personal finance

Physical shares will become illiquid after March 31: Here's how to demat them


If you are someone who owns listed physical shares, you won’t be able to transfer them after March 31 without first dematerialising them. After March 31, listed companies’ physical shares will need to be ‘dematerialised’ to be sold or transferred. Consequently, after March 31, unless dematerialised, these shares would become technically ‘illiquid’.

The capital markets regulator had extended the previous deadline of December 5, 2018 for transfer of listed shares in physical. In a December 3 press release regarding the extension of the deadline, the Securities and Exchange Board of India (Sebi) stated that it had “received representations from shareholders for extension of the date of compliance.”

The reason for this may be the fact that a lot of people still own equity shares in physical form, especially senior citizens. As on December 31, 2018, almost 4 percent of the total number of shares of the 30 Sensex companies were still held in physical form. That is 418 crore shares still in non-demat form. When
ET Online did the story in November last year, there were a total of 423 crore shares held in physical form among the 30 companies that constitute the Sensex. Then, too, there wasn’t a single company in the benchmark index where all shares are dematerialised.

Sample this: a company like ITC has 375 crore shares in physical form in total, which is a whopping 30 percent of its total equity shares. Others are better off, Bajaj Auto l has 6.18 percent in physical form, Tata Steel has 1.9 percent, and HUL 1.7 percent. Coal India has the least number of non-dematerialised shares (5289 shares that is 0.000085 percent). And a slightly far away second is Power Grid with 41,973 shares held physically, which is 0.000802 percent.

Now, since data on shareholding pattern is released when companies announce their quarterly results, we can only tell after March 31, 2019, (end of the Jan-Mar quarter) to see if investors have indeed dematerialised all their shares.

So, if you are someone who hasn’t dematerialised their physical shares here is a look at what will happen to those shares and how you can dematerialise the shares before the March 31 deadline.

Why are there so many physical shares?

On June 8, 2018, Sebi notified the amended Listing Obligations and Disclosure Requirements regulations saying that except in the case of transmission or transposition of securities, listed companies will not be allowed to process requests for the transfer of shares shall not be processed unless the securities are held in the dematerialised form with a depository.

Most of these shares have been purchased decades ago before the Depository Act was passed and since the investors intended to hold them long-term, they did not see any reason to pay for a demat account.

These are some of the reasons why people still have physical shares.

  • These are legacy shares held by many families, where certificates have been inherited from forefathers.
  • Investors who have changed their names.
  • Investors who have moved abroad and become NRIs.
  • Joint holders and combinations created for IPO subscription now difficult to bring back together.
  • Joint holders who are no more, with no nomination or documents needed to claim the shares.

What will happen to these shares after March 31?
According to Sebi, no transaction for transfer of securities of a listed company, at a stock exchange or an off-market transactions between buyers and sellers, can happen in physical certificate form. So, all shares held in physical after March 31 will become illiquid except for transmission and transposition. Transmission (transfer to heirs in case of death of owner) would be possible in case of inheritance but the new owners will have to dematerialise the shares if they wish to sell or further transact in them.

How to convert to demat?
The first step is to open a demat account if you do not already have one. The demat account will have to be opened in the names of all the holders of the shares in case of shares which are held jointly and the order of holding (first and second) in the demat account will have to be the same as that of the shares. For opening of a demat account all the KYC verification procedures will have to be completed for all holders, incorporating the 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 the physical shares, along with all the required documents. Normally, separate demat forms need to be filled in for shares of different companies.

“If the company whose shares are being held has not joined a 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,” wrote Uma Shashikant, chairperson of the Centre for Investment Education and Learning, in a recent column.

Opening a demat account
Demat accounts can be opened with any depository participant (DP) in India. A DP is a financial services firm that ties up with a depository and becomes a participant. Shares dematerialised with a particular DP are held in demat account of the client and allotted unique Client IDs.

The securities in the demat account are held by the depositary participant (DP) with any one of two depositories in India. There are two Depositories – National Securities Depository Ltd (NSDL) and the Central Depository Services India Ltd (CDSL). The Depository where your shares will be held in demat form will depend on which one your financial services firm has tied up with. The address of your demat account therefore would include the client ID and the DP-ID after that.

Some of the DPs operating in India include Stock Holding Corporation of India Ltd, HDFC Bank, ICICI Bank etc.

Charges: As with any financial service, the fees and transaction charges play an important role while selecting a DP. In addition to the account opening fees (which the DP some times waive off) and the annual maintenance fee, , the transaction charges are important. So, base your decision on whether you are going to trade very often or buy and stay invested for a longer duration. (As a retail investor, it is advisable to invest rather than to trade.) DPs have various kinds of pricing plans on offer for demat accounts. For example, it can be 0.50 percent or minimum of Rs 25, on both buy and sell transaction values.





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