Consumer Education & Research Centre

Ref. : ER/Press/2006/Dematmds.3/dG

Ms Sucheta Dalal, noted journalist and Trustee, Consumer Education and Research Centre (CERC), Ahmedabad, appeared before the Security Appellate Tribunal (SAT), Mumbai, on Wednesday (4 January 2006), requesting it to allow CERC to intervene on
investors' behalf in an appeal filed by the National Securities Depository Limited (NSDL) against a SEBI order.

The NSDL had appealed to the Tribunal challenging the said order, which has asked it not to impose exit loads on investors seeking to switch from one Depository or Depository Participant to another. The NSDL had stated that SEBI had not informed it about representations by investors' associations and, therefore, CERC be directed to file an application explaining its grounds for intervention, particularly when CERC had submitted a long note on the subject to SEBI.

The Tribunal allowed CERC to submit an application justifying its intervention on which it will decide on merits at the next hearing.

The Tribunal, at its first hearing on Wednesday, rejected the NSDL's objections to allowing CERC to intervene in the issue. The Tribunal chairman observed that the measures involved are primarily to be taken by SEBI to promote investors' interests
and, therefore, an investors' association could intervene.

Earlier, Ms Dalal told the Tribunal that CERC, a recognised investor protection cell registered by SEBI, had taken up the issue of high dematerialisation charges with the regulator during the past few years and made representations. She said the CERC Chairman Emeritus, Prof. Manubhai Shah, represents investors on SEBI's Secondary Market Advisory Committee and she herself is on the Primary Market Advisory Committee. CERC is, therefore, interested in protecting investors' interest, supporting SEBI and opposing the NSDL appeal against the SEBI order. Therefore, CERC sought permission to intervene in the issue on behalf of investors.

Ms Dalal submitted to the Tribunal the agenda prepared by CERC for the SEBI investors' meeting which includes its plea for improvement in the demat process and reduction in charges. She also submitted a copy of Prof. Shah's dissent note to the Report of the C. B. Bhave Committee, set up by SEBI on the demat issue.

In the note, Prof. Shah alleged that the NSDL had failed in its duty and so had the DPs. The NSDL had made huge surplus during the last several years compared to its counterpart in the USA which works on a no-profit and no-loss basis. Dematerialisation
is compulsory in India whereas even today it is voluntary in the USA.

Prof. Shah also referred in the note to a few instances of fraudulent transfer of shares from Demat Accounts ranging from about Rs. 45,000 to Rs. 4.5 lakh, which he described as "only a tip of the iceberg". He, however, chose to withhold the names of the Demat Participant banks or brokers with whom the Demat Accounts were maintained and from where the shares had been transferred.

In the note, he cited one particular instance involving a couple of medical practitioners, whose several shares worth Rs. 4.5 lakh had been transferred from the Demat Account without their signatures, much less without any payment received for transfer. When their own efforts failed to set things right, they approached CERC. Prof. Shah met the Chairman of the Bank and presented the facts. On being asked by the bank's Chairman, an officer of the bank replied : "There is an organised gang regularly working for fraudulent transfer of shares."

Prof. Shah observed that if CERC as an investor association had to deal with complaints of such a large magnitude, many more complaints of this kind across the country may or may not have come to the surface. A large number of investors must have suffered in silence or pocketed injustice by evasive explanations given by DPs and more or less endorsed by SEBI and NSDL. Besides, there may be many more organised gangs and cases of this kind which need to be investigated, corrective measures taken and the
loopholes plugged, Prof. Shah added in his note.

He said the publicly listed companies are the biggest beneficiaries of dematerialisation. They do not have to print and send share certificates to the shareholders, much less run a whole department and/or engage a BPO by way of share transfer agents and registrars and incur a huge expenditure for transfer of shares. Therefore, the cost of dematerialisation should largely be borne by publicly listed companies and not necessarily by the investors.

The only charge that is required to be paid should be by those investors who enter into trading transactions for sale and purchase of shares through Demat Account. But those investors who are largely not operating the account and holding shares in demat form should not be required to pay any charges whatsoever, Prof. Shah said in his note submitted by Ms Dalal to the Tribunal.

The next hearing of the Tribunal is scheduled for Friday 13
January 2006.

Date : 07/01/2006 Pritee Shah
Place: Ahmedabad Editor Insight-The Consumer Magazine