CORPORATE ACTIONS UNDER DEPOSITORY SYSTEM

CHAPTER VI CORPORATE ACTIONS UNDER DEPOSITORY SYSTEM The Depository System can only be a medium for distribution of benefits in securities form whereas, computation of entitlements will rest with the company. A depository can be helpful in delivering the benefits in securities form viz. bonus, rights, shares consequent to conversion etc. The depository can disburse the securities to the beneficial accountholders, if the company gives information on entitlements in electronic form. -Pavan Kumar Vijay, Past President, ICSI

CORPORATE ACTIONS UNDER DEPOSITORY SYSTEM In pre demat era, investors were usually used to face problems like Non-receipt and delayed receipt of the physical securities after bonus issues, conversion, consolidation, splitting, mergers and de-mergers declared by the companies Delayed or denied receipt of cash corporate benefits like receiving interest, dividend and redemption proceeds in case of debentures etc Loss of certificates in transit Follow up the Issuer companies for problems related with corporate actions Long No delivery period as Issuers used to take much time to update their shareholders registers so that they could fix the entitlements of owner of securities Late commencement of trading of securities as the receipt of the securities in the hands of the shareholders was late and used to take uncertain time All the above problems got their solution with the involvement of depositories as distributors of non-cash corporate benefits and as information providers in case of cash corporate benefits. Depositories provide the service of distributing securities arising out of the corporate actions. This chapter deals with the securities entitlement or benefits accruing to investors in the nature of monetary and non- monetary aspects, which are generally referred to as corporate actions in the context of depository operations. As per Rule 9.8.1 of NSDL Bye-laws, Corporate benefits mean and include any action taken by the Issuer relating to prescribing dates for book closures, record dates, dates for redemption or maturity of security, dates of conversion of debentures, warrants and such other action from time to time. Here the prescribed date is very important because investors entitlements are fixed on the basis of this date only. In practice, on the basis of distribution viewpoint, corporate benefits are of two types: 132 (i) Monetary benefits- These benefits are in the cash form.the most common examples of such events are payment of interest, dividend, redemption of debentures and preference shares etc for monetary actions. (ii) Non-monetary benefits-these benefits are in securities form. Bonus shares, rights or preferential issue of shares, mergers and de-merger, redemption, sub-division, stock option plan, commodities, mutual fund units, postal saving certificates and Govt.

133 securities etc are example of non-monetary actions. The Depository distributes securities entitlements or benefits into the accounts of the respective DPs who in turn distribute these benefits to the respective investors account. The investors are intimated to the non- cash benefits by the DPs. The chapter explains the role of depositories for effecting corporate actions for investors. It also provides in tabular form the different aspect of monetary and non-monetary corporate actions. Operational processes for cash and non-cash corporate actions have been explained. General precautions that should be taken care by the demat accountholders while receiving corporate actions has been mentioned. Survey results have been complied with a view to analyze whether the demat accountholders are satisfied regarding direct receipt of non monetary benefits into their accounts through demat system. Acceptance of demat system as distributor of non-cash benefits has been presented with the help of secondary data available. Role of Depositories regarding Corporate Actions The depositories play the following roles regarding corporate actions: (1) To provide list of persons entitled for cash and non-cash corporate actions Depositories provide information to the issuers/rtas about the persons entitled to receive corporate benefits. The beneficial owners are legally entitled to all rights and benefits and are subject to all the liabilities in respect of the securities held by them in a depository. Since such corporate actions affect the beneficial owners of the securities, it is important to determine the actual beneficial owner of the securities on the cut-off date announced by the issuer for a specific corporate action. (2) To take responsibility regarding distribution of non-cash benefits Depositories themselves take the responsibility of distribution of non-cash corporate benefits. If credit of securities is based on a pre-determined ratio ( as is always in case of bonus shares, split of shares, consolidation of shares, securities issued as a part of mergers/demergers/ amalgamation scheme etc.), Issuer/RTA sets up the ratio of entitlement in the system and on the date specified by the Issuer/RTA,the corporate actions are triggered in the demat accounts of the beneficial owners by the depositories through their network of DPs. (3) To provide details regarding Bank account numbers of the beneficial owners to the

