Legal Regime Over Transfer of Corporate

Securities : Electronic and Manual Modes

Manipal University Jaipur

School of Law

Supervised by- Submitted by-

Dr. Sony Kulshrestha Mukul Bhagtani
141401013
B.A.LL.B (Hons.)
VI Semester

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 CERTIFICATE

This is to certify that Mr. Mukul Bhagtani, student of B.A. LL.B. (Hons.) semester VI,
School of Law Manipal University Jaipur has completed the project work entitled Legal
Regime over Transfer of Corporate Securities: Electronic and Manual Modes under my
supervision and guidance.
It is further certified that the candidate has made sincere efforts for the completion of this
project.

________________
(Dr. Sony Kulshrestha)

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 ACKNOWLEDGEMENT

I hereby acknowledge the help and support of the teachers, who helped me in compiling this
project. I thank the faculty and management of Manipal University Jaipur, School of Law, as
the resources that were necessary to complete the project were provided by them.
I am highly indebted to my teacher Mr. Robin Luke Varghese for his guidance and constant
supervision as well as for providing necessary knowledge regarding the subject at hand and
also for her support in completing the project.

I would like to express my gratitude towards my parents and friends for their kind
cooperation and encouragement which help me in completion of this project.

Mukul Bhagtani

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Contents
Introduction...........................................................................................................5
What is Depository?.............................................................................................6
Depository Act, 1996 and its Effects with regards to Companies Act 2013.........6
Dematerialization..................................................................................................8
Procedure for Dematerialization of Shares by the Shareholder............................8
Conclusion............................................................................................................9
Webliography......................................................................................................10

Introduction
In general parlance, transfer takes place when title to the property is transferred from one
person to another whereas transmission refers to devaluation of title by operation of law.
Transmission may takes place either by succession or by testamentary transfer.

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According to Section 44 of Companies Act, 2013, shares, debentures or other interest of a
company are moveable property, transferable in the manner provided by the articles of
association of the company. A member can also transfer any other interest in the company
in the manner provided in the articles. For example, a guarantee company may transfer
membership interest, suspension of membership or assignment of interest etc. by making
special provisions in the articles.

Transfer of securities mean that the company has recorded in its books, a change in the title
of ownership of the securities effected either privately or through an exchange transaction. To
effect a transfer, the securities should be sent to the company along with a valid, duly
executed and stamped transfer deed duly signed by or on behalf of the transferor (seller) and
transferee (buyer). It would be a good idea to retain photocopies of the securities and the
transfer deed when they are sent to the company for transfer. It is essential that you send them
by registered post with acknowledgement due and watch out for the receipt of the
acknowledgement card. If you do not receive the confirmation of receipt within a reasonable
period, say within 2 months, you should immediately approach the postal authorities for
confirmation. Please note that, postal authorities will be able to provide confirmation only if
you approach them within 3 months. Sometimes, for your own convenience, you may choose
not to transfer the securities immediately. This may facilitate easy and quick selling of the
securities. In that case you should take care that the transfer deed remains valid. However, in
order to avail the corporate benefits like the dividends, bonus or rights from the company, it is
essential that you get the securities transferred in your name. On receipt of your request for
transfer, the company proceeds to transfer, the securities as per provisions of the law. In case
they cannot effect the transfer, the company returns back the securities giving the details of
the grounds under which the transfer could not be effected. This is known as company
objection. When you happen to receive a company objection for transfer, you should proceed
to get the errors/discrepancies corrected. You may have to contact the transferor (the seller)
either directly or through your broker for rectification or replacement with good securities.
Then you can resubmit the securities and the transfer deed to the company for effecting the
transfer. In case you are unable to get the errors rectified or get them replaced, you have
recourse to the seller and his broker through the stock exchange to get back your money.
However, if you had transacted directly with the seller originally, you have to settle the matter
with the seller directly. Sometimes, your securities may be lost or misplaced. You should
immediately request the company to record a stop transfer of the securities and

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 simultaneously apply for issue of duplicate securities. For effecting stop transfer, the
company may require you to produce a court order or the copy of the First Information
Report filed by you with the police. Further, to issue duplicate securities to you, the company
may require you to submit indemnity bonds, affidavit, sureties, etc., besides issue of public
notice. You have to comply with these requirements in order to protect your own interest.

