The move to shift the primary market entirely to the demat format had been recommended by the Shankar Acharya committee and was accepted by the Sebi board.

However, despite the market regulator's clearance, the issue was referred to the primary market committee. Verma is of the opinion that the infrastructure for investors to open demat accounts across the country was not in place yet to bring in such a change. "We referred the issue to the primary market committee which has said that mandatory demat in the primary market should wait for some time. We are trying to find out other ways in which the inflow of fresh paper into the system can bestymied till such time as we make it mandatory on all issuers to allot only demat shares," said a senior Sebi official. Verma confirmed that he had expressed reservations on the move as the depository had not expanded to all parts of the country yet and this could severely restrict the investor base if an issue was mandated to be made in demat form only.

"Small investors who subscribe to very small lots of shares may not be keen to get shares in the demat mode. Hence, we feel that the issue needs to be discussed. For the time being, both the options (demat as well as physical shares) can be maintained," Verma said. Sources close to the primary markets panel said Verma is in favour of putting a cap on the number of shares up to which small investors can be issued shares in physical form. At present, investors across more than 2,000 cities, towns and villages have access to depository accounts but the regulator feels that this is not enough. It is felt that the branch network of 100-odd depositoryparticipants is not yet strong enough to cater to the investor base.

Sebi sources pointed out that certain interim measures are being looked at. One such move is to make it mandatory for companies to offer the demat option to investors when they make an IPO.

The Depositories Act gives the right to an investor to hold his shares in physical or demat form, but this would be applicable only once a share has been created and, hence, Sebi can well mandate companies to offer demat shares as well. The other measure being looked at is to set a cap beyond which the shares would be issued only in demat form. "We could mandate investors opting for more than, say, 10,000 shares to take their allotment only in demat form. This would bring all traders and institutions into the demat mode and keep small investors away from subscribing to demat shares for the time being," said a Sebi source. As of today, more than Rs 1,40,000 crore of shares have been dematerialised through seven lakh accounts.

INSIGHT

Thelogic for not making demat compulsory for a fresh issue of shares is questionable. If the reason is that small investors in remote areas don't have access to depositories, why permit trading in equities at all? Access to markets is even lower than access to depositories. One just has to compare the number of official stock exchanges in India with the number of towns and villages in the country to apply the same logic. The simplest option is to keep a specific cutoff date for making equity dilution through demat mandatory--and stick to it. Despite all the Cassandras, compulsory demat trading in some stocks has worked like a charm. There is no reason why it can't work for IPOs.

--Urmik Chhaya