SEBI Guidelines on Dematerialization of Physical Shares and Their Implications for NRI clients

The guidelines will be effective from December 05, 2018. Post December 05, all requests for transfer of shares will have to be in the demat format only.

Sep 03, 2018 02:09 IST India Infoline News Service

The Securities and Exchange Board of India (SEBI), on June 08, 2018, issued regulations pertaining to the mandatory dematerialization of securities for effecting transfers. The guidelines will be effective from December 05, 2018. Post December 05, all requests for transfer of shares will have to be in the demat format only.
Currently, it is possible to send physical certificates to the registrar of the company whose shares one holds for transfer and get new certificates issued in your name. The dematerialization can be done after the physical certificates have been transferred to your name. But remember, this will be permissible only until December 04, 2018. In this duration, an investor can transfer physical shares into his/her name purely on the basis of the Transfer Deed (TD). Effective December 05, only demat transfer requests will be considered. This means that if you are still holding physical share certificates after this date, then it will not be possible to sell these shares unless you dematerialize them first.
In India, the rules of dematerialization are nearly the same for resident Indians as well as for NRIs, however, there are some additional regulations that the latter have to follow.
Let us take a closer look at what these new rules mean for NRIs.
What if an NRI is Holding Physical Share Certificates Bought in India?
Currently, there are no restrictions, nor is there a need to get special permission, for an NRI to sell or purchase a specific stock from the primary market. However, there are instances where NRIs purchased physical certificates while living in India but did not get them dematerialized.

Here, the NRI will have four options.
  1. If the NRI already has an ‘NRI Demat account’, then the process becomes a lot simpler. They can just fill up the Demat Request Form (DRF) and submit it along with the share certificates to the Depository Participant (DP). The NRI has to be careful to deface the share certificates with the words “SURRENDERED FOR DEMAT”. The DP will then upload the details into the NSDL/CDSL system which the registrar and transfer agent (RTA) of the company will have to approve. Once approved, equivalent shares will be credited into the NRI Demat Account. The entire process takes around a month under normal circumstances, i.e. if there are no objections or issues raised. Once the shares are transferred into the NRI’s demat account, they are free to be sold.
  2. If the NRI does not have a demat account, then he can open a new demat account in India. While opening the demat account, the account type has to be specifically selected as ‘non-resident’. There is also a secondary selection that the NRI will have to make, i.e. whether the demat account will be repatriable (NRE) or non-repatriable (NRO). Repatriable accounts are those in which there are no limits on repatriating funds out of India. The NRI client needs to choose his type of account wisely and after ascertaining his/her requirements. Once the account is opened, the NRI can then send the shares for dematerialization by filling up the DRF and following the above mentioned procedure.
  3. What if the NRI already has a resident demat account opened in India? Can the shares be dematerialized into the resident demat account? Yes, but there is a catch here. As an NRI, he is only permitted to operate a NRI demat account. Therefore, even though he already has a resident demat account, he will have to open (or change the type of account if the DP permits) a dedicated demat account under NRO category and these physical shares can only be dematerialized into that account.
  4. In case the NRI is opening a new demat account and wants to hold shares in repatriable and in non-repatriable form, then he/she will have to open two separate NRI demat accounts and specifically tag one as ‘repatriable’ and the other as ‘non-repatriable’. Now, before sending the physical shares for demat, the NRI must clarify whether such shares were acquired under an NRE or an NRO status. Based on the source of income invested while acquiring the shares, the NRI should dematerialize these physical shares into the appropriate demat account. The below table will give you a better idea about the type of account required based on the source of income used to buy shares before dematerialize the shares.
Income type invested while
buying the physical shares
Type Demat Type
Income in India Non-Repatriable NRO
Income out of India Repatriable NRE
What if the NRI Received the Shares via Transmission?
This new rule could create a piquant situation for NRIs if the physical shares were received in the form of transmission. Unlike a transfer, which is a voluntary action, a transmission is an involuntary movement of shares by the operation of law.
Consider this, what happens if the father of the NRI, who holds physical shares in his name, passes away? How will the new rules of compulsory dematerialization apply here?
The answer is that this rule will only apply to transfer and not to transmission. This means that the NRI can get the shares transmitted to his name with the support of the death certificate and the registered will or appropriate evidencing document. Once such shares are transmitted and new physical certificates are received, then the NRI will have to compulsory dematerialize these shares into his demat account if he wants to transfer or sell them.
Also, these rules of transfer will not apply to any unlisted physical shares that the NRI is holding.

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