Many investors, especially senior citizens who continue to hold shares in physical form are struggling to have them converted into dematerialised form or are finding it difficult to claim bonus shares and split shares when such corporate action happens. The numbers are huge.

More than 300 crore shares of the current Sensex companies are still held in physical form, according to a recent analysis by Moneylife. Most of these shares have been purchased decades ago before the Depository Act was passed and since the investors intended to hold them for long-term, they did not see any reason to pay for a demat account or the annual maintenance charges of depository participants. The decision was further dictated by the fact that the procedure to open a demat accounts remains expensive and cumbersome. For these investors, bonus shares or splits are issued in physical form. Investors often complain that the bonus or split shares are lost in transit after the companies claim to have mailed them. When that happens, the process of having duplicate share certificates issued is even more cumbersome as the investor has to a file police complaint along with a whole list of other documentation.
 

The switchover from physical to demat system has been fraught with a variety of problems.
 

CB Bhave, former chairman and managing director, National Securities Depository had acknowledged in 2007 that many have not converted their physical shares to demat saying, “There are a large number of investors who still own shares in physical form. Since they don’t intend to trade or sell, they don’t feel the need to enter the demat system.” In fact, every time investor groups complained about high demat charges, especially the annual maintenance costs, Mr Bhave used to point out that there is no need for people to dematerialise their shares if they did not intend to sell the shares in a hurry.
 

FAQs on Exit Route Scheme for Physical Shares by BSE
 

However, keeping shares in physical form is now leading to a series of problems. As of now companies are not allowed to issue physical shares except in case of bonus or split of shares, which need to be issued to those whose original holding continues to be in physical form. Investors complain that often these shares are lost in transit after the companies claim to have mailed them. When that happens, the process of having duplicate share certificates issued is even more cumbersome. The shareholder would have to send his request for issue of duplicate share certificate accompanied by, affidavit, indemnity bond, surety form, proof of income of the surety and receipted copy of police complaint reporting loss of share certificate and voucher copy of advertisement released in local newspapers regarding loss of share certificate. This is highly strenuous for senior citizens people and needs urgent simplification.
 

Investors suggest that the practice of companies issuing physical certificates for bonuses or splits should be curbed and the regulator should make it mandatory for companies to offer demat as an option before dispatching the physical shares. Investor groups across India have long demanded that companies, who have been the biggest beneficiaries of dematerialisation, must bear a part of the cost of dematerialisation, at least during the initial conversion.
 

Over 13 years after the Depository Act introduced paperless trading, the Securities and Exchange Board of India (SEBI) has discovered that hundreds of companies show discrepancies between their listed capital and actual capital (dematerialised + physical shares). The NSE and BSE have reported discrepancies in share capital reconciliation of 329 and 695 companies respectively for the quarter ending March 2012. As per reports submitted by the stock exchanges to the market regulator, some companies have failed to submit their quarterly audit report or have reported discrepancies in share capital reconciliation. Further, in some cases, the discrepancy is explainable whereas in some cases, the issuer is unable to provide justification for the discrepancy, reported PTI.
 

 What makes this scandalous is the fact that the discrepancy was first discovered in the DSQ Software case during the Ketan Parekh scam nearly 12 years ago. An investigation revealed that 1.30 crore shares of DSQ Software had not been listed on any stock exchange. Dalmia is alleged to have made false representation to the NSDL and fraudulently got the 1.30 crore shares dematerialised, showing them as fully paid and allotted by the company. (For more read:  DSQ Software Saga )
 

This formed the orders of the Mohan Gopal-Leeladhar committee of the SEBI board against NSDL, which was vigorously contested by Mr Bhave. However, the finance ministry went ahead and appointed Mr Bhave as SEBI chairman and the orders were controversially sought to be dismissed as “non est” (or void) until a Supreme Court order corrected the situation.
 

It now turns out that DSQ Software was not an outlier. The bland use of the word ‘reconciliation’ hides a more serious issue where the sanctity of a company’s capital, backed by its equity shares is not clear.
 

SEBI admits as much in a memorandum presented to its board. It says, “The non-reconciliation of share capital undermines the integrity of the market. In order to ensure protection of investors and market integrity, there is need to have measures in place to prevent issuer companies/promoters and issuer’s agents from introducing fraudulent shares in the market or borrowing against such shares or accessing banking system for loans, etc.”
 

Consequently, SEBI has finally woken up to the need to empower depositories to initiate penal action against companies that do not properly reconcile their demat and physical shares which exposes the equity market and investors to possible frauds.
 

Holding securities in demat form helps investors to get immediate transfer of securities. No stamp duty is payable on transfer of shares held in demat form and risks associated with physical certificates such as forged transfers, fake certificates and bad deliveries are avoided. In case of non cash corporate benefits like split of shares/bonus shares, the holders of shares in physical form must opt to get the shares in electronic form as these benefits are automatically credited to the demat account.
 

There are two entities—National Securities Depository and Central Depository Services—which hold securities of investors in electronic form through their registered depository participants. According to latest data available with SEBI, NSDL and CSDL together held 71,337 crore demat securities at the end of 2011-12 up by 24% over the previous fiscal.