FAQ's

Dematerialisation

Q. 1 What is Demat and what are its benefits?

Dematerialization ('Demat' in short form) signifies conversion of a share certificate from its present physical form to electronic form for the same number of holding.

It offers scope for paperless trading through state-of-the-art technology, whereby share transactions and transfers are processed electronically without involving any share certificate or transfer deed after the share certificates have been converted from physical form to electronic form.

Demat attempts to avoid the time consuming and complex process of getting shares transferred in the name of buyers as well its inherent problems of bad deliveries, delay in processing/fraudulent interception in postal transit, etc.

Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has to demat the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares, he/she will get delivery of the shares in demat form only.

The Depositories Act 1996 has been enacted to regulate the matters related and incidental to the operation of Depositories and demat operations. Two Depositories are in operation - National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Q. 2 How does the Depository System operate?

The operations in the Depository System involve the participation of a Depository, Depository Participants, Company/Registrars and Investors. The company is also called the Issuer.

A Depository (NSDL and CDSL) is an organization like a Central Bank, i.e. Reserve Bank where the securities on an investor are held in electronic form, through Depository participants.  

A Depository Participant is the agent of the Depository and is the medium through which the shares are held in the electronic form. They are also the representatives of the investor, providing the link between the investor and the company through the Depository.

To draw analogy, the Depository system functions very much like the banking system. A bank holds funds in accounts whereas; a Depository holds securities in accounts for its clients. A bank transfers funds between accounts whereas; a Depository transfers securities between accounts.

In both systems, the transfer of funds or securities happens without the actual handling of funds or securities. Both the banks and the Depository are accountable for safe keeping of funds and securities respectively.

Q. 3 How do I demat my shares?

First, you will have to open an account with a Depository Participant (DP) and get a unique Client ID number. Thereafter, you will have to fill up a Dematerialization Request Form (DRF) provided by the DP and surrender the physical shares, which you want to be dematted to the DP.

The DP upon receipt of the shares and the DRF, will send an electronic request to the company’s registrar and share transfer agent through the Depository for confirmation of demat. Each request will bear a unique transaction number.

The DP will simultaneously surrender the DRF and the shares to the company’s registrar and share transfer agent with a covering letter requesting the registrar and share transfer agent of the company to confirm demat. The company’s registrar and share transfer agent after necessary verification of the documents received from the DP, will confirm demat to the Depository.

This confirmation will be passed on from the Depository to the DP, which holds your account. After receiving this confirmation from the Depository, the DP will credit the account with the shares so dematerialized. The DP will hold the shares in the dematerialized form thereafter on your behalf. And you will become beneficial owner of these dematerialized shares.

Q. 4 Once my shares are dematted, can I ever get them converted into physical shares?

If you are holding shares in electronic form, you still have the option to convert your holding in physical form by submitting a Rematerialization Request Form (RRF) through your DP in the same manner as Dematerialization. Upon receipt of such request from your DP, the company will issue share certificates for the number of shares so rematerialized.

Q. 5 What are the charges to be paid to demat one's physical shares? Will the company pay it or do I have to pay for it?

The charges differ from DP to DP and therefore you will have to contact your DP for the same. The charges for demat have to be borne by the shareholder.

Q. 6 I have purchased some shares in Physical (paper) form. Can I directly give the share certificates to my Depository Participant for dematting them in my favor?

Prior to dematting your shares, they have to be registered in your favor. Hence, you have to necessarily lodge the share certificates with a duly executed transfer deed with the company’s registrar and share transfer agent.

Q. 7 Is it a fact that Hexaware shares are to be traded compulsorily in Demat Form? Do I have the option of holding them in physical form?

Yes. The shares of the company are to be compulsorily traded in demat form.

Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has to demat the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares, he/she will get delivery of the shares in demat form only.

Q. 8 How do I get my dividends on dematted shares? Will I get the Annual Report after I demat my shares and would I be able to attend the AGM?

The Depository Participants will give the list of demat account holders and the number of shares held by them in electronic form on the Record date to the company (Beneficiary Persons, known as Benpos in short). On the basis of Benpos, the company will issue dividend warrants in favor of the demat account holders.

The rights of the shareholders holding shares in demat form are at par with the holders in physical form. Hence you will be eligible to get the Annual Report and will have the right to attend the AGM as a shareholder.


Q. 9 What are the chances of any fraud/disputes in using a demat account? Whom should I approach in such cases?

Common risk factors applicable to trading in physical shares like mismatch in signatures, loss in postal transit, etc., are absent since the dematted shares are traded scrip less.

