The Depositories Act, 1996 has paved the way for an alternate
mode of effecting transfer of shares. Investors will, however, have the choice
of continuing with the existing share certificates and adopt the existing mode
of effecting their transfer.
The Depositories Act provides for the establishment of one
or more depositories. Every depository will be required to be registered with
the SEBI and receive a certificate of commencement of business on fulfillment
of such conditions as may be prescribed. Investors opting to join the system
will be required to be registered with one or more 'participants' who will be
agents for the depositories. The participants will be custodial agencies like banks,
financial institutions as well as Iarge corporate brokerage firms. Upon entry
into the system, share certificates belonging to the investors will be
'dematerialised' and their names entered in the books of participants as
beneficial owners. The investors' names in the register of companies concerned
will be replaced by the name of depository as the registered
owner of the securities. The investors will, however,
continue to enjoy the economic benefits from the shares as well as voting
rights on the shares concerned.
Shares in the depository mode shall cease to have
distinctive numbers. Issuers of new securities will give investors the option
either to receive physical securities or to join the depository mode. While
investors holding share certificates may opt to become beneficial owners in a depository
system, those investors opting to exit from a depository will be allowed to do
so and claim share certificates from the company by substituting their names as
the registered owner in place of the depository.
Ownership changes in the depository system will be made
automatically on the basis of delivery vs. payment. There will be a regular,
mandatory flow of in-formation about the details of ownership in depository's record to the company concerned.
If the latter has any reservations about the admissibility of share acquisition
by any person on the ground that the transfer of the security conflicts with
the provisions of SICA, 1985, the company will be entitled to make an
application to the Company Law Board (CLB) for rectification of the ownership
records with depository. During the pendency of company's application with the CLB, the
transferee would be entitled to all the rights and benefits of the shares
except voting rights which will be subject to the orders of the CLB.
The Act provides for detailed regulations to be framed by
SEBI as well as detailed bye-laws to be framed by the depositories with the
approval of SEBI. The bye-laws will crystallize the rights and obligations of participants and
beneficial owners as well as procedures for ensuring adequate safeguards to
protect the interests of investors. Any loss caused to beneficial owners due to
the negligence of the depository or the participant will be required to be
indemnified by the depository.
Insertion of new
section, viz., s.111.A. Subject to the provisions of this section, viz., s.111A,
the shares or debentures and any interest therein of a company, other than a private
company and a deemed public company shall be freely transferable.
The Company Law Board may/ on an
application made by a depository, the company, participant or investor or the
Securities and Exchange Board of India within two months from the date of
transfer of any shares or debentures held by a depository or from the date on
which the instrument of transfer or the intimation of transmission was
delivered to the company, as the case maybe, after such inquiry, as it thinks
fit, direct the company or depository to rectify register or records if the
transfer of the shares or debentures is in contravention of any of the provisions
of the Securities and Exchange Board of India Act, 1992 or regulations made
thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985. However
the CLB may, at its discretion, make an interim order as to suspend the voting
rights before making or completing such enquiry.
The provisions of this section
shall not restrict the right of a holder of shares or debentures, to transfer
such shares or debentures and any person acquiring such shares or debentures
shall be entitled to voting rights unless the voting rights have been suspended
by an order of the Company Law Board.
Notwithstanding anything contained in this section, any further transfer, during the pendency of
the application with the Company Law
Board, of shares or debentures shall
entitle the transferee to voting rights
unless the voting rights in respect of
such transferee have also been suspended.
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