The Indian equity market is rapidly moving towards paperless trading.
Ninety-eight per cent shares of companies in the Nifty basket and 96 per cent of CNX 500 companies’ shares are now dematerialised. But the proportion is lower, at around 80 per cent, for the entire universe of listed companies.
PSU shares
The ratio of shares in demat form to total shares outstanding for Nifty companies has improved from 86 per cent in June 2011 to 98 per cent this June.
More than half the shares in PSU companies with large government holding such as Coal India, BHEL, BPCL and GAIL were held in physical form last year.
Similarly, shareholders of companies with foreign promoters such as Maruti Suzuki, Hindustan Unilever were also seen holding out till last year.
But last June, SEBI had ruled that the entire promoter holding of listed companies ought to be dematerialised by the end of September 2011. Failure to do so would have resulted in shares of the company moving to the trade-for-trade segment.
Intra-day trading is not allowed in this segment and delivery is compulsory. The circuit filter is also tighter at 5 per cent. The regulator’s move was aimed at improving liquidity since it was expected that unlocking promoters’ shares held in physical form could increase the shares in circulation. But this plan has not really worked as the cash volumes have moved downhill over the past year.
Impact on volumes
“Although transacting in dematerialised form is easy, and in an ideal situation should have helped in increasing the cash volumes, the current nervousness among retail investors, given all the headline news over the last one year, may have resulted in lower participation in the market and hence the lower volumes,” says I. V. Subramaniam, Director, Quantum Asset Management Company Private Ltd.
“Secondly, if the increase in demat shares is mainly due to promoter holding getting dematerialised, then the transaction volumes in the market would be low as the promoters may not necessarily be selling or trading their shareholding.”
While SEBI’s threat has worked wonders with the front-line companies, the same is not true of the entire market. In about a third of the companies listed in Indian exchanges, investors still hold more than half their shares in physical form.
Subramaniam thinks that elderly investors who have been holding shares of companies for many decades, might still be holding them in physical form. These kind of investors probably have no desire to sell and are probably too lethargic or uncomfortable about dematerialising.
There may also be instances where the investor purchased shares during the physical regime and was subsequently transferred to another city or has gone abroad.
In such cases, sending the transfer deed to the old broker and getting a new form might be too cumbersome to undertake. In such cases also, the shares might still be in physical form.
The value of the share also plays a significant role in the decision to convert holdings into demat form. If the value is significantly high, then the investor would take steps to convert the physical holdings into demat form.