134 Issuers/RTAs of securities for distribution of cash corporate benefits To avoid wrong encashment of dividends, SEBI has issued a direction to the companies and stock exchanges to require companies to use the bank account details furnished by the Depositories for the distribution of dividend and other cash corporate actions. Using the bank account details inclunding MICR number of BOs, Issuers/RTAs disburse the cash benefits directly into bank accounts of shareholders by using the ECS (Electronic Clearing System). In this manner the role of depositories is very important regarding all types of corporate actions. Operations performed regarding Corporate Actions Whenever any corporate action is announced, the Issuer or its RTA informs respective depositories about the proposed corporate action by the next day of communication to the relevant stock exchange. After getting this formation, depositories inform all DPs by e-mail as well as by circulars about the corporate action, the No delivery period, the cut-off date etc to fix up the entitlement of actual beneficiaries of the corporate action. DPs are asked to take the following steps: The changes in tax status, bank details, change of address etc. in the beneficial owner accounts are up-dated well in advance of the book closure / record date. All balances in the pool accounts are transferred to the relevant beneficiary account well in advance of the book closure / record date. Depositories provide list of the beneficial investors and their electronic holdings as on the record/ book closure date for recording the actual entitlements of the corporate benefit. The details provided by the Depository also include the particulars like name, address, and bank details of the beneficial owners. The issuer / RTA calculates the entitlement of the corporate benefit due to all shareholders. Process of Non- monetary Corporate Actions Credit of non- cash entitlement is made to the BOs demat accounts through the depositories with the help of respective DPs network. Following is the diagrammatic presentation of procedure of a Non- Cash corporate action:

135 6.1- Process of Non -monetary Corporate Actions 1 The Issuer informs depository about the corporate action. 2 On the record date, the BOs file is downloaded to the RTA by the Depository. 3 RTA uploads the allotment file to the depository on determining the benefits to BO accounts at concerned depository. 4 Depository credits the securities directly into the BO accounts as per the RTA file. In this manner, investors get credit of non-cash benefits into their demat accounts. Process of Monetary Corporate Actions Regarding these benefits, the role of the depositories is indirect and limited to as information providers regarding BOs bank accounts details on the record date. Following is the diagrammatic presentation of procedure of monetary a corporate action: 6.2- Process of Monetary Corporate Actions 1 The Issuer/ RTA informs Depository of the corporate action and intimates the record date. 2 The RTA/ Issuer accesses and downloads the BOs data as on the record date. 3 RTA/ Issuer distributes the cash benefits to the BOs directly through ECs on the basis of bank account details.

136 Tabular Presentation of Corporate Actions - Depository Prospective Following table has been designed to give a view of both type of corporate actions: s. No. Table 6.1 Presentation of Corporate Actions - Depository Prospective Particulars Non- Monetary Corporate Actions 1. Meaning Functionally, it is related with benefits in securities form. 2. Contents It deals with capital increases via bonus, right issues, calls and capital reorganisations through splits, mergers, acquisitions, amalgamation and conversions. 3. Role of Depository system regarding corporate actions 3. (A) 3. (B) 3. (C) As information provider to Issuer/ RTAs As distributor of benefits Details of bank accounts of investors It provides details of beneficial owners on the Record Date to the Issuer / RTAs to enable company to calcule the benefits accruing to actual owners of holdings. Regarding these benefits, Depository itself takes the responsibility of distribution of securities entitlements through its DPs in individual BO s account. No such detail is required here because securities have to be distributed. Flowever DPs have complete record of detail of bank account of individual investors having demat accounts. Monetary Corporate Actions It relates with benefits in cash form. It deals with entitlements like payment of dividend, interest on debenture, refund of application money, redemption of preferential shares and debentures etc. It provides details of beneficial owners on the record date to the Issuer / RTAs to enable company to calcule the benefits accruing to actual beneficial holdings. Depository does not take responsibility of distribution of these benefits. The Issuer/RTA carries out necessary processing and distribution of such benefits itself outside the system. Depository provides the list of bank accounts of beneficial owners so as to help company/issuer/rta for the distribution of cash entitlements directly in bank accounts of investors through ECS. As per SEBI guidelines, only bank A/c numbers available with DPs can be considered for distribution of cash entitlements.

