SEBI's New Measures to Enhance Investor Protection in Dematerialized Securities Transfers

Securities Exchange Board of India (“SEBI”) vide a circular no. SEBI/HO/MRD/MRD-PoD-2/P/CIR/2024/18, dated March 20, 2024, has issued safeguards to address the concerns of investors on transfer of securities in dematerialized mode (“Circular”). The provisions of the Circular have come into effect from April 01, 2024.

The Circular aims to amend the SEBI’s master circular for depositories dated October 06, 2023, which lays down the guidelines to address the concerns arising out of transfer of securities from the Beneficial Owner Accounts (“BO Accounts”) without proper authorization by the concerned investor.

This Circular has been issued by the SEBI in exercise of their powers under Section 11(1) of the Securities and Exchange Board of India Act, 1992, which states that it is the duty of the SEBI to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.

SAFEGUARDS SPECIFIED IN THE CIRCULAR

Following safeguards are to be implemented to address the concerns of the investors appearing from the transfer of securities from the BO Accounts:

1. The depositories shall prioritize investor education particularly focussing on the careful preservation of Delivery Instruction Slip (“DIS”) by the Beneficial Owners (“BO”).

2. The Depository Participants (“DP”) shall not accept pre-signed DIS with blank columns from the BO(s).

3. If the DIS booklet is lost, stolen, or if it cannot be traced by the BO, the BO must promptly notify the DP in writing. Upon receiving this notification, the DP will cancel any unused DIS from the reported booklet.

4. The DP shall also ensure that a new DIS booklet is issued only on the strength of the DIS instruction request slip duly complete in all respects, unless the request for fresh booklet is due to loss, etc. Further, in case the request for issuance of the DIS booklet is received in an inactive/dormant account, the DIS booklet shall be delivered at the registered address of the BO as per the DP records. Such issuance of DIS shall be authorized by the compliance officer or any other designated senior official of the DP.

5. The DPs shall not issue more than 10 (ten) loose DIS to 1 (one) account holder in a financial year (April to March). The loose DIS can be issued only if the BO(s) come in person and sign the loose DIS in the presence of an authorised DP official.

6. The DPs shall put in place appropriate checks and balances regarding the verification of signatures of the BOs while processing the DIS. 7. The DPs shall cross check with the BOs under exceptional circumstances before acting upon the DIS. 8. The DPs shall confirm with a BO before acting upon the DIS for an inactive/dormant account, whenever any security in such account is transferred at a time. This confirmation by DPs shall require a recorded phone call on registered number of BO by the authorized official of the DP and shall be additionally authorised by the compliance officer or any other designated senior official of the DP. The verifying DP official must record the verification details on the instruction slip.

However, in case of active accounts, such verification may be made mandatory only if the BO account has 5 (five) or more International Securities Identification Number (“ISIN”) and all such ISIN balances are transferred simultaneously. The authorized official of the DP verifying such transactions with the BO, shall record the details on the instruction slip under their signature. Such verifications shall be additionally authorized by the compliance officer or any other designated senior official of the DP.

CONCLUSION

Pursuant to the provisions of the Circular issued by the SEBI, the depositories are advised to make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision immediately, as may be necessary/applicable and to bring the provisions of this circular to the notice of the DPs of the depository. The depositories are further advised to disseminate the same on their website as well as monitor compliance by DPs and to communicate to SEBI the status of implementation of the provisions of this circular in the Monthly Development Report. The Circular holds importance as the SEBI has taken proactive measures to address investor concerns related to the transfer of securities in dematerialized mode. Through this Circular, the SEBI aims to prevent fraud by means of transferring shares from inactive demat account/accounts.