Demat Delay Worries Investors

Seven years after the formation of the depository system in India, many companies are yet to dematerialise their shares, giving sleepless ni...

Seven years after the formation of the depository system in India, many companies are yet to dematerialise their shares, giving sleepless nights to lakhs of shareholders. Though trading in shares is now allowed only in the demat form, shareholders of hundreds of companies are running from pillar to post to get the shares dematerialised.

The Securities and Exchange Board of India (Sebi) had recently warned 38 companies to speed up the delayed dematerialisation of their shares failing which appropriate action would be initiated against the issuer company and its directors. The Sebi warning follows innumerable investor complaints against the deliberate move by many companies to delay demat of their shares.

Under the Depositories Act, 1996, and the Sebi regulations the issuer company is under obligation to complete the process of dematerialisation once it is admitted into the depository system and is in receipt of the certificate of security from the investor. As per reports by India’s two depositories — Central Depository Services (India) Ltd and the National Securities Depository Ltd — some of the companies are deliberately delaying the dematerialisation of securities thereby hampering the elimination of physical paper and related problems in the Indian capital market.

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Sebi says delay in the dematerialisation will adversely affect the investors confidence. “It is detrimental to the investor confidence as it deprives them of liquidity and results in the loss of opportunities to sell,” said a merchant banker.

Some of the companies which are delaying dematerialisation of shares are: Arihant Industries Limited, Montari Industries Ltd, Arihant Cotysn Limited, Punjab Wireless Systems Limited, Inditalia Refcon Ltd, TPI India Ltd, Arihant Threads limited, Overseas Cables ltd, Manna Glass Tech Industries Ltd, Chicago Software Industries Ltd, D R Softech and Industries Ltd, Ices Software Ltd, Kunal Overseas Ltd, Real value Appliances Ltd, Lan Eseda Industries Ltd, DCL Finance Ltd, Malvika steel Ltd and Mayo Hospitals Ltd.

According to investors, some of the companies listed by the Sebi perpetually harass investors on one pretext or another. Some of them were suspended by stock exchanges for violation of listing norms. “Many of these companies raised money from the public but they don’t have any project,” said C. Rodrigues, a small investor.

In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork.

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If a company doesn’t dematerialise its shares, its shareholders won’t be able to sell their shares on the stock exchange. After the problems created by vanishing companies and delisting of stocks, demat defaults have become a nightmare for investors.

The menace of fake shares has also cropped up. Over 40 companies seem to have dematerialised shares in excess of their share capital, i.e., more than the actual number of shares issued. Though the Sebi has now plugged the loopholes which created fake demat shares, investor confidence has taken a beating. The regulator now needs to force companies to speed up dematerialisation to boost the investor morale.