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PERSONAL FINANCE
MONEY MINDER'S MAILBAG
Dematerialisation
Dialogues
By Larissa
Fernandr
Dear Money Minder,
I have come across a number of investors who tell me that
they are planning to dematerialise their shares. But I don't see how this will benefit
them. After all, replacing a share certificate with a depository receipt is not
significant, is it?
A Reader
Dear Reader, dematerialised trading is, primarily, the
electronic trading of shares. In dematerialised trading, you don't need share certificates
and transfer deeds. Being electronic, the paperless trading facilitates share transactions
and transfers. Despite what you might say, the advantages of dematerialised trading are
many. Paperless settlements eliminate some of the problems which dissuade people from
investing in the market: transit losses; the risk of being stuck with fake or stolen
certificates; bad deliveries; delays in share transfers; lost, mutilated, burnt, torn,
forged, or stolen shares. In short, you are assured of total security. There is also no
dispute over corporate benefits or company objections. And unlike the physical segment,
where marketable lots are in tens, fifties or hundreds, the unit of trading in the
dematerialised mode is one share. Thus, the problem of odd lots is completely eliminated.
Dear Money Minder,
I get your point. But how do I go about dematerialising my
shares? Do I have to approach the National Securities Depository Ltd (NSDL)? Are there
other depositories in the country? Or do I have to approach my stockbroker first?
A Reader
Dear Reader, at present, we have just one depository, the
NSDL, which is a corporate body holding the securities of investors in electronic form.
This depository maintains the records of the beneficial owners in its systems, and
arranges for the distribution of rights and bonuses. An investor's link with the
depository (in our case, the NSDL) is through intermediaries, called Depository
Participants (DPs). According to the Securities & Exchange Board of India's (SEBI)
guidelines, banks, financial institutions, stockbrokers, and custodians can be DPS.
As an investor, you have to maintain and operate an account
with a DP. So, in effect, the depository is the securities bank, and the DPs, its
branches. Just like a bank, your DP will give you a passbook, or a statement of holdings.
There is no restriction on the number of DPs you can open accounts with. However, as in
the physical segment, all your trading has to be channelled through a broker. And while
buying or selling shares, you must provide your broker with your account number, and your
DP's identification number. The broker, on his part, must also open an account with the
depository.
Dear Money Minder,
At present, it takes ages to get shares transferred. Is the
process as long and cumbersome with dematerialised trading too? How do I go about
transferring dematerialised shares?
A Reader
Dear Reader, start by getting a list of DPs from the NSDL
(or see the table alongside). Then, approach any of them to open an account in your name.
Subsequently, you will have to submit the share- certificates to the DP, along with a
signed dematerialisation request form to get your shares dematerialised. The DP will then
send the shares to the company, and credit the securities account on its receipt from the
depository.
Dematerialisation is a process in which your physical share
certificates are first taken back by the company, or its registrar, and actually
destroyed. Then, an equivalent number of securities is credited in your electronic
holding. The process should take around 15 days. But the shares have to be in your name
before they are sent for dematerialisation. In case you decide to opt out of the system,
you can go in for rematerialisation, whereby the shares will be converted from the
electronic to the paper form. In that case, your DP will forward your rematerialisation
request to the NSDL after verifying whether you have the necessary securities balance. The
NSDL, in turn, will intimate the registrar, who will print the certificates, and despatch
them to you. This should take about a month.
Dear Money Minder,
While the advantages are clear, isn't dematerialised
trading a more expensive proposition? I have heard of custodial fees which investors are,
apparently, reluctant to pay.
A Reader
Dear Reader, let me tell you that the stamp duty has been
waived completely to make share-transfers in the dematerialised segment more
cost-effective. In the physical segment, the stamp duty is 0.50 per cent of the market
value of the shares transferred. As for the custodial fees, they range between 0.05 per
cent and 0.10 per cent, and vary between DPs. The problem is that there's a mental block:
investors do not want to pay custodial fees at all.
Normally, in the physical segment, you can hold the shares
at market delivery for, approximately, one year. In such a situation, you do not pay any
stamp duty since there is no transfer involved. So, there is no money paid except on the
purchase. In the depository mode, the custodial fee has to be paid irrespective of whether
you sell or hold. Moreover, you have to pay the annual service charges even if there are
no securities in your account. But a depository relieves you of the bother of sending your
shares for transfer, and saves you the postal and courier charges.
