Professional Documents
Culture Documents
7
Allotment &
Transfer of Shares
DR. V. K. JAIN
M.Com., LL.M., M.Phil., Ph.D(Tax), FCS
7.2 Underwriting
Underwriting is in the nature of an insurance against the possibility of inadequate subscription. Underwriting is a
contract by which a person (known as underwriter) agrees that if the shares/debentures about to be offered for
subscription are not, within a specified time taken up by the public, he will himself take them up and pay for what
the public do not take up. A company may pay underwriting commission to any person in consideration of
his(a)subscribing to or agreeing to subscribe or (b) to procure subscription for shares/ debentures. Underwriting of
shares or debentures is not compulsory .
Conditions: Section 76 permits the payment of underwriting commission subject to the following conditions:
1. The payment of commission should be authorised by the Articles.
2. The names and addresses of the underwriters and the number of shares or debentures underwritten by each
of them should be disclosed in the prospectus.
3. The amount of commission should not exceed, in the case of shares, 5% of the price at which the shares
have been issued or the amount or rate authorised by the Articles whichever is less and in the case of
debentures it should not exceed 2.5%.
4. The rate should be disclosed in the prospectus, or in the statement in lieu of prospectus and should be filed
with the Registrar along with a copy of the underwriting contract before the payment of the commission.
5. The number of shares or debentures which persons have agreed to subscribe absolutely or conditionally for
commission should be disclosed in the manner aforesaid.
6. A copy of the contract for the payment of the commission should be delivered to the Registrar along with the
prospectus or the statement in lieu of prospectus for registration.
7. Section 76(4A) clarifies that commission to the underwriters is payable only in respect of these shares or
debentures which offered to the public for subscription
7.2a Brokerage
Brokerage is different from underwriting commission inasmuch as a broker does not undertake to subscribe for
shares in case the same are not subscribed by the public. Brokerage is essentially the reward paid to middle man
who brings about a bargain between the company and the purchaser of shares or debentures. the amount of
brokerage paid or payable should be disclosed in the prospectus or statement in lieu of prospectus. However,
brokerage can be paid only to professional brokers.
7.13 DEPOSITORY
What is a Depository?
The system of depositories have revolutionized stock markets. The most single important development in the Indian Capital
Market in the last decade is the emergence of the Depositories System.
A depository is a company where securities of investors are held in electronic accounts. Just as the banks holds money, in the
same way a depository holds securities. A depository in India, must have a net worth of 100 crores and must obtain a
certificate of commencement of business from SEBI.
Depository vs Bank A depository is similar to a bank. Just as you leave money in banks rather than holding it in cash,
you leave shares in the depository instead of holding them in physical form. As proof of you holdings, you get a statement
from the depository, just as you get a statement from a bank giving you the balance in your account. For withdrawing cash
from bank you issue a cheque. In the depository when you sell the shares you have to issue a debit instruction for delivery
of securities from your account. Similarly to receive securities into your account, you have to issue a credit instruction
similar to a pay -in-slip used for crediting money to your bank account. The depository, thus is to shares what a bank is to
money.
Depository Bank C o n s t it u t e n t s o f t h e D e p o s it o r y S y s t e m
- Holds securities in Accounts - Holds
funds in Accounts
- Transfers securities between Accounts - Transfers D e p o s ito ry
funds between Accounts
- Transfers without handling securities - Transfers
without handling money P a r t ic ip a n t s ( D P ) Is s u e r ( C o m p a n y )
- Safe keeping of securities - Safe
Keeping of money B anks C u s to d ia n s
S h a r e H o ld e r s
Constituents : There are four constituents in the depositories
B ro k e rs N B F C
system:
a) The depository
C le a rin g C o rp s . F in .In s ts .
In v e s t o r s
69
b) The depository participants
c) The beneficial owner
d) The issuer
a) The depository: The depository holds the securities of the investors in the form of electronic book entries (dematerialised
form). It maintains ownership records of securities and effects transfer ownership through book entry.
b) The depository participant: The depository cannot deal with millions of investors directly. It appoints agents called
depository participants who open and maintain accounts. It is similar to the branch of a bank. You can open account in any
branch of a bank.