3. (D) 3. (E) To update the beneficial owners account Special role in case of Govt. Securities 4. In case of any mismatch of records of Issuer and depositories regarding demat accountholders 5. Verification by an investor for the benefit received with the actual entitlements DPs update the beneficial owners accounts by entering changes in their addresses, tax status and bank details etc on record date so that eligible investors are able to get credit of entitlements of securities in their demat accounts. Depository distributes all the non- cash as well as cash benefits in case of Govt, securities. DPM of the depositories rejects that particular record. Depository then requires the Issuer/RTA to rectify the records within seven days from the execution of non-cash benefit. If RTA fails to rectify records within stipulated period, then the entitlements are made in physical securities outside the demat system by the RTA. DPs as well as company intimate investors regarding non-monetary benefits. An investor can verify / reconcile the information received through DP and company with help of credit entry in demats account. Date of transaction and quantity of credit as per the ratio intimated by the company should be verified by BO. An investor should first contact the Issuer/RTA. If he does not find a solution of his problem, he can contact SEBI. 6. In case of any grievance to BO regarding any corporate action Entitlement of Corporate Benefits in some Special Cases 137 DPs update the beneficial owners accounts by entering changes in their addresses, tax status and bank details etc. so that respective securities entitlements could can be transferred in their accounts. Only in case of Govt, securities, Depository takes responsibility to distribute cash entitlements. Regarding demat accountholders, bank account details provided by the depositories are used by the issuer/rtas. If any investor faces any discrepancy, he has to contact to Issuer regarding solution of this matter. Cash benefits are informed directly by Issuer/ RTA to investors. Investors can verify on the basis of credit in their bank accounts and information received from the respective issuer regarding their entitlements. An investor should first contact the Issuer/RTA. If he does not find a solution of his problem, he can contact SEBI. Beneficial owners at Record Date or Book Closure date are eligible to get the entitlements or benefits arising out of corporate actions. How the beneficial owners at record date are decided decided in following special cases?

138 1. If the securities are lying as balances in the CMs Pool account 2. Lending of securities 3. Pledging of securities 4. Closed or suspended demat account of investors 1. Securities are lying as balances in the CM s Pool account on the Record Date It is necessary that as on the record date, there should be nil balance of that particular securities in the CM account. In case any balance of that securities is lying in pool account, the rightful BO of the securities is decided in the following manner: (i) CM writes to Depository giving details including CM-BP-Id, record date/ book closure, ISIN, quantity and a copy of his transaction statement reflecting the above transaction. (ii) Depository then tracks the movement of securities and accordingly determine the beneficial owner of such securities. (iii) The beneficial ownership information is given by Depository to the concerned Issuers/ RTA and then BO (either buyer or selling) gets the benefit of corporate actions. In nut-shell a BO who has made any sale or purchase transaction on the record date of securities, whether he will get the corporate benefit or not, that is decided by the depository on the basis of the above process. 2 Corporate benefits to Lender (under Stock Lending Scheme) of Securities* A lender of securities is entitled to all corporate benefits in respect of the securities lent by him. The procedure for distribution of benefits, depends on the status of securities lent as on the cutoff date, i.e., whether the securities are still lying in the intermediary account, or they have been transferred to borrower s account. (i) For securities lying in the intermediary account, the intermediary would either: Return the securities to the lender on the cut-off date and In this way the lender would automatically get the benefit or Transfer the securities to its own beneficiary account and receive the benefit from issuer / RTA. In this case, the intermediary reimburses the lender for the benefits received by it on behalf of the lender. The intermediary also executes a proxy form in favour of the lender to enable him to exercise his voting rights. *Extracted from Depository Operations Module-3, NSDL

