Thursday, January 20, 2011

A Case For Mandatory Dematerialisation of Securities

In yesterday’s Financial Express, Prof. Jayanth Varma makes a compelling case for abolition of physical share certificates and for mandatory dematerialisation of all shares.

To supplement the arguments he makes, dematerialisation also impacts the manner in which transfers of shares are recognised in law. In the case of physical shares, a transfer obtains legal effect only if it is registered by the company (an act usually performed by the board or a special committee constituted for the purpose) in accordance with Section 108 of the Companies Act, 1956. This perpetuates a circumstance where shares may be held in street names – sellers hand over share certificates and transfer forms but the purchaser does not tender them to the company for registration. Due to this, there is a separation of legal and beneficial ownership of shares. In the case of dematerialised shares, however, the transfer is made effective through the depository system and does not require any involvement on the part of the company. This makes recording of share ownership more straight-forward and lends greater transparency to the system than physical certificates.

1 comment:

Jayant Raghu Ram said...

Prof. Verma's opinion is definitely interesting. However, I have a question in the context of restrictions on transferability of shares.

Assuming that shares issued to a certain class of investors which have attached to it a pre-emptive right like a ROFR are issued in the form of physical certificates; wouldn't compulsory dematerialisation in effect prevent the issue of such shares with pre-emptive rights?

Please correct me if I'm wrong in assuming that shares issued with pre-emptive rights have to be in the form of physical certificates.