The Securities Exchange Board of India (“SEBI”) published a consultation paper dated January 14, 2025[1] (“Consultation Paper”) seeking comments or suggestions from the public and other stakeholders on the following proposals relating to amendments to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). This Consultation Paper is open for comments and suggestions via e-mail till February 04, 2025. The key features of the Consultation Paper include:
I. Background:
In view of the benefits of dematerialisation of securities, such as mitigating risks like loss, theft, mutilation, and fraud associated with physical certificates, several policy measures have been implemented. These include public issue of securities being permitted only in demat mode or transfer of physical securities being permitted only in demat mode.
However, listed companies can still issue securities in physical mode in specific cases, such as:
(a) Consolidation of face value of securities,
(b) Sub-division or split of face value of securities, and
(c) Issuance of securities under a Scheme of Arrangement, including mergers, demergers, and reconstructions.
Accordingly, to align with SEBI’s objective of advancing dematerialisation, it is essential to prevent the creation of new physical securities for the corporate actions as mentioned above.
II. Existing Provisions:
Currently, the LODR Regulations do not specifically mandate the issuance of new securities exclusively in dematerialised form for actions such as stock splits, consolidation of face value, or mergers/ demergers. However, listed companies may choose to include this requirement in the shareholders’ resolution approving such corporate actions or incorporate it into the scheme of arrangement for mergers/ demergers.
III. Rationale:
Dematerialisation of securities offer numerous advantages, including reduction of fraud and forgery, prevention of loss or damage, faster transfers, enhanced transparency and regulatory oversight, fewer legal disputes, and cost savings for investors and companies. While SEBI encourages investors to hold securities in demat form, some still retain them in physical form. Though legally allowed, such securities can only be sold or transferred after dematerialisation.
IV. Proposal:
SEBI proposes to amend the LODR Regulations to mandate the issuance of securities exclusively in dematerialized form for sub-division, split, consolidation of face value, and schemes of arrangement, thereby encouraging demat holdings.
For investors without a demat account, issuer companies will be required to open a separate demat account with an appropriate ledger of ownership to manage such securities.
Accordingly, SEBI invites public comment and suggestions as to whether issuance of new securities pursuant to (i) subdivision / split /consolidation of Face Value of Securities and (ii) Scheme of Arrangement, should be compulsorily allowed in dematerialized form only?
V. Modifications to certain provisions of LODR Regulations:
The following regulations of the LODR Regulations have been omitted:
(a) Regulation 40 (4), which discusses the listed entity shall not register transfer when any statutory prohibition or any attachment or prohibitory order of a competent authority restrains it from transferring the securities from the name of the transferor(s).
(b) Regulation 40 (5), which states that the listed entity shall not register the transfer of its securities in the name of the transferee(s) when the transferor(s) objects to the transfer. Provided that the transferor serves on the listed entity, within 60 (sixty) working days of raising the objection, a prohibitory order of a court of competent jurisdiction.
This is because the transfer of shares in physical form has been discontinued by SEBI with effect from April 01, 2019. Hence, these sub-regulations may not be relevant.
Further the following amendments are proposed under the LODR Regulations:
SEBI proposes the requirement of maintaining the “proof of delivery” relating to the intimation of “minor difference in the signature” and “major difference in signature” or “non-availability of signature” to be omitted from the Schedule VII of the LODR Regulations.
This is because listed entities currently maintain proof of dispatch records, with dispatches carried out via speed post or courier services. These records, which include proof of delivery, are typically retained for up to 6 (six) months for reference. However, it is not practical for listed entities to individually download and maintain proof of delivery records for each dispatch.
[1]https://www.sebi.gov.in/reports-and-statistics/reports/jan-2025/consultation-paper-on-certain-amendments-to-sebi-lodr-regulations-2015-with-the-objective-of-encouraging-dematerialization-of-securities-and-streamlining-certain-processes-in-view-of-current-regulato-_90753.html