Although framers of the Depositories Act, 1996 did not want legislation to foreclose scope for competition -- the law does permit a multiple-depository system -- policy-makers do not seem to have contemplated the existence of more than one depository. This seems to have influenced the drafting of the law, which has now given rise to some ambiguities.

The Depositories Act added a new section (Section 8A) to the Indian Stamp Act, 1899 to provide a four-point framework for exemptions from stamp duty. Section 8A(a) provides that issue of securities to a depository would be chargeable to duty, but these securities need not be stamped. Quite obvious, because thesecurities would be in paperless form. Section 8A(b) stipulates that when an investor opts to hold his securities in paper form, stamp duty would become payable in the same manner as the issue of a duplicate certificate. So far so good.

It is the next two clauses that need immediate attention. Section 8A(c) reads: "transfer of registered ownership of shares from a person to a depository or from a depository to a beneficial owner shall not be liable to any stamp duty;" Section 8A (d) reads: "transfer of beneficial ownership of shares, such shares being shares of a company dealt with by a depository shall not be liable to duty under article 62 of Schedule I of this Act."

This indicates that the Indian Stamp Act differentiates between the transfer of registered ownership and the transfer of beneficial ownership for the purposes of charging duty. While transfers of beneficial ownership of all forms are exempted from duty, two modes of transfer of registered ownership would be exempted from duty.

TheDepositories Act makes it clear that it is the depository that would be the registered owner of the securities dematerialised with it, while the original shareholder who opted for dematerialisation, would be recorded as a beneficial owner in the depository's books (Section 10(1)).

As for transfer of beneficial ownership of shares, if two transacting beneficial owners operate sub-accounts in the same depository, there is no cause for concern. This is because the transfer of securities balances would take place internally in the books of the depository. However, when the transfer is from a beneficial owner with a sub-account in one depository, say CDSL, to another beneficial owner with a sub-account in say, the National Securities Depository Ltd (NSDL), the picture changes.

The same transaction would result not only in a transfer of beneficial ownership, but also a transfer of registered ownership. NSDL would have to credit a securities sub-account in its records and CDSL would have to debit asub-account in its records, to effect the transfer of beneficial ownership. At the same time, the issuer company would have to effect a change in its Register of Shareholders by effecting a transfer or registered ownership from CDSL to NSDL.

It is here, that states, which are routinely loathe to let go of any opportunity to tax business transactions could step in to demand stamp duty.More so, given the state of finances of various states and the pressure on state bureaucrats to shore up revenue.

Worse, if any depository takes a stand that such duty constitutes "liabilities in respect of securities" transacted, the duty liability could get passed on to the beneficial owners -- a complete travesty of the objective of scripless trading. In fact, Section 10(3) of Depositories Act states: "The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository."

A reference to Section 108 of the Companies Act too isrelevant at this juncture. This section requires a transfer of securities to be effected through the execution of a duly stamped transfer deed. The enactment of the Depositories Act inserted sub-section (3) to this section, which reads:
"Nothing contained in this section shall apply to transfer of security effected by the transferor and the transferee both of whom are entered as beneficial owners in the records of a depository." This too could be open to interpretation. When a company has to register a transfer of ownership from one depository to another, it could well be argued that a transfer deed with the attendant stamp duty, would have to be executed.

Another inadequate provision that needs to be addressed is Section 7 of the Depositories Act. If a depository participant in NSDL intimates CDSL about a sale by a sub-account holder, under this section, CDSL would have to immediately effect the change in beneficial ownership in its records.

However, there is no legal provision that wouldenable CDSL itself to get immediately registered as a shareholder in the registers of the issuer.

Moreover, as seen above, such a transfer would perhaps require the execution of a transfer deed, with the attendant delays. Therefore, there could also be a delay in passing on any corporate benefits that accrue to the beneficial owner during such a time lag. Sebi would have to stipulate norms that certify the conclusiveness and reliability of communication transmission between every depository and participants of other depositories over whom it has no control.

In the absence of iron-clad norms for electronic data interchange, transactions that involve inter-depository transfers could give rise to serious mismatches of records, resulting in losses for the beneficial owners. Since Section 16 of the Depositories Act provides that a depository would have to indemnify beneficial owners from losses arising out of negligence of the depository and its employees, such grey areas could open the floodgates tolitigious claims in the scripless market.

These would have to be ironed out at the earliest opportunity, particularly because Sebi has a positive, stated agenda of moving more and more stocks to the list of securities in which trading would be permitted only in dematerialised form. The Sebi (Depositories and Participants) Regulations, 1996, as they stand now, do not throw much light on how these issues can be resolved.

Regulatory hurdles placed by the Department of Telecommunications in the form of disallowing interface between two telecom networks, is also a serious technical hurdle. Unless the government acts fast to instill confidence, the most spectacular reform movement in the Indian capital market -- of going paperless -- could get endangered.

The author is an associate with Udwadia, Udeshi & Berjis, a Mumbai-based law firm. The views expressed are his own