The serious effort is required towards strengthening the mechanism so that corporates and investors alike stand to gain.

Faced with innumerable complaints of investors with regard to delays and malpractices in transfer of securities and realising the genuine problems of investors and the need for setting right matters before it is too late, SEBI constituted a committee under R Chandrasekharan, Managing Director, Stock Holding Corporation of India Limited, to recommend measures for expediting and simplifying the share transfer process.

The committee, after an in-depth study of international practices, has recommended those in vogue in the United Kingdom being adopted as the model for India too, as Indian laws and the legal system are by and large shaped on the British pattern. SEBI's decision to make the committee's recommendations open for public debate will help infuse the much-desired transparency in the system.

The problem of transfer of shares is not a recent one, for it has been plaguing the corporate sector and investors for the last over two decades. The matter received a sharp focus in the 1980s particularly after Swaraj Paul's bid to take over DCM and Escorts. It is worth noting that the Sachar Committee too in 1977 had examined the issue of transfer and transmission of shares. A working group under R N Bansal subjected share transfer procedure to a further scrutiny in 1987. In 1996, the matter was entrusted to C.R. Bhave of SEBI along with other experts.For its part, the Institute of Company Secretaries of India had brought out under its Secretarial Practice Series, a publication Transfer and Transmission of Shares in 1980 and also issued a secretarial standard on toning up the efficiency of the secretariat/share transfer departments of companies in regard to transfer and transmission of securities.

A close look at the numerous complaints lodged with SEBI from time to time reveals that a majority of complaints relate to share transfers. This problem has been further aggravated by inordinate delays or refusal of transfers on flimsy grounds on the part of share transfer agents and issuing companies. The consequence has been a serious bottleneck in the functioning of the secondary market.

The Chandrasekharan Committee, after a detailed study of international practices in vogue, has recommended the adoption of the British practice being the most suited to Indian conditions. It has, however, observed that there was a vast difference in infrastructural facilities and management practices adopted by share transfer agents in the UK and those in vogue here. In the UK, the securities are lodged by the clearing houses/brokers with the share transfer agents (STAs) for registering in favour of transferers and the transfer is effected in three-five days from the date of receipt of the documents from the clearing house. Further, transfer of securities is approved by the STAs and not by the company and the documents are returned to the broker and not to the individual buyer. The share transfer agents also do not check the distinctive numbers and signature of the seller and there is no concept of marketable lot. There is also no practice of blank transfer deeds and in the event of a fraud, the aggrieved investor is immediately put right by the company either with repossession of the original certificates or by the purchase of an equivalent number of shares.

The committee has made a diagnostic study of the procedures being followed by the market participants in India, transfer problems associated with verification of signatures and problems associated with transfer deeds and the technology being adopted by the STAs. The major finding is that most of the work by STAs is done manually. The committee feels that STAs have not adopted the modern technological automated devices to speed up the transfer process. It has also examined the issues relating to postal and police authorities and those relating to duplicate certificates, stolen shares, thefts etc. Efforts have also been made to identify the procedures to be adopted for the future. The committee has made an exhaustive study of the existing system and tried to identify the various problems after listening to various market participants and it is of the view that the reforms and recommendations suggested must be implemented in toto and simultaneously in respect of all the market constituents for successful implementation of the strategy.

Once the recommendations are finalised and implemented, there will be a paradigm shift in the share transfer process with the ultimate objective of improving investor confidence and healthy development of capital market.The committee has classified its recommendations separately for issuers, R&T agents, stock exchanges, brokers, Department of Company Affairs and SEBI. All the players in the system have identified the same issues which relate to blank transfers, share transfer forms, share transfer stamps, verification of signatures of transferer on the transfer deed and need for deletion of dates from the transfer deeds.

The committee's study has been made in the changed environment when a depository has been set up and the Companies Act is being amended. Its report becomes all the more important in the context of the emergence of STAs. Some of the issues are totally new which had not been studied by previous panels. The committee's suggestion that companies should appoint a well-qualified compliance officer vested with the responsibility for monitoring the transfer process and reporting to the board of directors will go a long way in helping investors. This officer should be a qualified company secretary so as to be well informed in matters of transfer of shares and related issues. What is more desirable is that the STAs be suitably advised to appoint professionals well versed in corporate laws, so that these institutions become acceptable over a period of time.

It is imperative to strengthen the manpower wings and infrastructural developments of STAs if companies do not wish to have in-house share transfer departments. In fact, while entering into an agreement with STAs, companies should insist upon one compliance officer. This functionary would not only help solve the problems faced by STAs but also instil the required confidence in the companies because it is ultimately the liability of the company. In the report of the working group on the Companies Act, it has been recommended that STAs be included as one of the officers in default and if the recommendation is accepted, it would be in their own interests to appoint well-qualified personnel who have in-depth knowledge and can provide the required services efficiently. Regulatory agencies should, on a continuous basis, monitor the working of STAs by resorting to regular inspection either by officers of the SEBI or by a panel of professionals appointed for this purpose, to ascertain the availability of the infrastructure facilities (staff, space, machines and working environment) keeping in view the work load they have agreed to take on.

The author is Secretary, the Institute of Company Secretaries of India.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.