A depository participant (DP) acts as an agent of a depository. A DP could be a public financial institution, bank, custodian,
broker, NBFC etc. having a net wroth of Rs. 1 crore. It is required to be registered with SEBI. An investor who wants to
avail the services of a depository must open an account with a depository participant. The investor has to enter into an
agreement with the DP after which he is issued a client ID number. The Stock Holding Corporation of India Ltd. was the
first depository participant registered with SEBI. The number of DPs operational till June 2002 was around 212 with 1649
service centers across the country.
c) Beneficial owner: By fiction of law, the depository is registered owner of the securities held with it with the limited purpose
of effecting transfer of ownership at the behest of the owner. The name of the depository appears in the records of the
issuer as registered owner of securities. The name of actual owner appears in the records of the depository as beneficial
owner. The beneficial owner has all the rights and liabilities associated with the securities. The owner of securities
intending to avail of depository services opens an account with a depository through a depository participant (DP). The
securities are transferred from one account to another through book entry only on the instructions of the beneficial owner.
d) The issuer: It is the company which issues the security.
Models of depository : There are two models of depository – Immobilisation and dematerialisation. In the immobilization
model, physical scrips are held in the depository vaults, supporting the book entry records kept on the computer. It means
storage of scrips in the vaults of the depository so that the physical movement of scrips is frozen. In contrast, in
dematerialisation, there is no physical scrip in existence and the scrips are held in dematerialised form (electronic form).
India has adopted dematerialisation model of depository system.
Why Depository?
The depository system was introduced to eliminate the ills associated with paper based securities system such as delay in
transfer, bad delivery, theft, fake and forge shares etc. Before the introduction of the depository system the following problems
were faced by the investors and the companies :
- Forged and fake share certificates
- Bad deliveries
- Loss of certificates in transit
- Mutilation of certificates
- Delays in transfer
- Long settlement cycles
- Mismatch of signatures
- Delay in refund and remission of dividend interest etc.
Due to these problems large scale irregularities took place in the capital market and a securities scam broke in 1992.
Benefits of a depository :
- Eliminates bad deliveries. The problems of signature differences, deficiencies in the share transfer form associated with
the physical shares which causes bad delivery is eliminated.
- Improves liquidity : Immediate transfer of shares
- Low cost of public Issue
- No stamp duty in case of transfer within the depository.
- Eliminates the scope of theft, forgery etc. risks associated with physical form.
- Entitles the transferee to all rights immediately and settlement of transaction.
- Reduction in handling large volumes of paper
- Reduction in transaction cost
- Convenient method of consolidation of folios/accounts
- Holding investments in equity, debt instruments and Government securities in a single account
- Lower rate of interest for loan against pledged demat shares.
Key concepts of depository :
Depository facilitates paperless trading and electronic book entry transfer of securities. The following are its key concepts :
- Concept of FREE TRANSFERABILITY of shares.
- Concept of FUNGIBILITY of shares
- Concept of DEMATERIALISATION
- Concept of REMATERIALSATION
Concept of FREE TRANSFERABILITY of Shares The system of depository requires the free transferability of shares. Since
there is immediate transfer of shares through computers one cannot wait for the Board of Directors approval for transfer of
70
shares ( which is the necessary condition in case of transfer of shares in the paper based transfer system). For implementing
the depository system the Companies Act was amended to provide for free transfer of shares in case of public companies.
Concept of FUNGIBILITY of shares: Shares are held in the depositories in electronic form(dematerialized form) These
shares are fungible i.e., all shares in electronic form are alike and same. This is in contrast to the paper form where the
shares are identified by certificate number or distinctive number. Under a depository, shares do not have distinctive numbers,
this means that shares, like currency are fungible meaning exchangeable for any other. The concept of fungibility permits book
entry transfer without attribution to specific scrips or distinctive numbers. All securities held in a depository are fungible
implies that all certificates of the same security are inter changeable and of same value having equal rights and privileges.
Share certificates shall become interchangeable. Investors will not get the same share certificates bearing same distinctive
numbers which they surrendered at the time of entry into depository
Concept of DEMAT or DEMATERIALISATION: is the process of transferring physical scrips into computerised ledger A/c
maintained by Depository. Demat securities are in fungible form i.e. they do not carry distinctive numbers.
Dematerialisation Process
1 In dematerialisation process, investor surrenders defaced certificates along with Dematerialisation Request Form to the
depository participant.
2 Depository participant intimates NSDL of the request through the system.
3 Depository participant submits the certificates to the registrar.
4 Registrar confirms the dematerialisation request from NSDL.
5 After dematerialising certificates, registrar updates accounts and informs NSDL of the completion of dematerialisation.
6 NSDL updates its accounts and informs the depository participant.
7 Depository participant updates its accounts and informs investor.
Concept of REMATERIALISATION: The conversion of dematerialised holdings back into certificates is called
rematerialisation. If the investor wishes to get back his securities in physical form, all he has to do is to request his depository
participant for rematerialisation of the same by filing up Rematerialisation Request Form. Depository Participant will then
forward the request to the depository after verifying that the investor has necessary balances. Depository, in turn will intimate
the registrar who will print the certificates and dispatch the same to the investor. The entire process of rematerialisation usually
takes a maximum of 30 days.