What is Depository?
A depository is an organisation which holds securities (like shares, debentures, bonds,
government securities, mutual fund units etc.) of investors in electronic form at the request of
the investors through a registered Depository Participant. It also provides services related to
transactions in securities. A Depository Participant (DP) is an agent of the depository through
which it interfaces with the investor and provides depository services. Public
financial institutions, scheduled commercial banks, foreign banks operating in India with the
approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers,
clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer
Agent complying with the requirements prescribed by SEBI can be registered as DP. Banking
services can be availed through a branch whereas depository services can be availed through
a DP.

At present two Depositories viz. National Securities Depository Limited (NSDL) and
Central Depository Services (India) Limited (CDSL) are registered with SEBI.

Depository Act, 1996 and its Effects with regards to Companies Act 2013
1. Dematerialisation of shares of a company is regulated by the Depositories Act, 1996
2. According to the Depositories Act, 1996, an investor has the option to hold securities either in
physical or electronic form. Part of holding can be in physical form and part in demat form.
However, SEBI has notified that settlement of market trades in listed securities should take
place only in the demat mode.
3. Section 29 of the Companies Act, 2013 provides that every company making public offer;
and such 172 PP-ACL&P other prescribed companies shall issue the securities only in
dematerialised form by complying with the provisions of the Depositories Act, 1996 and the
regulations made thereunder. Any company, other than a company mentioned above, may
convert its securities into dematerialised form or issue its securities in physical form in

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 accordance with the provisions of this Act or in dematerialised for in accordance with the
provisions of the Depositories Act, 1996 and the regulations made thereunder.
4. Further, SEBI (Issue of Capital and Disclosure Requirements), 2009 has made it mandatory
for a company to make a public or rights issue or an offer for sale of securities in a
dematerialized form but allows an option to be given to shareholders to receive the security
certificates or hold securities in dematerialized form with a depository.
5. Section 8 of the Depositories Act provides that every person subscribing to shares offered by
a company shall have the option either to receive the share certificates or hold shares with a
depository in electronic form. Where a person opts to hold his shares with a depository, the
company shall intimate such depository the details of allotment of the shares and on receipt
of such information the depository shall enter in its records the name of the allottee as the
beneficial owner of the shares [Sub-section (2) of Section 8].
6. Section 9 of the Depositories Act clarifies that all the securities held by a depository shall be
dematerialised and shall be in a fungible form that is, they do not bear any notable feature
like distinctive number, folio number or certificate number. Once shares get dematerialized,
they lose their identity in terms of share certificate, distinctive numbers and folio numbers.
7. According to Section 10 of the Depositories Act, a depository shall be deemed to be the
registered owner of the shares for the purposes of effecting transfer of ownership of the
shares on behalf of a beneficial owner and the depository as a registered owner shall not
have any voting rights or any other rights in respect of the shares held by it. It is only the
beneficial owner of the shares who shall be entitled to all the rights and benefits and be
subject to all the liabilities in respect of his shares held by a depository.
8. Every depository shall maintain a register and an index of beneficial owners in the manner
provided in Section 88 of the Companies Act, 2013.

Dematerialization
Dematerialisation of securities means holding of securities in electronic form in lieu of
physical certificates. Dematerialisation is comparable to keeping your money in a bank
account. In demat form, physical share certificates are replaced by electronic book entries;
purchase of shares are reflected as credits in demat account and sales are reflected as debits.
The risk associated with physical share certificates such as loss, replacement, theft, damage
etc. are overcome in the share certificates held in Dematerialisation form which are totally
risk free.

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 Procedure for Dematerialization of Shares by the Shareholder
1. For the purpose of Dematerialisation of the shares of a registered shareholder of a
company, the shareholder has to enter into an agreement with a depository through a
participant in the manner specified by the bye-laws, for availing of its services [Refer Section
5 of the Depositories Act.]

