Not too many years ago, stock broking in India was predominantly a family business. While those who were good in maths handled the numbers, and those with attitude did the trading, the families also had a laggard who ended up working as the “Patavat boy.” This was an extremely responsible position, though the job itself was menial in its description. One had to carry bundles of share certificates to the stock exchange, sit down on the floor, verify the lists and hand over physical share certificate as settlement.
This was how things worked before 1996 when NSDL was set up as the first depository for dematerialised shares. Those were very risky times. Someone who bought shares on the stock exchange paid good money as settlement, but could end up with bad delivery of shares. Bad delivery was a long list—over 100 situations had been listed by then. Unscrupulous operators simply printed fake share certificates, or offered torn, patched up, or grievously altered pieces of paper in exchange of good money.
There were too many instances of fraud and manipulation, especially if there was an IPO that was popular. Investors would pay for their shares and get an allotment, but the share certificates that were dispatched to them would be stolen by a cartel working in collusion with various agencies, and sold off in the market place. The buyer would lodge the certificate for transfer in his name, and at that time it would be found that the signatures were forged, and that the seller was a fraud.
Meanwhile, the original buyer would be lodging complaints about not getting allotment of shares. It was a mess, to say the least.
The idea of converting equity shares into book entries and doing away with physical certificates was not new. Phiroze Jeejeebhoy, after whom the BSE Tower in Mumbai is named, had proposed a bank account type of facility for equity shares long ago. However, it took the scam of 1992 and the opening up of the markets to foreign investors to bring about the much-needed reform to replace physical shares with electronic entries.
In a country like ours, with its diversity and democracy, it is tough to introduce legislation that mandates how private citizens would hold their assets. If the problem was the risky and poor quality settlement on stock exchanges, and the unscrupulous practices of fraudsters accessing certificates, the law stipulated that such transactions will become electronic, once the depositories were established.
The law did not preclude investors from holding shares in physical form if they so desired. It also allows investors to remat, or reconvert electronic entries into physical shares if that is the mode they would want to hold it in. However, they cannot transfer or sell such shares on the stock exchange, where the rules of settlement require an electronic transfer of securities.
An initial list of highly traded stocks was mandated for demat settlement only, and slowly expanded to include most actively traded stocks. If one desires to sell or buy these shares on the stock exchange, one had to provide or accept securities in the demat form alone, as valid settlement. Companies joined the depository, enabled the creation of a unique identity number for their issued securities, and dematerialised into electronic entry all physical certificates that were surrendered to their registrars. New issues were made in demat mode.
Soon enough, unscrupulous operators began applying for IPOs by opening multiple demat accounts in the names of retail investors, who were “renting” their accounts for the purpose of getting an allotment in the retail investor quota. This scam was unearthed and plugged. However, there continues to be instances of fraud and manipulation, especially of physical shares, where the record of share transfers and the trail of transactions are difficult to trace.
While many investors chose to convert to demat, many decided to stay put with physical shares. These include legacy shares held by many families, where certificates have been inherited from forefathers; investors who have changed their names and addresses; investors who have moved abroad and become NRIs; joint holders and combinations created for IPO subscription now difficult to bring back together; and joint holders who are no more, with no nomination or paperwork to claim the shares.
Sebi has now mandated that after 5 December 2018, no transaction for transfer of securities of a listed company, at a stock exchange or as an off-market transactions between buyers and sellers, can happen in physical certificate form. Exceptions have been made for transmission (transfer of shares after the death of the original shareholder) and transposition (change in the order of joint holders of securities).
This renders all paper shares held after 5 December 2018 illiquid. It primarily prevents fraudulent acquisition and transfer of these securities. They can still be bequeathed, but the new owners will have to convert them to demat if they wish to sell or further transact in such shares. This is an opportunity to clean up the paper and unlock their value.
Investors can consolidate the paperwork when they make a request for dematerialisation, in a two-step process. The first step is to open a demat account if they already do not have one. At this stage, all the KYC verification procedures will be completed, incorporating the new name, contact details, address, email, bank account for electronic transfer of dividends and such details of the investors. The second step is to complete the Dematerialisation Request Form (DRF) for each of the physical shares, along with all the required documents.
If the company whose shares are being held has not joined the depository, and therefore does not have a unique number (ISIN), such shares cannot be dematerialised. Except these, all other physical shares can be converted into electronic entries, which make it easy to sell, pledge, transfer and otherwise easily transact with them.
Many conversations go back to the past and delve in nostalgia, and proclaim the lost pleasures of the good old days. Such indulgence sometimes misses the marvels of progress—especially mindful progress like dematerialisation that made stock transactions fair, efficient and qualitatively better. No shareholder will miss the days of patavat and physical delivery of shares. Do not let those paper shares of yore lie in the trunks and attics; utilise this mandate to demat them so you and your family can actually make use of the wealth locked in them.