Clearing members given one month extension to complete Interoperability
Clearing members have been given an extension of one month by the stock exchanges to complete the development and testing of the interoperability framework, laid down by the market regulator. The Securities Exchange Board of India had laid down the guidelines for an interoperable framework among Clearing Corporations on 27 November 2018. These guidelines were required to be adhered to and operationalized by stock exchanges and clearing members by 1 June 2019. However, the extension of one month has postponed the operation date of the interoperability framework to 1 July 2019.
 
Interoperability would reduce trading costs as it will allow trading members to choose a clearing member of their choice, than opt for the clearing owned by the bourses. As per the current practice, different stock exchanges have their own clearing houses to handle trade settlements on respective exchanges.
 
"Interoperability among CCPs necessitates linking of multiple clearing corporations. It allows market participants to consolidate their clearing and settlement functions at a single CCP, irrespective of the stock exchange on which the trade is executed," the Sebi circular said.
 
To promote transparency in the area of charges levied by the exchanges and CCPs, Sebi had said the transaction charges levied need to be clearly identified and made known to the participants upfront.
 
Addressing the delay in operationalising the guidelines, BSE and NSE stated in a public release, “while a large number of clearing members have updated their systems and processes necessary to implement interoperability, a few market participants have expressed that they are still in the process of developing and testing their systems and processes and need more time to move to the interoperable framework.”
 

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Can Physical Shares Be Offered For Buyback?
Buyback of shares is offered by the management of companies presumably with a view to maximise the value of the shareholders, reduction of surplus liquidity and similar considerations. One of the major objectives of regulations is to permit buyback for small shareholders and, therefore, even the SEBI (Securities and Exchange Board of India) Regulations mandate reservation of 15% of the number of securities, which the company proposes to buyback.
 
Many small shareholders continue to hold shares in physical form. Even though SEBI has, vide SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2018, strongly motivated demat of shares held in physical form by proscribing their transfer after 1 April 2019,  yet, it is a matter of common knowledge that many small shareholders, particularly those held by elderly persons, continue to be in physical form.
 
Can the offer for buyback be denied to such shareholders? Is buyback a case of transfer of shares to the company or simply a case of liquidation or redemption of the shares? There is a prevailing practice followed by several companies wherein the public announcement for buyback provides as under:
 
‘PROCEDURE TO BE FOLLOWED BY REGISTERED EQUITY SHAREHOLDERS HOLDING EQUITY SHARES IN THE PHYSICAL FORM
 
As per  the  proviso  to  Regulation  40(1)  of  the  SEBI  (LODR)  Regulations  (as  amended  by  the  Securities  and  Exchange Board of India (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations,  2018), effective from 1 April 2019, requests for effecting transfer of securities shall not be processed unless the securities are held in the dematerialized form with a depository.
 
In  this  buyback,  considering  the  timelines  of  activities  prescribed  under  the  Buyback  Regulations,  the  acceptance  of  tendered  shares  will  be  undertaken  after  1 April  2019. 
 
ACCORDINGLY,  THE  PUBLIC SHAREHOLDERS WHO ARE HOLDING EQUITY SHARES IN PHYSICAL FORM AND ARE DESIROUS OF TENDERING  THEIR  EQUITY  SHARES  IN  THE  BUYBACK  CAN  DO  SO  ONLY  AFTER  THE  EQUITY SHARES ARE DEMATERIALIZED. SUCH PUBLIC SHAREHOLDERS ARE ADVISED TO APPROACH ANY DEPOSITORY PARTICIPANT TO HAVE THEIR EQUITY SHARES DEMATERIALIZED.
 
National Stock Exchange (NSE) Circular
 
In continuation of the NSE’s circular NSE/CMTR/34242 dated 22 February 2017 pursuant to the SEBI circular nos. CFD/DCR2/CIR/P/2016/131 dated 9 December 2016 and CIR/CFD/POLICYCELL/1/2015 dated 13 April 2015 regarding the mechanism for acquisition of shares through stock exchange pursuant to tender—offers under takeovers, buy back and delisting, NSE on 9 May 2019 issued circular No. 51/2019. The circular provides that all orders under tender offer mechanism on the NSE platform shall be accepted in demat mode only.
 
This article analyses permissibility under the provisions of law in relation to buyback of shares held in physical form.
 
SEBI Press Release
 
Vide its press release No. 12/2019 dated 27 March 2019, SEBI clarified the following:
 
  • There is no prohibition on the investor from holding the shares in physical form; investor has the option of holding shares in the physical form even after 1 April 2019.
  • Any investor who is desirous of transferring shares (which are held in physical form) after 1 April 2019 can do so only after the shares are dematerialised.
  • The transfer deed(s), once lodged prior to the deadline and returned due to deficiency in the document, may be re-lodged for transfer even after the deadline of 1 April 2019.
 
There was no reference in the amendment notification or in the press release extending the restriction to corporate action, viz., buyback of securities.
 
Transfer of Securities
 
In the case of transfer of the securities, the transferor transfers the title in shares to the transferee with or without consideration. Transfer of securities held in physical form is governed by Section 56 of Companies Act, 2013.
 