2. Section 6(1) of the Act lays down that a person who has entered into an agreement under
Section 5 shall surrender the certificate of the shares, for which he seeks to avail the services
of a depository, to the company in the manner specified in the SEBI (Depositories and
Participants) Regulations, 1996.

3. According to Sub-section (2) of Section 6 of the Act, the company, on receipt of the share
certificate under Sub-section (1) from such a shareholder, shall cancel the certificate, (which
action is referred to as Dematerialisation of shares) and substitute in its records, the name of
the depository as the registered owner in respect of those shares and accordingly inform the
depository.

4. On receipt of the information from the company under Sub-section (2), the depository shall
enter the name of the shareholder in its records as the beneficial owner of the shares and
inform the company, who shall in turn inform the shareholder that his shares have been
dematerialized and his name has been entered in the depositorys electronic records [Refer
Sub-section (3) of Section 6 of Depositories Act, 1996.

5. A Dematerialisation Request Form (DRF) issued by the Depository Participant is to be

filled and deposited with the concerned DP together with certificates after writing
Surrendered for Dematerialisation on the face of each certificate.

6. The DP will send DRF along with the certificates to the concerned company for
confirmation of its genuineness simultaneously to Share Transfer Agents electronically
through the Depository (NSDL or CDSL as the case may be).

7. After checking the genuineness of the certificates and DRF the company/ Share Transfer
Agents destroy the certificates and send a confirmation to the NSDL or CDSL which, in
turns, confirm the dematerialisation of securities to DPs.

8. DPs on receipt of such confirmation should inform the investor accordingly.

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 Conclusion
Even though, it is not compulsory to have shares in physical format, most of the shares of
present times are traded in demat form. Moreover, some companies even do not deal with
physical shares anymore. Apart from these, you will even hardly find any agents that will do
the job for you. On the other hand, you can easily purchase or sale your demat share with
brokers or agents. Furthermore, having physical shares can even affect your capital gains tax
as you do not pay any security transaction tax with your physical shares.

Advantages of Dematerialization

1. The biggest benefit is that you do not need to hold securities in physical form rather
they are kept in electronic form and therefore the risks of losing shares due to theft, fire,
flood and earthquake are eliminated.

2. One can have instant transfer of stocks from one account to another and therefore the
whole process of buying and selling becomes fast which in turn increases the efficiency
and effectiveness of stock market as a whole.

3. Since they are hold in electronic form there is no stamp duty on transfer of securities
which reduces the transaction costs associated with buying and selling of shares.

4. Demat account is not only for equity shares but you can keep mutual funds, gold
exchange traded fund, preference shares in it which makes it easier for individuals to
keep track of their investments as they do not have to check several account, they just
have to check their demat account for knowing about their portfolio.

5. An individual having demat account can even trade for 1 share also which was not the
case when you hold them in paper form.

Disadvantages of Dematerialization

1. The biggest limitation is that in order to have a demat account one needs to be internet
savvy and therefore people who are not that literate with internet will find it hard to
operate their demat account and therefore they tell their brokers or sub brokers to
transact on behalf of them which sometimes lead to fraud and mismanagement of funds
by the sub brokers.

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2. Another limitation is that since stocks are dematerialised individuals tend to keep
looking the stock price more often than they would have if stocks were in paper form
and therefore they end up doing trading instead of investment, however this limitation is
not of demat account but of individuals as they are not patient enough still many people
blame it on demat account when they are asked why they are in a hurry to sale shares.

Webliography

1. http://www.studymode.com/essays/Legal-Regime-Over-Transfer-Of-Corporate-
55482407.html

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2. http://www.marketcalls.in/market-regulations/convert-physical-shares-to-demat-
form.html
3. http://www.sebi.gov.in/faq/faqdemat.html
4. https://www.icsi.edu/docs/webmodules/Publications/ACLP.pdf
5. http://www.letslearnfinance.com/advantages-and-disadvantages-of-demat-
account.html
6. http://www.letslearnfinance.com/advantages-and-disadvantages-of-demat-
account.html

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