Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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

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

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


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