Over the last three weeks, mutual fund investors have been fuming at the creation of a new identification number, which has been mandated, in addition to the Permanent Account Number (PAN) card of the Income Tax Department. If you are one of those investors who has complied with all the formalities, you expect a system that makes no mistakes about accounting for and crediting the shares that you have bought or sold into your twice-verified depository (DP) account.
Well, read about the experience of Madhav Parekh a regular retail investor. Many would say Parekh is a lucky person. On December 2, 2006, this Mumbai resident received his routine DP statement from the Stock Holding Corporation of India Ltd (SHCIL) and was surprised to find a credit of 20 shares of Parasvnath Developers, although he had never applied to its Initial Public Offering (IPO).
A little later, there was another surprise — a refund letter from Parasvnath Developers informing him of the electronic credit of Rs 12,000 through UTI Bank to his bank account. The letter, a copy of which is available with us, shows an ostensible payment of Rs 18,000 by Parekh, an allotment of 20 shares and a refund of Rs 12,000.
Parekh’s bank account however showed no such credit. Since then he has written several letters to the registrar and the company pointing out that he has neither applied for the shares, nor received any credit of Rs 12,000, as claimed.
If that were not bad enough, the refund intimation letter is addressed to “Kamlesh Parekh”, while the address, demat account and bank account details belong to Madhav Parekh. His DP account however does show a credit of 20 shares. The registrar in this case is Intime Spectrum and the depository is National Securities Depository (NSDL).
Many in Parekh’s position would have been thrilled at the bonanza, sold the shares, pocketed the money and even closed the DP account and waited for someone to detect the mistake. Instead, he has been chasing his DP and registrar for six weeks to rectify the problem and transfer the shares. We got to know the case only because when he was tired of being given a run-around whereas he should rightfully have received a Thank You and an apology from the DP and Registrar.
The flip side of this is that another investor, who actually applied for Parasvnath shares is surely running around for the last six weeks agitated at the loss of Rs 18,000 and also not getting any response from those responsible. What is the point of multiple identification systems if key information can be messed up so much? And what if a similar mistake had led to the debit of a large sum of money from Parekh’s account rather than a credit of 20 shares that are being traded at a substantial premium?
A serious problem today is the lack of a clear line of accountability between companies, depositories, stock exchanges and the Securities and Exchange Board of India (Sebi). Each one of them treats grievance redressal like a post office and merely transfers complaints instead of understanding issues. For instance, Madhav Parekh’s case is less about the 20 shares credited to his account and more about the lack of robustness of the IPO process. But how does an investor even get the attention of the top brass in the organisations responsible for the job? Such weaknesses ultimately lead to bigger scams. Fortunately, the automated system works well most of the time, but if you are the unfortunate victim of a mix up or callous intermediaries, life can be extremely tough.
This happened to Gurdip Singh, a Delhi based senior citizen, who ended up having to approach a consumer court and fight a four year battle, including one appeal just to get his physical shares of Mahavir Spinning Mills Ltd dematerialised. An original allottee of Mahavir Spinning shares, he decided to get his shares dematerialised in 2002.
His DP (depository participant), Standard Chartered Bank said the request was turned down due to “signature mismatch” and he would need to get it verified by the bank.
On complying with this, the company still rejected the demat request.
On writing to the company, it asked him to sign an affidavit in a specified format, but it rejected the demat request again. It now wanted the affidavit attested by a first class magistrate, because by now, in the process of going back and forth, the shares had been stamped for demat without actually being dematerialised. The State Consumer Forum noted that the company and its agent (Allankit Assignments Ltd) were making up rules, like asking for attestation by a magistrate, even when there was no such legal requirement.
The Forum not only ordered the company to dematerialise Mr Singh’s shares, but decreed payment of a compensation of Rs 3,000 for loss of profit during the period and a compensation of Rs 1,000 for mental agony and harassment. A pertinent question raised by Singh’s experience is, why couldn’t this problem be resolved through Sebi?
Clearly, even one experience like this is enough for a retail investor to keep away from the capital market altogether.
Singh’s case again highlights a systemic weakness not an individual problem. Companies are not directly accountable to depositories or to Sebi; in most cases they are accountable to Ministry of Company Affairs (MCA). Since there is little co-operation or coordination between MCA and Sebi, there is a systemic weakness. Only last week, a business news channel carried a report saying 100 companies had introduced physical shares in the market without requisite approvals nd they found their way to the market.
NSDL also alleged that it had written 50 letters to Sebi in this regard; Sebi in turn said that its Secondary Market Advisory Committee is discussing the issue — this is a decade after the depositories came into existence and compulsory dematerialisation was introduced. Until Sebi finds a solution, investors such as Singh will continue to be harassed by companies and their agents.