However, in the unlikely event of any other dispute, the concerned Stock Exchange and/or Depository Custodian viz. NSDL/CSDL or SEBI would have to be approached for resolving such issues.

Q.10 Can I pledge my shares in demat form for the purpose of availing any funding/loan arrangement with my bankers?

Yes. You will have to contact your DP for this. 


Taxation Issue With Unlisted Shares :

The government has proposed to reduce long-term capital gains tax on unlisted securities for all non-resident investors, including private equity players, from 20% to 10%. The decision has been taken to bring parity with FIIs, who enjoy a concessional rate of 10%.

The changes in the finance Bill proposed by finance minister Pranab Mukherjee would address the demand raised by private equity players who felt that differential taxation deterred their exposure in the Indian market.

What is Delisting ?

As is evident from the term, it means a listed company removing its shares from trading on a stock exchange.
Companies generally delist when they want to expand or restructure, are acquired by others, or the promoters wants to raise their stake. Delisting can be a voluntary decision where a company pays investors and removes its securities from the exchange or a forced delisting by stock exchanges for non-compliance with their rules.
Here, we are discussing companies which delist voluntarily. Forced delisting by exchanges leaves investors in the lurch as they have no option but to sell at whatever price is decided, which may be less than the actual value of the company.

To voluntarily delist, a company normally offers shareholders a premium to the price at which the shares are being traded on the exchange. When an investor sells to a promoter wishing to delist, the transaction is off the exchange. 
So, any profit is considered as a capital gain. If delisting takes place after one year of the purchase of the security, there is no capital gains tax. If delisting happens within a year of the purchase, the gains will be taxed according to an individual's tax slab.
Since July 2010, when the government made it compulsory for listed companies to increase public shareholding to a minimum of 25% - to be done over three years by selling a minimum of 5% every year - the hunt for companies likely to delist has gained momentum. 
Public shareholding means shares held by anybody other than the promoters, persons acting in concert with the promoters or an acquirer company. When this regulation came into force, investors started looking for companies with promoter holding in the range of 80-90%, anticipating they would delist.

Who might delist ?

While the level of promoter shareholding is one of the criteria for finding a potential delisting candidate, the ability of a company to pay is also important. "Generally, MNCs are more likely to consider delisting. A company whose parent company is not listed on a stock exchange outside India may choose to delist because it is not used to working in a listed environment. Companies who want to grow and need capital might also delist," says Kotak's Mallik.

"One needs to study a range of qualitative and quantitative factors to understand whether an India-listed MNC is planning to delist. One must assess the financial health of its parent company, the valuation of shares in India vis-à-vis the home country, the company's outlook on India, the shareholding pattern and intellectual property rights aspects, to name a few. It is a complex process," says Kotak's Mallik.

Should you buy a delisting candidate?

 

Market experts advise caution. "Any prudent retail investor should not look at delisting as a reason for investment. However, one should do regular stock-picking with focus on fundamentals. If the company announces delisting, one will end up being lucky, as the investor will not tender shares unless the deal is good," says Jyothi Prasad, head of investment banking at Asit C Mehta Investment Intermediates.

On UTV Software, Nisha Shah of Motilal Oswal Investment Banking says one should look at the company's long-term prospects. "UTV Software is a good company for the long term, but I would not recommend buying it purely for delisting."

Last but not the least, if the company is successful in buying over 90% shares, it can delist and will not be available for trading. In that case, if an investor has not tendered the shares, he or she might end up holding non-tradable securities. The only resort in such a case is to either write to the company for buying back the shares or sell to a firm which trades in non-tradable securities.

However, there is one more option minority shareholders can resort to in case they don't like the buyback price. They can move court, as in the Cadbury case.

In early 2003, chocolate-maker Cadbury delisted, offering Rs 500 to shareholders. The company managed to buy over 90% shares, the minimum required for delisting. The 8,149 minority shareholders, holding about 2.4% equity, rejected the price and moved court.

In September 2009, the company revised the offer price to Rs 1,340 per share, but the shareholders rejected this too. In May 2010, Ernst & Young (E&Y), appointed by the Bombay High Court, arrived at a figure of Rs 1,743 per share, which was also rejected by the shareholders. In January 2011, Cadbury revised the offer price to Rs 1,900 per share. The shareholders demanded that the company be valued according to the discounted cash flow method. In July 2011, E&Y valued the shares at Rs 2,014 per share, still much lower than the Rs 2,500 the shareholders are expecting. The case is still on.