139 (ii) In case the securities have been lent and transferred to the borrower s beneficiary account: The benefits in respect of such securities is paid by the issuer/rta to the borrower or to the person who has bought securities from the borrower. In this case, it is duty of the intermediary to collect the value of lender s entitlement to the corporate benefits from the borrower and pay the same to the lender. Here lender is not entitled to the voting rights in respect of the securities lent by him. In every case, lender of securities is entitled to get the benefits arising out of corporate actions. 3 Corporate benefits to pledgor In case of securities pledged or hypothecated through the demat system, the pledgor is entitled to all the benefits accruing in respect of the securities pledged or hypothecated. 4 Closed or Suspended demat accounts of investors (i) Closed demat account- If on the execution date, the status of any demat account is to be closed, the depository rejects the credit of action in demat account and the securities are issued in physical form by the Issuer/RTA to the beneficial owner. (ii) Suspended demat account- A demat account is suspended by the DP in case it receives a directive or order to this effect from depository, Income-Tax or Judicial authorities. In such cases, depository credits the action in the DP Suspense Account. The entries are reversed when the status of the account is changed to active from suspended and investor gets benefit at a later stage. Precautions to be taken by BOs regarding receiving Corporate Benefits Although investors get automatic credit or receipt of these benefits yet they need to take following precautions to avoid any inconvenience or time delay: 1) Investors must ensure that the correct demat account details (DP Id and Client Id) are mentioned in forms for public issue, right issue etc. 2) Investors must intimate to their DPs regarding any change in address, if any and get the same updated in demat system in order to receive dividend / interest warrants, annual reports, notices of companies etc. from the issuer at the correct address. 3) As bank details are printed on the dividend/ interest warrants, beneficial owners should ensure that the bank details, including MICR details provided to the DPs are proper and correct.

140 4) Investors should ensure that all the securities purchased are received into beneficiary accounts before the Record date / Book closure. The securities must not be lying in the pool accounts of the CMs. SEBI has made it mandatory for clearing members to move securities to the beneficiary account of the investors within four calendar days or two working days which ever is later. 5) If the securities are lying in the pool accounts of CMs, company gives the corporate benefits to the broker. In that case, BOs should collect benefits from their trading members or sub-trading members. 6) If any investor wants any change in the bank particulars from the one given in the account opening form, it must be changed before the record date. 7) If an investor has physical securities, even then he can receive the corporate benefits in demat form by writing directly to the issuer/ RTA giving its DP Id, Client Id and his name. 8) If BO has lent some securities under stock lending scheme of SEBI, he should be attentive and get the corporate benefit from his intermediary. 9) Pledgor of securities has the right to get the corporate benefits. If the investor has pledged some securities, he should be alert and verify from the Transaction Statement whether non cash corporate benefits have been credited to his demat account. 10) If the investor s demat account was having a status of Suspended demat Account and later on the status is changed then he should verify that all corporate benefits related to him and lying in DP Suspense Account should be reversed and he should get the benefits. Above precautions can help an investor in timely receipt of his corporate benefits. Survey Results regarding Receiving Corporate Benefits in demat environment Before the introduction of demat system, investors were prone to the grievances on account of monetary and non-monetary corporate actions declared by the companies. Problems relating to non-receipt of refund/allotment were an eyesore for 26.05% of the investors while the grievances on account of dividend/interest warrants had been faced by 15.31% of investors. * *Hooda R. R, Indian Securities Market: Investors Viewpoint, published by Excel Books, New Delhi, edition 1998, p.143

