200 companies face SEBI rap over low Demat holding record

MUMBAI: Indian Metals & Ferro Alloys has underperformed the BSE Mid-Cap index in the past month. The trading volumes in the stock have plunged to just a 10th of what it was in the first week of January. This is not an isolated case. Nearly 200 stocks face a similar fall in price and volumes due to the reluctance of more than half the investors in these companies to dematerialise their shares.

The Bombay Stock Exchange , or BSE, has shifted over 200 companies to the trade-for-trade, or TFT, segment for their failure to maintain at least 50% of public holding in the demat form. The companies have been shortlisted on the basis of their latest available shareholding patterns, details of which have been filed with the exchange.

The BSE has shifted 207 companies to the TFT group for non-compliance with SEBI's norms on public demat holding, taking the total number of companies in the segment to nearly 1,000, including those penalised for reasons other than non-compliance of demat norms. KGN Industries , Shri Ganesh Spinners , Empower Industries and Avance Technologies have less than 50% public holding in the demat form, a list compiled by the BSE shows.

Even more than a decade after the introduction of dematerialisation, many investors continue to hold shares in the physical form. For completing delivery, one must have stocks in the dematerialised form, but an individual can keep it in the physical form if he or she is not interested in selling it.

Probably, this shifting of companies to the TFT segment could force shareholders to speed up the process of converting shares into the electronic form. Apart from the uniform circuit limit of 5%, companies in the TFT group are subject to other conditions like compulsory delivery of shares and no intra-day squaring of positions.

Dematerialisation of shares is the process of opening a demat account with any of the depository participants registered with SEBI to keep shares in the electronic form. It saves shareholders from the risks of theft of shares, forgery and bad delivery over signature mismatch.

"Typically, the problem of low demat public holding is faced by small companies that have little or no investor interest either due to poor performance or illiquidity," said Edelweiss Securities executive vice-president and head of institutional equities Vikas Khemani. But some investor groups are against the forcible conversion of shares into the dematerialised form.

"If an investor does not want to convert his holdings, he or she cannot be forced to do so as the conversion carries initial and recurring costs," said Virendra Jain, founder of Midas Touch Investors Association. "It is wrong to shift all those companies that have not disclosed their share-holding pattern to the TFT segment. If a company fails to provide the details, the company should be penalised, not the investors," he said.