Sharepro scam: Sebi plans new rules for share transfer agents, registrars

Mumbai: The Securities and Exchange Board of India (Sebi) is drafting rules to monitor share transfer agents and registrars and improve their functioning, two people with direct knowledge of the matter said.

This comes a year after Sharepro Services (India) Pvt. Ltd, a share transfer agent, was found to have defrauded at least 10 companies including Britannia Industries Ltd, Asian Paints Ltd, Aptech Ltd, Tata Communications Ltd and Kansai Nerolac Ltd of Rs21.7 crore. Some of the companies also filed police petitions against Sharepro, and Sebi imposed an interim ban on the company. The money was found to be transferred to the accounts of the relatives of senior Sharepro officials and unauthorized entities over 10 years.

According to the first of the two persons mentioned above, Sebi had extended its probe into the Sharepro scam to all 135 share transfer agents. “During examination, the regulator observed certain systemic concerns that needed to be addressed, such as improving monitoring and functioning of these market intermediaries,” said the first person.

Investigations highlighted falsification of records, forgery, repeated printing of new certificates without any request or authorization from shareholders and irregular transfer transactions.

The second of the two persons quoted above said the market watchdog had formed a committee which submitted its report to the regulator in December last year.

“A committee comprising of companies, depositories, share transfer agents and banks was set up to suggest suitable changes for these market intermediaries. The committee has submitted its report and is currently under consideration,” said the second person.

According to the first person, among the changes suggested by this committee are regular audit of their functions, to be done by companies who are utilizing their services. It was also suggested the management of the registrar and share transfer agent should be governed by a strict code of conduct, including operational controls such as how the bank details of investors and companies would be captured, he added.

As per G.V. Nageswara Rao, chief executive officer and managing director of National Securities Depository Ltd, these controls are important but the biggest change needed is to ensure 100% dematerialization of shares.

“Physical shares are always more susceptible to manipulation. To avoid such occurrences in the future, there is an urgent need to ensure that all the shares are held in demat form,” said Rao.

Under the provisions of the Depositories Act, 1996, non-promoter investors have the option to hold securities either in physical or dematerialized form.

In 2011, Sebi asked all promoter shareholders to dematerialize all their holdings. While it is not compulsory, most retail investors have also moved to the demat format.

As of March 2017, 98% of the total traded shares were in demat form. While Sebi has been keen to have all the shares in demat form, it is facing legal hurdles due to the Depositories Act, which allows for both forms of shares. To facilitate the transition, the Act would need to be amended.