Dear Money Minder,
That's a one-sided argument. You are looking only at the
stamp duty. Aren't there other costs involved?
A Reader
Dear Reader, sure there are. Each DP is free to price its
services the way it wants to. So, different DPs have announced different structures for
their services. You will have to pay for opening or closing an account, and the rates
range between Rs 50 and Rs 500. However, quite a few DPs do not charge for either opening
and closing an account, or for one of them.
The cost of dematerialising your shares is Rs 3 to Rs 5 per
certificate. But the cost of rematerialisation is more: Rs 10, going up to Rs 25,
depending on the DP. Then, there is the market transfer cost when you buy or sell which,
however, is much less than the brokerage--between 1 and 2.50 per cent--in the physical
segment. These costs are in addition to the annual custodial fee. But, by and large, you
would still be saving money since you will not have to pay the stamp duty and the postal
charges.
Dear Money Minder,
Since we are on the subject of costs, what about the prices
of the shares? Are dematerialised shares more expensive? Or do they quote at the same
levels as in the physical segment of the market?
A Reader
Dear Reader, it would be logical for shares in the physical
segment to quote at a slight discount to their counterparts in the dematerialised segment.
After all, the benefits of dematerialised trading are substantial. However, this is still
not the case. If fact, the situation right now is just the reverse. The shares in the
physical segment are quoting at a slight premium to those in the dematerialised segment.
And most dematerialised trade takes place at a discount of 2 to 3 per cent to the
prevailing price in the physical segment. This is, primarily, because of the lack of
liquidity in the dematerialised segment.
Dear Money Minder,
What you are saying is that investors do not want to opt
for the depository system because of insufficient volumes. But why?
A Reader
Dear Reader, it's a chicken-and-egg situation. Liquidity is
low because not many investors are joining the depository system. And the main reason why
investors are not joining the system is that liquidity is low. However, following the
announcement by the SEBI, dematerialised securities can be delivered against delivery
obligations in the physical market from April 6, 1998. Physical shares, however, cannot be
delivered against delivery obligations in the dematerialised section. This is bound to
ease the liquidity constraint.
It also means that if you want to be an active player in
the market, you have to have an account with a DP. The liquidity constraint will further
ease as more investors opt for dematerialisation. Already, the NSDL, in conjunction with
24 DPs, has announced more sops for retail investors upto May 15, 1998. These include the
waiver of the account-opening charges, the security deposit, and the account-maintenance
charges for a year.
Dear Money Minder,
How long is the settlement cycle in the dematerialised
segment? Will I have to wait for the shares to get credited to my account?
A Reader
Dear Reader, in the dematerialised segment, the rolling
settlement formula is t+5. What t+5 means is that all trades executed on a particular day
(t) will be settled by the following fifth (t+5) working day. Thus, trades executed on a
Monday will normally be settled the following Monday (Saturday and Sunday being
non-working days). And the share transfer will take place within a couple of days of the
settlement date. When you buy shares in the dematerialised mode, you become the owner of
those shares in the electronic form within a day of the completion of the settlement.
Similarly, when you sell shares in the electronic form, you receive the payment much
faster. Moreover, in electronic trading, you do not have to apply to the company concerned
for registering the shares in your name. Thus, the possibility of loss--or theft--of your
share-certificates in transit are precluded.
Dear Money Minder,
Banks offer loans against shares. But for that, I have to
surrender my share certificates to them to get the loan. Do they now accept depository
receipts?
A Reader
Dear Reader, at present, some banks do not. But the good
news is that all of them are adjusting their systems so that they can advance loans
against depository receipts. Citibank and Standard Chartered Bank will offer this facility
soon. And some, like HDFC Bank and Global Trust Bank, have announced that they will reduce
the rate of interest on loans and advances secured against dematerialised securities by 1
per cent.
Dear Money Minder,
Can I dematerialise the shares of all the companies that I
have invested in. Or are there restrictions?
A Reader
Dear Reader, just the Bombay Stock Exchange and the NSE
have dematerialised segments. Right now, there are around 164 scrips which are available
for dematerialised trading; the number keeps increasing though. But companies don't
dematerialise all their shares; just a percentage of them. For instance, IndusInd Bank had
59.64 per cent of its outstanding shares dematerialised as on March 7, 1998. On the same
date, the figure for Tata Steel was 18.61 per cent; and for ACC, 11.94 per cent. As for
DPs, there are around 48 of them, of which 37 offer services to retail investors. |
