SEBI Issues Norms to Demat Re-Lodged Shares

Following a re-lodged transfer request, the Securities and Exchange Board of India (SEBI) established an operational guideline framework for the crediting of physical shares to demat accounts. In this article, we explain these guidelines in an elaborate manner to save our readers from the trouble of having to view several other articles to understand this change. We also provide you with a timeline on what rule got released when and how it has impacted extant regulations.

Before understanding this timeline and the newly issued regulations for demat accounts, it is important to understand what exactly SEBI is and why their circulars matter. Formed in April 1992, SEBI is a statutory regulatory body in India. Their main duties involve regulating Indian capital and the securities market. This regulation must be monitored on a regular basis as well and must also protect the interests of investors. In simple words, SEBI is in charge of the prevention of malpractices in the capital markets in India while simultaneously ensuring that the rights and interests of investors are safeguarded.

It is also important to understand what a demat account is before reading and understanding the changes in regulations pertaining to it. A demat account is an account that is accountable for holding securities and shares in an electronic format. Demat is a short term for ‘dematerialisation’ of shares. Dematerialisation refers to the process of the conversion of physical shares to electronic shares. This process is imperative to make the trading of shares much easier for investors in India. It also adds to the safety of these trading practices as electronic documents improve tracking regulations. To own demat shares or dematerialised shares, it is important to have a depository participant (DP). A DP acts as a medium between an investor and an individual’s account. This agent can be a bank, financial institution or a certified individual from the SEBI. Some individuals link their demat account and savings account for the ease in the transfer of funds from one account to another.

A SEBI circular dated September 7, 2020 stated explicitly that March 31, 2021 is a fixed date for the re-lodgement of transfer requests. Any shares that get transferred will be in a demat form.

A SEBI circular dated December 2, 2020 specifies the operational guidelines for crediting transferred shares into an investor’s demat account.

– As stated clearly in a circular published by SEBI, the processing of a re-lodged transfer requests will be followed up by the registrar and share transfer agent (RTA) retaining physical shares and intimating the investor about the execution of the transfer via a letter of confirmation.

– Within 90 days of the issue of this confirmation letter, a demat request is required to be submitted to the DP. A reminder must also be sent out to an investor from the RTA by the end of the 60 days since the issuance of this confirmation letter. This letter forms an important part of this circular. It is specifically also stated that the letter will be sent through registered or speed postal services. An email can also be sent accompanied by a digitally signed letter and must contain information on the shares, endorsement and folio of the investor.

– Based on the details on this letter of confirmation, the DP will decide whether they should process the demat request.

– In a situation where there is no sent out demat request from the investor by the end of 90 days since the issuance of the letter of confirmation, the shares will be credited to the suspense escrow demat account of the company.

A SEBI circular dated November 6, 2018 stipulated certain norms for the transfer of shares in a physical format. According to this circular, in case the shares have a specified lock-in period, the RTA will intimate the depository about the lock-in and its duration while reviewing the demat request and confirming it. These shares that are aided by stringent lock-in periods will be locked in a demat format for six months from the date of the registration of transfer.

It is important to understand that it is necessary for depositories to:

– bring a notice of the provisions of the circular to their participants’ awareness and publish or announce the same on a website for the participants to read as well.

– make imperative amendments to the rules, regulations and bye-laws (if necessary) following the implementation of the above-mentioned directions.

March 31, 2021 marks the cut-off date for the re-lodgement of share transfer requests. Holding securities that have been transferred in a physical form has been discouraged and has been discontinued on April 1, 2019. No rule states, however, that investors cannot hold shares in a physical form. SEBI clarified that those transfer deeds that got sent out before the April 1, 2019 deadline and got returned or rejected due to any deficiency in the documents can be re-lodged with the necessary documents to strengthen the deed. This rule was published in March 2019.

The constant monitoring of the capital market in India by SEBI has led to constant improvements over the past few years with regards to demat accounts and their roles. This published guideline on the crediting of physical shares to the demat account is important as it strengthens the safety net based on which investors trade their shares. It also makes it easier for the government to track certain financial instruments in case of any misconduct. Eliminating any potential loopholes in the system, the SEBI has also specified the exact dates within which certain actions must be completed. The 90 day and 60 day rules must be followed or it could paint a dire image of the investor to the regulating board in India. To iterate it once more, within 90 days from the issuance of the confirmation letter, a demat request must be sent to the DP, and within 60 days from the issuance of the confirmation letter, a reminder notice must be sent to the investor. Both these rules are very important and not abiding by it can be detrimental to the investor.