer agent after the issue of this circular by SEBI?
 
The Registrar and share Transfer agent will send the letter through registered post/speed post within 90 days from the date of this circular to the Securities holders of the issuer Companies holding securities in physical mode seeking the copy of Pan Card, original cancelled cheque leaf /attested bank passbook showing the name of the account holder.
 
3. What is the duty of the Securities holders holding securities in physical mode after receipt of the letter from RTA?
 
The Securities holders holding securities in physical mode should send a copy of PAN card, original cancelled cheque leaf /attested bank passbook showing the name of the account holder to the RTA within 21 days from the receipt of the letter from the RTA.
 
4. What if, the securities holder is not replied for the RTA within 21 days?
 
The RTA will send another two reminders with a gap of 30 days between the two reminder letters and all the 3 letters will have 21 days’ notice period to provide the details.
 
5. What if the securities holder did not reply for the RTA within 180 days from the date of the Circular?
 
Securities holders who are unable to respond to RTA call and provide PAN and bank details within 180 days of the circular or have informed that the securities available in their name as per the records of RTA does not belong to them, shall be subject to enhanced due diligence by Issuer Company.
 
SECURITIES AND EXCHANGE BOARD OF INDIA (LODR) FOURTH AMENDMENT REGULATIONS 2018
 
The depositories, trading members and brokerage houses had requested SEBI to make the holding of shares compulsory only in the demat form to eliminate frauds.
 
On 8th June 2018, SEBI has notified vide Notification No. SEBI/LAD-NRO/GN/2018/24 by issuing SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) (FOURTH AMENDMENT) REGULATIONS, 2018 that except in case of transmission or transposition of securities, requests for effecting the transfer of securities shall not be processed unless the securities are held in the dematerialized form with a depository.[10]
 
To bring in further alignment, SEBI has also amended Regulation 40 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) which deals with transfer or transmission or transposition of securities.
 
According to this amendment, the requests for share transfer of listed securities shall not be processed unless the securities are held in the dematerialized form with a depository.
 
 
Purpose of this amendment
 
  1. To prevent the fraudulent transfer of securities and for ensuring more transparency in the share transfer as well as shareholdings.
  1. Quick transfer of securities improves convenience and safety of transactions for investors.
  1. To ensure that, the listed companies shares are traded in the demat mode only and the benefits from the Corporate Actions like dividend and Bonus shares is reached to the shareholders directly.
  1. Eliminating fraud and manipulation in physical transfer of securities
 
Date on which this amendment will come into effect:-
 
These regulations shall come into force on the one hundred and eightieth day from the date of its publication in the Official Gazette. i.e. after the 5th of December 2018.
 
To whom this Notification is applicable:-
 
This Notification is applicable only to the Listed Companies.
 
Impact of this Amendment:-
 
There will not be any transfer of physical shares after 5th December 2018.
 
Whether the shareholder can sell his shares held in physical form now?
 
Yes, the shareholder can sell his shares held in physical form until December 5th, 2018.
 
Whether the shareholder can hold the shares in Physical form?
 
Yes, the holder can continue to hold his shares in the physical form but he cannot transfer the same in physical form. The Shareholder has to mandatorily convert his shares into demat form to sell or transfer his shares after the 5th of December 2018.
 
Conclusion
 
Dematerialization of shares provides numerous benefits to the shareholders, some of which are:-
 
1. The risks pertaining to physical certificates like loss, theft, forgery and damage are eliminated completely with a DEMAT account.
 
2. The lack of paperwork enables quicker transactions and higher efficiency in trading.
 
3. Trading has become more convenient as one can trade through computers at any location, without the need of visiting a broker.
 
4. The shares that are created through mergers and consolidation of companies are credited automatically in the DEMAT account.

5. As all the transactions occur through the depository participant, a trader does not need to communicate individually with each and every company.
 
6. There is no need for stamp duty for transfer of securities; this brings down the cost of transaction significantly.
 
7. One can also choose to take a loan against securities which are held in a DEMAT account by offering it as a collateral to the lender.
 
A DEMAT account holder can buy or sell any amount of shares. However, there is limit on the number of transactions done using physical securities.
 
Therefore, considering the above facts the holders of Physical Share Certificates should come forward to dematerialize their Physical Shares to protect themselves from Securities Market Related fraud.
 
 
For further such resources on various topics, please visit our website: http://mamtabinaniandassociates.com
 
Thank you
 

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