141 In field investigation, a question was asked from the investors regarding their satisfaction in receiving any type of corporate benefit through their DPs. The purpose of the question was to know whether the depository operations have resulted in increased comfort level and improved services for investors on the point of redressal of grievances regarding corporate actions. The results of the survey were complied as follows: Table 6.2 Response Frequencies of Sample Investors regarding receipt of Corporate Benefits under Demat System Queries Percent of Respondent Investors receiving the Benefit through DPs (a) Have you ever received any non-cash corporate benefit through your DP? (b) If yes, are you fully satisfied regarding receipt of corporate benefit through your DP? 78 100 Source: Field Investigation As regards investors satisfaction with the matter of receiving corporate benefits under depository system, the sample data presented in above table depicts a very clear and healthy position. Out of the available responses, 78% of investors accepted that they had received corporate benefits through their DPs. As regards the overall experience of receiving benefits under depository system, all the receptionists of corporate benefits are fully satisfied which indicates an excellent level of comfort and improved services available for investors on the point of corporate actions under demat system. On the basis of the above analysis, it can be concluded that demat system facilitates faster and trouble- free disbursement of corporate benefits. On one side it ensures accurate and fast distribution of benefits to beneficial holders simultaneously it eliminates the risk of physical securities getting lost-in-transit. Trading of securities can commence faster, since the receipt of securities in the hands of shareholders is fast and automatic. Undoubtedly, on the parameter of corporate benefits, demat system has resulted in drastic improvement in comfort level and service standard for an investors.

142 Acceptance of Depositories as Distributors of Non-cash Corporate Benefits Implementing corporate actions through demat system is beneficial for investors as well as for issuer companies. Issuer companies are benefited in terms of reduction in printing and dispatch costs for securities in addition of proof for the securities actually delivered to beneficial owners through depository system. Following table is the proof of increasing trends regarding distribution of non-cash corporate actions through NSDL. These corporate actions include bonus, rights, employees stock option plan, sub-division, merger, de-merger, bonds, commodities, mutual fund units, postal saving certificates and Govt, securities etc. which have been declared by different companies from time to time. Table 6.3 Trends regarding Acceptance of NSDL as Distributor of different Corporate Actions Financial Year Number of Investors Benefited (In Lakh) Number of Units of Securities disbursed 1999-00 6 20,000 2000-01 21 82,637 2001-02 8 59,366 2002-03 30 1,13,019 2003-04 52 1,85,617 2004-05 77 4,05,280 2005-06 122 4,17,384 Source: Complied from annual reports of NSDL and Nest Updates of relevant periods The above table (and Chart 6.3) clearly indicate that except for year 2001-02, there is a sharp increase in the number of investors who have been benefited by receiving their corporate benefits through NSDL. Declaration of corporate actions depends upon the issuers so any increase or decrease in the number of investors and units of securities is independent of the efficiency and effectiveness of depositories in distributing these benefits. Distribution of non-cash corporate action through NSDL started in the year 1999-2000 when around six lakh investors received their entitlements from their DPs and around 20,000 lakh units of securities were credited into the demat accounts of BOs. The number of investors benefited reached at a level

Chart 6.3 ACCEPTANCE OF NSDL AS DISTRIBUTOR OF CORPORATE ACTIONS 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Financial Years I Number of Investors benefited Number of Units of Securities in Lakh Number of Investors in Lakh 1999-00 2000-01 2001-02 2002-032003-04 2004-05 2005-06 Financial Years I Number of Unit of Securities disbursed Source: Table 6.3

144 of 122 lakh and 4,17,384 lakh of units of securities were credited in BOs account spread all over the country in the year 2005-06. Conclusion With the gradual acceptance of investors and companies for the depository system, there is continuous increase in number of investors getting corporate actions through their DPs. Issuers/ RTAs are now free from attending the complaints from BOs regarding loss of certificates in transit. But a large number of investors have not joined the demat system till now as has been explained in the chapter VIII. The data represented in the Table 6.3 is concerned with those investors who have joined the demat system. These figures could be many times more if the number of investors and companies joining the demat system would be many times more. There is a direct positive association between number of investors benefited with number of investors joining the demat system. The complete benefit of demat system regarding corporate actions will be received when investors who are still outside the demat system will join the demat system.