Regulator SEBI has decided to empower depositories to take penal action against companies that do not properly reconcile their demat and physical shares and thus expose the equity market and investors to possible frauds.

The depositories have the mandate to help the companies convert their physical shares into de-materialised or demat form and thereafter maintain those shares, while the companies are required to reconcile their total share capital, including physical and demat shares, in a proper manner.

However, discrepancies have come to light in share capital reconciliation of hundreds of companies, a senior official said.

While depositories and stock exchanges have already been asked to take necessary action against the defaulting companies, SEBI is of the view that certain regulations need to be amended to empower the depositories to take penal action in such cases.

A proposal to this effect has been approved by the SEBI board and the necessary amendments would be made soon to the SEBI (Depositories and Participants) Regulations, the official said.

The proposed amendment would allow depositories to take action if a company or its agent contravenes any provision of the relevant regulations and/or fails to furnish any information relating to its activity as an issuer of shares.

Besides, SEBI can take action against an issuer that contravenes any of the relevant regulations, fails to provide the information sought from it, does not co-operate in any inspection, investigation or enquiry conducted by any person authorised by SEBI and fails to comply with SEBI directions.

For the purpose of enabling issue of demat shares, the issuers enter agreements with the depositories and their agents and these agreements lay down obligations to comply with the provisions of the relevant SEBI regulations.

However, it has been observed that there is no provision for action which can be taken by depositories in the event of non-compliance by issuers or their agents.

One of the obligations require proper reconciliation of share capital by the issuer company.

“The non-reconciliation of share capital undermines the integrity of the market,” SEBI has said in a memorandum presented before its board.

“In order to ensure protection of investors and market integrity, there is need to have measures in place to prevent issuer companies/promoters and issuer’s agents from introducing fraudulent shares in the market or borrowing against such shares or accessing banking system for loans, etc,” SEBI said.

Under the existing regulations, a company needs to reconcile its share capital on daily basis and send an quarterly audit report to the stock exchanges on reconciliation of the total issued capital, listed capital and capital held by depositories in demat form.

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