Facilities offered by Depository
There are two depositories operating in India. These are NSDL (National Securities Depository Limited) and CDSL (Central
Depository Services (India) Limited).
NSDL is the first depository in India. It was set up in 1996 by IDBI, UTI, NSE and SBI. By 2002 it had around 40 lakh client
accounts. The CDSL is the second depository set up by the Bombay Stock Exchange (BSE) and co-sponsored by the State
Bank of India, Bank of India, Bank of Baroda and HDFC Bank. BSE has a 45 per cent stake in CDSL while the banks have a
55 per cent stake. CDSL commenced operations on March 22, 1999.
Functions: The functions of depository include account opening, dematerialisation, rematerialisation, settlement and clearing,
pledge and hypothecation etc. Depository participant is the key player in the system who acts as an agent of the depository
and is in fact the customer interface of depository. It opens the accounts of the investors, facilities dematerialisation, settles
trades and effects corporate actions.
Depository also provides electronic credit in new issued wherein investor opens an account with the depository participant,
submits application with depository giving DP-Id and client-Id, the registrar uploads list of allottees to the depository and
depository credits allottee account with depository participant (DP). The refunds, if any, are sent by registrar as usual in any
public issue. The following facilities are offered by a depository:
• Dematerialisation i.e., converting physical certificates to electronic form;
• Rematerialisation i.e., conversion of securities in demat form into physical certificates;
• Facilitating repurchase/redemption of units of mutual funds;
• Electronic settlement of trades in stock exchanges connected to depository;
• Pledging/hypothecation of dematerialised
securities against loan; NSDL 2
(depository) Depository Participant
• Electronic credit of securities allotted in
public issued, rights
6 issue;
5 1
• Receipt of non-cash 3 corporate benefits such as bonus, in
electronic form;
• Freezing of demat 4 7 accounts, so that the
debits from the account are not permitted;
• Nomination facility for Registrar Investor demat accounts;
• Services related to change of address;
• Effecting transmission of securities;
71
• Instructions to your DP over Internet through SPEED-e facility.
• Account monitoring facility over Internet for clearing members through SPEED facility;
• Other facilities viz. Holding debt instruments in the same account, availing stock lending/borrowing facility etc.
Depository Process
How does an investor operate in the depository system? Just as in case of banks, he has to first open an account with a
depository through a depository participant (DP). For this purpose the investor has to enter into an agreement with the DP
after which he is given a client ID number. To convert his physical holdings into dematerialised form, the investor makes an
application to the DP in a dematerialisation request form (DRF). To convert his security from demat form into physical form he
has to make a rematerialisation request through rematerialisation request form (RRF). The investors have the option to hold
the securities in physical or dematerialised form or to rematerialize securities previously held in dematerialised form. But the
trading in the specified scrips can take place only in demat form, as the investors right is limited to holding of securities only.
The following diagram explains the structure of a depository.
How to trade in electronic shares?
Buying and selling shares in the electronic form is just like buying and selling physical shares, the only difference is trading in
securities in the electronic form is simpler and safer.
If investor wish to sell his shares, he places an order with his broker and instruct his depository participant by way of a delivery
instruction (which is a cheque like instrument) to debit his account with the number of shares sold by him.
When he buys shares he must inform his broker about his depository account number so that the shares bought by him are
credited into his account and instruct his participant by way of Receipt instruction to receive credit in his account.
Payment for electronic shares either bought or sold is made in the same way as in the case of physical securities. The shares
thus bought are transferred in the investors’ name the very next day of pay out. No formalities of filling transfer deeds, affixing
share transfer stamps and applying to the company for registering the shares in investor’s name are required to be observed
as in case of physical transfer of securities.
Initial offer to be in demat form in certain cases (Section 68B) Section 68B provides that every listed
public company, making initial public offer of any security for a sum of rupees ten crores or more, shall issue
the same only in dematerialised from by complying with the requisite provisions of the Depositories Act, 1996
(22 of 1996) and the regulations made thereunder.
Days to come: SEBI has notified certain scrips for compulsory demat trading by all investors. The details of some
forthcoming are given below :
- Securities to be mandatorily dealt in electronic form
- Public issue only in demat form
- Dividend distribution
- Securities lending and borrowing
- Increased participation by international investors.
- Faster settlement cycle – rolling settlement.