Recovery of Shares

Restriction on Transfer of Physical Shares

Transfer of Physical Shares

The physical shares can be understood as a corporeal share certificate. It is possessed by the investor in paper format and contains details of the company, number of shares, and value of the shares, address and contact number of the company and investor. The physical shares are issued to the investors when they subscribe to the shares of a company. Even though the shares were held in physical form, the SEBI had made it mandatory for all the investors to convert their physical shares into electronic form in case of any future transaction, including selling and transfer of physical shares, after notification dated 5th December 2018.

This step puts the securities of the company under the scrutiny of SEBI and ensures that the borrower’s interests are safeguarded. The SEBI had explicitly ordered that the physical shares shall not be accepted if received with the transfer requisition. They will reject the same and will intimate the investor by notice. However, the SEBI does not reject the request for transmission or transposition of physical shares.

What are the Transmission and Transposition of shares?

The transmission is a transfer of shares by operation of law. The word operation of law means that the shares are transferred by inheritance, succession or death of a shareholder. It means the transfer of title to the surviving holder, legal heirs, nominees, and legal representative of the deceased. In contrast, the transposition of shares means re-arrangement or interchangeability of names in different orders in the shares.

Benefits of Restriction on transfer of Physical Shares

The SEBI has introduced the amendment to bring changes in the transaction of the financial environment. It was introduced with the primary objective of eliminating the fraudulent transfer of shares that occurs in unlisted or private companies. The benefits served by the amendments are as follows:

  1. The stoppage in the transfer of physical shares will ensure that they are not circulated fraudulently in the market.
  2. The conversion of physical shares will make sure to address the difficulties faced by the investors, including mutilation of physical shares, misplaced or lost certificates, error in the signature of a deceased shareholder, company verification etc.
  3. The conversion would help the investor to keep track of all his investments in different companies in one place.
  4. The conversion will help the investor speed up their transfer process without any physical effort.
  5. The dematerialised share is maintained in the encrypted format with the depository participants and provides safety in transactions.
  6. There will be no Stamp duty on the shares held in DEMAT form.
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Moreover, the SEBI has derived benefits from this amendment by way of:

  1. Collecting all the data on physical shares in one place will help the regulatory authority keep track of all transfers between the investor, investor and company and company & company. It keeps track of all the fraudulent transactions that aim at affecting the interestsof the investors.
  2. The mandate of converting physical shares into DEMAT form will help ensure transparency in all transfer processes.
  3. The possibilities of errors in the documentation process will be reduced during the transfer of shares.
  4. The SEBI can keep track of the unclaimed amount of the investor deposited by the company in the “Unclaimed Account of the company”.
  5. The SEBI can maintain substantial scrutiny over the transfer activities of the company.
  6. The present mandate of conversion will easily facilitate the transfer of unclaimed amounts from the IEPF authority.

SEBI Instructions on Restrictions on transfer of physical Shares

SEBI issued a clarification on the transfer of Physical Shares on 27th March 2019 to remove any confusion in investors’ minds.

  1. The request shall not be processed for physical share transfer, provided the securities are held in dematerialised form. However, such transfer can occur in the case of transmission and transposition of shares.
  2. SEBI does not prohibit investors from holding physical shares. Instead, they have been given an option to continue their holding even after April 2019.
  3. Investors willing to transfer their physical share to another person can do this only if the share is converted to DEMAT form.
  4. The transfer deed can be re-lodged after the deadline date of April 2019, even after it was returned due to any deficiency in the document.
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Dematerialisation of Shares

After the mandate of SEBI on the restriction of transfer of physical shares, all the shares must be converted to electronic form. This process of conversion is known as the dematerialisation of shares. It is necessary that the physical shares that are active and trading in the stock exchange shall be liable for conversion. Therefore, all the physical shares must be converted into electronic form. After the dematerialisation of the share, it is necessary that the shares shall be transferred to the DEMAT account[1] of the investor. The process for dematerialising the physical shares is as follows:

  1. The holder of the physical share certificate shall file a DRF (Dematerialisation Request Form) along with the share certificate to the concerned Depository participant.
  2. After submitting the request form, the Depository Participant will deface the original physical certificates with the stamp “SURRENDERED FOR DEMATERIALISATION”.
  3. Upon receipt of the DRF, the depository participant will examine both the request form and share certificate and issue an acknowledgement slip to the investor.
  4. If there is a default in the DRF and the investor’s documents, the same shall be sent back to rectify the deficiency.
  5.  If there is no default in the DRF and the investor’s documents, the DP shall process the same, and a DRN (Dematerialised Request Number) shall be provided to the investor.
  6. The DRN and DRF shall be forwarded to the Registrar and Transfer Agent (RTA)in electronic form, and the same shall be dispatchedalong with a covering letter.
  7.  The RTA will then examine the investor’s request and confirm the acceptance of their software system.
  8. The depository participant shall update their system and electronically transfer the investor’s shares to their DEMAT account.
  9. After the share transfer, the Depository participant sends the intimation to the investor.
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The investor will generally receive the confirmation of the dematerialisation request within 30 days of submitting the Dematerialisation Request Form and share certificates.


The restriction imposed by the SEBI aims to bring the transfer process under its ambit. It gives the regulatory authority the power to regulate the transfer of physical shares and minimise the fraudulent practice that is taking place between the share markets. The SEBI, by this amendment, does not restrict the shareholder from holding their shares; instead, the restriction only applies to the transfer of physical shares. Also, the investor can continue to hold the physical shares held by the shareholder of an unlisted company and is allowed to transfer or sell these shares even after April 2019. Therefore, liberty is provided to the shareholder to continue holding physical shares.

Read our Article: What is the Procedure for Conversion of Physical Shares to DEMAT

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