The panel, which has put forward a draft Depositories Act (Amendment) Bill, 1998, has said that section 8 of the Act should be amended in such a way that clause 3 of this section empowers Sebi to specify securities, by issue of a notification, where transactions of "buying or selling or otherwise dealing with, shall be permissible only in the dematerialised form".

According to the panel, the issuer shall take all the necessary steps to give effect to this provision within 30 days from the date of such a notification for dematerialisation of securities falling within this provision by entering into an agreement with the depository.

It may be recalled that the Depositories Act was silent on compulsory dematerialisation.

The Dhanuka panel has dealt with compulsory dematerialisation in three forms. One is the widely reported suggestion of making itmandatory for all public floats above Rs 10 crore to be issued only in the dematerialised form.The second suggestion is to ensure that every foreign institutional investor (FII) registered with Sebi or a public financial institution as defined under the Companies Act or a mutual fund including Unit Trust of India (UTI) shall buy or sell securities or deal in securities only in the demat form.

This has already been done by Sebi to an extent with regard to compulsory trading in 50 securities.

The key suggestion is, however, that of mandatory trading only in paperless shares, the absence of which has been the reason for the relatively slow take-off of the depository in India. Several markets, including some emerging markets, have adopted the procedure of mandatory demat trading to eliminate the ills of a paper-based environment.

The Indian government had, however, felt that dematerialisation should not be made mandatory and, hence, there was no mention of this in the Act of 1996. The Dhanuka panel has,however, said that while the option to hold the shares in a demat or physical form can continue to remain with the investor, he should trade the same only in a demat environment.

In another significant recommendation, the Dhanuka panel has recommended that a depository participant should hold the securities entrusted to him by the investor in a trust until the same is dematerialised and is recorded in the name of the investor as a beneficial owner.

"These securities shall never form part of the assets of the participant and the participant shall have no right, title or interest of any nature whatsoever on these securities," the panel has said in its report.

"The idea is to ensure that in the event of a DP being declared insolvent the shares lodged with him by an investor should not be treated as being owned by the DP and his dues be recovered from these shares. The move is aimed at protecting the interests of the investor," said DN Raval, Sebi executive director and a member of the panel.

Raval addedthat the panel has also called for the removal of stamp duty on all securities that are in a dematerialised form. This would include debt securities, for which the market has been clamouring for long. The other significant change suggested is that of providing for a nomination facility with respect to dematerialised shares.

In the event of a death of an investor, the shares should be transferred to the nominee.