Reducing frauds in dematerialized share transfers
The Securities and Exchange Board of India (SEBI) issued a circular this week listing measures to reduce frauds in dematerialized share transfers. While these will create inconveniences for many investors, it is doubtful whether they would reduce fraud to any significant degree.
SEBI says that individual account holders should get only one Delivery Instruction Slip (DIS) booklet containing not more than 20 slips. They can get a subsequent DIS booklet when only 5 slips are left in the old booklet. All this is borrowed from the practices that banks follow while issuing cheque books. But there is a big difference between cheques and DIS. Cheques are only a small fraction of all payments that a person makes. In traditional payment systems, well over 90% of all payment transactions by number take place using cash and not cheques. In more modern systems, cash is being replaced by debit/credit/ATM cards, but cheques remain a small part of the payment system by number of transactions. In shares on the other hand, the situation is reversed: I would imagine that well over 90% of all transfer transactions by number take place using DIS. The proposed measure will create a huge inconvenience to active investors, but it is not clear how it will reduce fraud.
SEBI says that a new DIS booklet should be issued only on the strength of the DIS instruction request slip (contained in the previous booklet). This used to be the practice in case of cheque books in the past, but this is not the case anymore. Today, many of us apply for a cheque book using internet banking facilities and the request slip is hardly ever used. Why should DIS be any different?
On the critically important issues, however, SEBI does not follow the cheque book analogy to its logical conclusion. It talks of appropriate checks and balances with regard to verification of signatures of the owners while processing the DIS. Such exhortation is pointless without strict liability. The banker is supposed to know the constituent’s signature perfectly and cannot escape liability even if the signature has been forged skillfully. Can we demand the same from depositories?
Similarly, SEBI asks the depositories to educate investors to preserve DIS carefully and not to leave blank or signed DIS with anybody. People have learnt to treat cheque books with this degree of care. Why do they not treat DIS the same way? Perhaps, the physical appearance of the DIS does not give an impression that it is a valuable document while cheques contains security features that provide visual cues that they are valuable documents. Perhaps investor education would be easier if the DIS had better visual cues about the importance of safekeeping them. Moreover if a fraudster can easily forge a blank DIS using a scanner and a laser printer, then careful preservation of the genuine DIS does not deter fraud.
After the securities scam of 1992, I remember seeing a sample of a banker’s receipt for billions of rupees of government securities. The banker’s receipt was poorly printed on paper of ordinary quality with no security features at all. The absence of visual security cues perhaps made that fraud easier.
Another anti-fraud measure would be a (possibly paid) service whereby the investor gets email and SMS alerts about every debit into the depository accounts. The circular is completely silent about this and other ways in which technology can be leveraged to guard against fraud.
On the whole, the circular gives me the impression that it is quite happy to impose costs and inconveniences on investors but it is not ready to impose significant costs on the depositories and their participants.
Posted at 5:32 pm IST on Fri, 16 Feb 2007 permanent link
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