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Before the advent of the dematerialization era of listed shares around the year 2000, the sale and purchase of shares were entirely manual. Stock brokers used to act as intermediaries for connecting buyers and sellers. The transfer of shares took place through a physical form SH-4, which is called a ‘transfer deed’ in common parlance. 

The transaction was considered complete once the buyer submitted the original share certificate and transfer deed to the company for getting the shares registered in his or her name.

If you were a buyer in one such transaction and, for whatever reasons, still hold physical shares with the transfer deed without getting it transferred in your name, note that the physical shares you hold may not have any value now. You may not be able to do much about it as Sebi banned the physical transfer of shares from 1 April 2019. The shareholder records of the company will continue to have the seller’s name. The buyer will not be entitled to any of the benefits that a shareholder is entitled to. The cost of acquiring the shares goes down the drain. 

I share my perspective on the regulator not allowing the transfer of physical shares in the above cases. Even today, there have been many genuine buyers who hold the physical shares with a transfer deed but are not able to claim their shares.

Bad deliveries

Back then, since the entire process was manual, there were a lot of cases of bad deliveries whereby the buyers could not get them transferred in their names due to technical issues such as mismatch in name or signature, difference in stamp duty, etc. 

There have been lakhs of such cases of bad deliveries which are persisting as, in some cases, the sellers do not cooperate in case of signature or name mismatch, or sometimes sellers are not traceable.

There were also cases where the buyer missed lodging of shares — submitting the original share certificate and transfer deed to the company for getting the shares registered in his/her name— within a stipulated time period of one year from execution of the deed.

SEBI’s Clampdown

Sebi’s notification dated 8 June 2018 on banning the physical transfer of shares and lodging with companies was a total shock to investors who bought physical shares but couldn’t get them transferred due to above reasons. With the extension of due dates, finally, Sebi in September 2020 put an end to the re-lodgement of transfer requests with the companies.

Therefore, no physically transferred shares can be lodged now and the genuine buyer of the shares is left with no option to get the ownership for which they have already paid the consideration. The only remote possibility is to go through the legal process by filling suits in court. But with the level of pendency of cases in our country, this seems to be a non-viable option for such investors. There doesn’t seem to be any way out for such buyers.

In my opinion, this complete ban on the process of getting ownership on physically held securities with a transfer deed is not justified as it deprives genuine claimants of their right and is also against the principles of natural justice.

Loophole

As per our experience, the ban on the transfer of physical shares with a transfer deed could also allow the sellers to take undue advantage by applying for a duplicate issue with the company. The company records still show the seller as a registered holder of securities, as buyers failed to lodge the shares with the company. Sebi has also recently waived the requirement to submit surety for the duplicate issue of shares. This will make the job of fraudsters much easier who intend to claim duplicate shares despite selling the shares to a buyer years ago. 

Measures required

To sum it up, Sebi might have stopped physical transfer with an intent to stop the manipulations in the process but it has also deprived several genuine investors who are entitled to those shares. Thus, regulators should consider these facts and circumstances and open the window for physical transfer of securities obviously with checks in place to prevent fraudulent transactions. Regulators may ask the duplicate share issue claimants to provide indemnity and surety or may ask for some bank guarantee or lien of fixed deposits, etc., for the equivalent amount for a certain period. 

Vikash Jain is co-founder at Share Samadhan Limited

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