Navigating the Twilight Zone of Dud Shares and Rematerialisation Charges
Admittedly, nine out of 10 investors in the stock market today began trading after 2020 and the COVID lock-down, primarily through the secondary market. Consequently, the issue I am writing about may seem foreign to them. However, many new investors are subscribing to the plethora of initial public offerings (IPOs) hitting the market every week, especially those in the small and medium enterprises (SME) segment. Some of these IPOs will do well, while others will fail and get delisted. When that happens, if you wish to close your demat account which has untraded/unlisted shares (henceforth referred to as dud shares), you will enter a peculiar twilight zone in which they remain as zombies. This is happening despite our claims to have a highly automated market.
 
The problem has persisted without resolution despite responsible activists bringing it to the market regulator’s attention since 2014 or earlier. The Securities & Exchange Board of India (SEBI) mandates that defunct companies are compulsorily delisted after a specific period of non-compliance and the demat accounts of promoters are blocked. So, SEBI rules contribute to creating dud shares but offer no solution, if you are stuck with them. 
 
In the past, physical share certificates reminded you of your investment mistakes, but you simply tore them up or sold them as waste paper (raddi). Today, in a 100% electronic environment, the shares remain stuck in your demat account on which you pay annual fees.
 
People with a large investment portfolio usually ignore dud shares and the cost attached. They do no harm and, perhaps, there is a faint hope that someone may acquire and revive the company. The catch is when you want to close your demat account. You then discover there is no provision to close a demat account if it holds even a single dud share. One solution is to transfer the shares; another is to rematerialise (remat) them by converting your electronic (dematerialised) share into a physical certificate. But this is easier said than done.
 
Lack of awareness about the dud share problem starts with SEBI itself. Over the past two weeks, I have asked heads of exchanges, depositories and registrar & transfer agents (RTAs) and drew a blank. Some ignored my query, others failed to understand it and some quoted wrong processes to get around the problem, without offering a proper solution. Consider these examples.
 
  • On 12 July 2014, Abhay Datar, a consumer activist and former banker, wrote to SEBI’s office of investor assistance & education about ‘untraded shares lying in demat form’. He held two untraded (dud) shares which prevented him from closing his DP (depository participant) account; rematerialisation was not possible he said. Mr Datar’s letter outlined the problem and suggested that SEBI come up with a solution, such as maintaining an electronic ledger of ownership of shares in dud companies before writing them off from individual accounts. SEBI’s response was to ask him to open a basic services depository account (BSDA) which allows investors to hold shares up to a certain value without paying any annual depositor charges. This would still keep dud shares in limbo in a DP account in his name; it was not a solution. He wrote again to explain this to SEBI but got no response. Many investors have shared similar experiences.
     
  • Nine years later, on 18 January 2023, Moneylife wrote to SEBI’s spokesperson about issues with closing demat accounts that held dud shares. An eminent business consultant’s sister, living in a care home, has a demat account with a single dud share (Crest Animation), preventing its closure. On trying to find a solution, he discovered that a formal letter writing off the investment is not an option. Instead, he was told by the depository that he could transfer the dud share to demat accounts of a family member, relative or friend so that his sister’s account could be closed. The National Securities Depository Ltd (NSDL) gave me the same response last week. It is a typical Indian solution (jugaad) about how to go around the problem by transferring it elsewhere. This solution is also part of SEBI’s FAQs (https://www.sebi.gov.in/sebi_data/ docfiles/20618_t.html). SEBI’s circular of 29 July 2022 on the framework for the automated deactivation of trading and demat accounts in cases of inadequate KYC (know-your-customer) also does not address closing demat accounts with dud scrips. SEBI did not bother to respond to our email sent last year.
     
  • One investor told me that his mother wants to close her DP account with HDFC Securities but cannot do so, since it has dud shares. When this was posted on social media (X), an HDFC bot offered a ‘cost-effective closure’. Scores of investors admitted to similar issues. The question is: Why should we pay a ‘cost’ to get rid of dud shares? Practical people would simply want to get rid of them.
     
  • When investors complained about annual account maintenance fees charged by depository participants (DPs), especially on dud shares, SEBI came up with BSDA. It allows small investors, with one DP account attached to a single PAN number to have securities, bonds and mutual funds below a certain value and pay zero or nominal fees for investment value of up to Rs2 lakh. SEBI plans to hike BSDA account holdings to Rs10 lakh. But it does not address the problem for investors with larger portfolios who also have dud shares; there is no mechanism to get rid of them. Making BSDA a graveyard of dud shares is also not an answer – but many posted this as a solution on social media.
     
  • Here is what happened to S Reddy, who has two dud shares in his account. He first approached NSDL, which directed him to go to his DP (Angel Broking), who in turn suggested rematerialisation via Axis Direct (https://simplehai.axisdirect.in/images/Forms/ 01_11_2022/CDSL---REMATERIALIZATION-REQUEST-FORM.pdf ). He was quoted remat charges of Rs200+18% GST for lots of 100 securities. Effectively, he would have to pay Rs4,720 to get 2,000 dud shares rematerialised after having lost money on his original investment; the government would also extract 18% GST and there is a tedious process involved.
     
  • The response that I received from market intermediaries and market infrastructure institutions (MIIs) was invariably callous or ignorant. Link Intime, a leading RTA, had a short reply to my detailed query on dud shares. “Single certificate can be issued in remat. Depends on the request made”, wrote a senior executive. 
 
When I sought feedback on X, investors listed scores of dud shares that they were holding and were uniformly angry at having to keep paying DP charges on them with no solution in sight.  
 
