Sebi proposal on no-delivery

B. Venkatesh

THE Securities and Exchange Board of India (SEBI) proposes to do away with the no-delivery period for shares in the compulsory demat form.

But before getting into why SEBI proposes to do as such, consider why we have the concept of a no-delivery period.

A share goes into no-delivery typically before the company concerned closes its register of shareholders for payment of dividend, bonus shares and such other benefits. This gives ample time for an investor purchasing shares in the secondary market to transfer them in his/her name to avail any corporate benefit.

Now, why is SEBI proposing to do away with the no-delivery period for demat shares? Because the capital market regulator wants to prevent price fluctuation during such period.

Consider this. During the no-delivery period, the sellers are not obliged to deliver the shares to the buyers. This typically results in increased trading activity in the stock during that period.

Such an activity may result in the price going up or down, depending on the sentiment prevailing in the stock at that time.

If there are more buyers than sellers, for instance, the share price may move up. On the other hand, if sellers are more than buyers, the share price may come down.

Now, what happens when the no-delivery period is over? As sellers will be obliged to deliver the shares to the buyers, trading will return to the normal mode. In other words, price trends that prevailed during the no-delivery period will be reversed.

Take Infosys, for instance. This share rose to Rs 300 during the no-delivery period only to fall thereafter. It is such price fluctuation that SEBI is trying to prevent by doing away with the no-delivery period.

But how will the company transfer shares if the no-delivery period is done away with? To facilitate such transfers, SEBI has considered it fit to do away with the no-delivery period only for the stocks in the electronic (demat) form; for transfers in these stocks do not take much time.