The transfer is registered by the company if a proper instrument of transfer, in Form SH-8, duly stamped, dated and executed by or on behalf of the transferor and the transferee specifying the name, address and occupation, if any, of the transferee has been delivered to the company. The instrument should be delivered by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities.
 
In case of securities held in demat, the beneficial owner effects the transfer of securities by submitting a delivery instruction slip to the depository (registered owner). Such transfers are outside the purview of Section 56 of the Companies Act, 2013.
 
Buyback of Shares
 
In general terms, buyback is a procedure wherein the company makes an offer to its existing shareholders to purchase its shares at a specified price. 
 
In case of buyback of shares held in physical form, the company extinguishes the share certificate (destroys/ purges the physical share certificate) so bought back. Therefore, this cannot be regarded as transfer of securities as referred in Section 56 of Companies Act, 2013 or referred in Regulation 40 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
 
As per Para  (p) of SEBI Circular dated April 13, 2015 one of the disclosures required to be given in public announcement for buyback regulations is ‘Methodology for placement of orders, acceptances and settlement of shares held in dematerialised form and physical form’. Additionally, para (q) of the SEBI circular provides as under:
 
‘(q) Participation by Physical Shareholders With regard to the participation of shareholders holding physical shares, the procedure similar to the buyback for physical shares through the open market method of buyback as specified in regulation 15A of SEBI (Buyback of Securities) Regulations, 1998 shall apply.’  
 
Regulation 19 of SEBI (Buyback) Regulations, 2018 corresponds to Regulation 15A of SEBI (Buyback of Securities) Regulations, 1998 and provides as under:
 
‘19. A company may buy-back its shares or other specified securities in physical form in the open market through stock exchange by following the procedure as provided hereunder:
 
(i) A separate window shall be created by the stock exchange, which shall remain open during the period of buy-back, for buy-back of shares or other specified securities in physical form.
 
(ii) The company shall buy-back shares or other specified securities from eligible shareholders holding physical shares through the separate window specified in sub-regulation (i), only after verification of the identity proof and address proof by the broker.’
 
Conclusion
 
Despite permissible provisions under SEBI (Buy-back of Securities) Regulations, 2018 in relation to buy back of shares held in physical form and SEBI press release clarifying that there is no prohibition to hold shares in physical form, the NSE circular prohibits acceptance of orders under tender offer, unless held in demat mode. Listed entities are incorporating similar restrictions in the public announcement made by them.
 
The practice followed is not in line with the provisions of the law. Buyback of shares cannot be treated at par with transfer of securities as both operate under two different provisions under the Companies Act as well as are governed by separate SEBI regulations. There is an urgent need for SEBI to issue a clarification especially in the interest of shareholders holding shares in physical form.
 
(CS Vinita Nair is partner at Vinod Kothari & Co)
 
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COMMENTS

BR

4 weeks ago

RTA wants Affidavit on Stamp Paper that too signed by Notary Public & ALSO Banker's Attestation. RTA quotes SEBI. SEBI did not insist on both. It must allow ANYONE. All are costly. Bank charges fee & GST. Each RTA has a different way. Demat acct too is very difficult to open. Upto 3 names are allowed in each. A bank acct with the same 3 names in the same order is needed to attach to it. Yrly Maintenance Fee is very high. Only to keep shares without trading & earning profits , it is not worth. On earning profits or trading we must pay a charge.

ramchandran vishwanathan

1 month ago

the process of transfer of shares especially if the shareholder is deceased is very cumbersome . Moreover the share transfer agent does not have complete knowledge of the process which adds to the delays

REPLY

Arun Adalja

In Reply to ramchandran vishwanathan 4 weeks ago

i fully agree with you as RTA are creating problems and simple thing they do not understand.if signature is attested by bank manager why do they need cancelled cheque?every RTA has got its own rules sebi must look into the matter.

Ramesh Bajaj

1 month ago

This has become very important and most necessary. There should be full clarity about shares held in physical form.

SAT grants interim stay on NSE's disgorgement order
The Securities Appellate Tribunal (SAT) has been granted a stay on SEBI orders in the co-location issue specifically pertaining to disgorgement order.
 
"The direction in impunged order relating to disgorgement by the NSE shall remain stayed during pendency of the appeal. The matter would be listed for admission and final disposal on July 22, 2019," the order read.
 
Accordingly, NSE has to transfer Rs 624.89 crore and Rs 62.58 crore into SEBI account by the way of deposit in an interest bearing account in two weeks. As per the order, the amount deposited with SEBI is subject to the final output of case which will be next heard on July 22, 2019.
 
In case if the final result is in favour of NSE, the Securities and Exchange Board of India will return the entire amount along with interest to NSE.
 
Further, NSE has been ordered to comply with SEBI directive to not come out with an IPO for the next six months from April 30. The development assumes significance as on April 30, the market regulator, in a marathon five orders in the co-location case, came down heavily on the NSE.
 
The co-location case was based on allegations about collusion and lack of oversight which allowed a few brokers to get faster access to market data.
 
In one of the orders, the regulator directed the NSE to disgorge Rs 624.89 crore in the co-location case.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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