In an off-the-record interaction, a capital market veteran finally admitted that there is serious problem and no easy solution to closing DP account with dud shares. Rematerialisation was one option. Surrendering shares to the company for a nominal value was another, but this is only possible up to one year after delisting, if the company exists. Some companies that are delisted but not defunct also agree to buy back their shares at a nominal cost, but this is very rare. As far as DPs are concerned, the attitude varies. Some are willing to negotiate lower rematerialisation charges, or waive them entire for investors with a large portfolio. A few DPs charge a flat fee of Rs10 plus taxes, but you are still paying good money for dud shares and hold worthless paper. 
 
This source also says there are ‘third parties’ who handle ‘unlisted and dead securities’ by finding off-market buyers or by working with companies. This route ought to concern the regulator if it cared. 
 
Isn’t this a ‘believe-it-or-not’ situation where SEBI, having imposed mandatory dematerialisation on investors, has found no solution to dud-shares lying in DP accounts? The problem has persisted for over two decades and investors have been paying DP charges on dud shares that are permanently in limbo.
 
Is there hope for such zombie shares to get out of this twilight zone? Just before this article was uploaded, I reminded SEBI about this problem. The SEBI chairperson responded to my message saying, “We will take it up.” Maybe, there will be light at the end of this particular tunnel after all. 
 
 
Comments
aarvi1948
2 days ago
Very well articulated. The irony is that the regulator turns a blind eye to such problems convenientylt. While efforts are made day in and day out to improve the IPOs and trading of shares - no one wants to touch the issue you have pointed out.
ca.kamalesh
6 days ago
There is no clarity about claiming the loss in the IT Return. In which year can one claim the Long Term Capital Loss? Whether indexation benefits can be taken? SEBI & IT Department can come out with a standard operating procedure in this behalf.
Kamal Garg
Replied to ca.kamalesh comment 6 days ago
An individual PAN holder cannot claim any loss arising out of such loss because the law stipulates that there has to be a "transfer" of asset and since there is no such "transfer" of asset, therefore, as per current law, this loss cannot be claimed in the ITR. A business man can claim such loss by simply reducing the valuation of closing stock of shares and therefore claim the loss accordingly but, then, he has to pay flat 30% tax on entire profit.
ca.kamalesh
Replied to Kamal Garg comment 6 days ago
I was under the impression that extinguishment was also covered under the definition of Transfer as per Section 2(47) of the Income Tax Act, 1961.
Kamal Garg
Replied to ca.kamalesh comment 5 days ago
There is no "transfer"; it is only extinguishment and the irony is that your shares still remain in your demat account even after "extinguishment".
FRANCISXAVIER
1 week ago
thanks sucheta ji, i am waiting for long that somebody will raise this important issue..
ksukumaran_72
1 week ago
Long back somewhere I had read an advice to transfer the shares to Tirupati
Dewaswom account and this can be treated as a contribution to the Lord.Not
sure whether this is a practical solution or jugad.
parthi1961
Replied to ksukumaran_72 comment 6 days ago
I think this is a good option. Any details of Tirupathi Temple Account
Kamal Garg
1 week ago
This is a real problem with no solution. Many such companies disappear/delisted/share capital written off/extinguished under NCLT approved resolution process, but, shares still keep on showing in our demat account.
Another pain is how an individual should 'treat' this capital loss in his/her income tax filing. Because the law says that share/asset has to be 'transferred' to claim capital gain/loss. Now since there is no share available for trade/transfer, how to treat this capital loss in income tax filing for an individual is a huge sore point.
kalemohan
2 weeks ago
I have two scrips 1.Daewoo Motors-200 shares listed but nontraded company.
2.Athena financial services-3oo shares non listed but non traded company.
Due to this I am unable to close my Demat account with janata sahakari bank pune.
nor the DP is not transfering my these shres to other DP.SOLUTION is close bank acct ant ignore / donot respond to DP
SIDDHARTHA DEY
2 weeks ago
Angel broking don\'t let me close my trading and demat account in spite of there is no share in demat account only 0.57 paise remain in trading account.There tactics is do not let me withdraw 0.57 paise so I can not close my account.
Even quarterly satalment they don\'t transfer 0.57 paise according to SEBI rules .
I feel totally hope less.
MLD
Replied to SIDDHARTHA DEY comment 1 week ago
this is strange. please file a complaint with SEBI SCORES... it will help
SV Prasad
2 weeks ago
In my case I am left with 100 shares of 'Modern Malleables' a Kolkata based delisted company , since over a decade due to which I am unable to close my one time charges Rs 555 lifetime free 2 in 1 account with IIFL securities, which they simply converted to normal account using the PoA held with them and started levying Rs 400 per annum in ledger as negative balance . When I sent an off market transfer request in favour of some one who makes off market purchases in this ISIN so that I can close the account, the broker IIFL securities simply rejected the transfer request on the grounds of insufficient balance in ledger, which contains a negative balance of Rs 3000+ due to unilateral AMC of Rs 400 levied for several years. So there is no way out unless I can sell them when they trade in markets. So my DP account remains abandoned and accumulating negative balances in ledger. If someone has a second DP account, none would be treated as a BSDA and AMC charges would be levied every year to ledger balance even though no other ISIN exists other than illiquid ones. and IIFL securities wouldnt close the account by transferring the ISIN something which they can very well do as per PoA given to them
MLD
Replied to SV Prasad comment 1 week ago
The negative balances is a very serious issue and I am sure limited to your broker.. it may also affect your credit score if you are not careful. so please ensure. you find a solution
MLD
Replied to SV Prasad comment 1 week ago
Please file a complaint with SCORES and also write to SEBI's investor services department. You can also file a broker complaint with with NSDL and NSE
or CDSL and BSE as applicable
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