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Mutual Funds - From physical shares to demat

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With Sebi making the transition to dematerialised form compulsory, it isnt going to be easy. Start now to avoid problems

"Dematerialising physical shares can be a horrible experience. It can take anywhere between three months to three years," warns Kartik Jhaveri, director, Transcend India. He should know. He is presently handling almost 15 such cases. Why should it take so long? "Companies and registrars keep on rejecting documents. The most common reason is signature mismatch. How can someone have the same signature in his 30s and 70s? Companies refuse to acknowledge that," he says.

Given such procedural delays, many investors would not like the market regulator, Securities and Exchange Board of Indias (Sebi) latest decision to make it mandatory for everyone to own shares in the non-physical format. While the concept was introduced in 1996, it has taken the market regulator almost 20 years to enforce it and, more important, set a deadline of this year-end for dematting the shares.

According to reports, the estimate for physical shares is Rs 2.3 lakh crore. Most of it would be held by retail investors, especially due to the emotional quotient and procedural roadblocks.


For instance, a financial planner says: "One of my clients has accumulated 200,000 shares of Hindustan Unilever over the years." He refuses to part with these because the first tranche of 200 shares were bought from his first salary. Forget selling; he doesnt want to even demat these. He has rented two lockers with a public sector bank and wrapped the shares in a red cloth (traditionally important documents, books of accounts and physical shares used to be wrapped in a red cloth for auspicious reasons). His sons, along with the financial planner, are afraid the physical shares might get destroyed. However, he refuses to budge.

Procedural blocks

Sentiments apart, there are many others who genuinely want to do it but face procedural delays. Jhaveri gives an example of a person who has inherited physical shares worth Rs 5 lakh. However, these were passed on to him by his father, who inherited these from his father. Both father and grandfather are no more. Now, the company is seeking a document which declares the investors dead father had the letter of administration. Only then can it be proved that the father could transfer the shares in his sons name. The question is, how does one get this letter?


* Submit the demat request form to a depository participant (DP) with signatures of all the shareholders
* Give an undertaking saying that demat is not a guarantee that the share can be traded, as it is dependent on liquidity

*To prevent misuse, DP will stamp the share certificates saying they cannot be sold

* The shares will be sent to the Registrar and Transfer Agent for verification of signature and shareholders name

* Sometimes, an affidavit may be required to provide details of name change

*  If the name of the company has changed, yet listed, a trail has to be established

* During a lock-in period like book closure, the demat process will happen only later

* Time: Between 30 and 60 days to convert physical share certificates into demat form if there are no complications

* The fees are Rs 11 per transaction

* In case of fully paid-up, demat is easier. If partly paid-up, only a percentage of the share can be demated

* If shares are stolen or misplaced, approach the company registrar directly. You will have to file a police complaint, place advertisements in at least two newspapers

G D Binani, a senior citizen from Bikaner, lost some share certificates while travelling to Mumbai. While some of the companies issued him duplicate shares on his giving an indemnity bond, the others insisted he file a police complaint and place advertisements in newspapers. It took time before he got the duplicate shares.

Binani has started converting his physical shares to demat. On why he continues to hold some in the physical format, he says: "These are shares I have purchased a long time ago and will sell only in case of an emergency. The dividends from these pay for my expenses. If I convert them, I will be tempted to sell when the markets go up. That is why I prefer to hold these in physical form." Given the procedural delays, many investors seek the help of brokers who specialise in this business. Says Jayant Pai, financial planner: "I get letters from brokers regularly asking me to sell them physical shares at a discount." But, these brokers might not buy shares of all companies. They prefer only the top companies. And, the discount can be hefty, even 25-30 per cent. Sometimes, such brokers can be fronting for companies which want to buy their own shares. "In such circumstances, the deal becomes easier for the seller because the discount might not be substantial," adds Pai.

Pai dematted his first tranche of shares in 1999. He says that the process is not supposed to be too complicated. One has to open a demat account, fill the request form with all the details and send it to the company. "However, some companies say the letter should be sent to the registrar and sometimes the registrar says it should be sent to the company. This mostly happens in case of mid-cap or small-cap companies with offices in smaller towns," adds another broker. Of course, if the company is no longer conducting any business, the physical shares are completely useless. Santanu Syam, head of operations, Angel Broking, says many of the physical shares are of shell companies or those gone out of business. Such companies dont update the list of shareholders with the Registrar and Transfer Agents (RTA) on a regular basis. Hence, the RTA may reject the application to demat such shares. "Every day, we send 15-20 forms to RTA for demat. But if the trading volumes are poor, the company might not pay fees to the RTA to maintain the shareholders records, he says.

Advantage demat

In the demat format, the biggest benefit is that even one share can be sold. In physical format, the document might represent five or 10 shares and in order to sell it, the entire lot has to be sold. Another big advantage of dematting is that the cost of a transaction goes down significantly. Also, when the company gives a bonus or goes for a rights issue, the allotted shares are immediately credited to the account of the investor. However, if your shares are in the physical format, bonus shares will only be given to you in the physical format. So, it will be sent to you by post. If you have shifted houses, you will have run around chasing the company.

In addition, there are other typical problems associated with physical shares, such as risk of damage due to fire or theft or forgery. Demat account holders also avoid stamp duty (as against the 0.5 per cent payable on physical shares) and filling of transfer deeds.

The biggest advantage of having a demat account is that you dont have to pay for stamping, since these are electronically stored, which reduces the transaction cost. Even for companies or a broker, the communication and transaction costs are significantly reduced.

Costs of demat

Opening of an account with most brokers does not cost anything. Most of them also do not charge any fees in the first year. However, from the second year onwards, there is an annual maintainence charge of Rs 250-600. Sebi has also introduced a no-frills account called a Basic Services Demat account, in which if the value of securities in an account is less than Rs 50,000, there is no annual maintenance charge (AMC) to that investor.

So, if he has a demat account with a holding of only Rs 20,000 in the form of stocks or any other investments, there will not be any AMC charged. If the value exceeds Rs 50,000 and goes up to Rs 200,000, the charges are capped at Rs 100 annually. Once the value of investments go above Rs 200,000, you have to pay the charges, levied by the Depositary Participant.

With the Union Budget indicating there will soon be a regime in which a single demat account will have all financial products, including insurance policies, investors who have to convert their shares should start the process.

Source : Team Cafemutual back