**Summary:**
This circular, issued by the Securities and Exchange Board of India (SEBI) on July 24, 2020 (SEBI/HO/MRD2/DDAP/CIR/P/2020/137), mandates that all depositories establish a system for capturing and recording all types of encumbrances on shares, as specified under Regulation 28(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This requirement is in addition to the existing framework for pledges, hypothecation, and non-disposal undertakings (NDUs). The processes and norms for recording these encumbrances should be similar to those already in place for NDUs. Freeze and unfreeze instructions will be subject to 100% concurrent audit. Depository Participants are prohibited from facilitating encumbrances outside the depository system. Depositories were required to implement the provisions of this circular within one month of its issuance.
The circular also advises depositories to: (i) amend relevant byelaws, rules, and regulations; (ii) implement necessary system changes; (iii) disseminate the provisions of the circular on their websites; and (iv) communicate the implementation status in their Monthly Development Report to SEBI.
This circular is issued under the authority granted by Section 11(1) of the Securities and Exchange Board of India Act, 1992, and Section 19 of the Depositories Act, 1996, to protect investor interests and regulate the securities market.
For further information, contact Versha Agarwal, Deputy General Manager, Market Regulation Department, at vershaa@sebi.gov.in.
Key Entities Referenced
Securities and Exchange Board of India: Regulatory body for securities market in India; also referred to as SEBI.
Depositories: Entities that hold securities in electronic form.
SEBI Substantial Acquisition of Shares and Takeover Regulations, 2011: Regulations governing the acquisition of shares and takeovers in India.
Regulation 28(3) of SEBI Substantial Acquisition of Shares and Takeovers Regulations, 2011: Specific regulation within the SEBI takeover regulations pertaining to encumbrances.
NDUs (nondisposal undertakings): Agreements restricting the sale or disposal of shares.
SEBI Depositories Participants Regulations, 2018: Regulations concerning the functioning of depository participants.
Section 11(1) of Securities and Exchange Board of India Act, 1992: Legal provision granting powers to SEBI.
Section 19 of the Depositories Act, 1996: Legal provision related to depositories.
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Securities and Exchange Board of India
SEBI/HO/MRD2/DDAP/CIR/P/2020/137 July 24, 2020
CIRCULAR
To,
All Depositories
Subject: Recording of all types of Encumbrances in Depository system
Sir/ Madam,
1. SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 requires
promoters of a company to disclose details of their encumbered shares. In this regard,
it was observed that apart from pledge, hypothecation and non-disposal
undertakings(NDUs), currently there is no framework to capture the details of other
types of encumbrances in the depository system.
2. It has now been decided that Depositories shall put in place a system for capturing and
recording all types of encumbrances, which are specified under Regulation 28(3) of
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, as
amended from time to time. Towards this end, Depositories shall follow processes and
other norms similar to that stipulated for the purpose of capturing and recording NDUs
in Depository system. This is apart from pledge and hypothecation, whose processes
and specific norms are separately provided in SEBI (Depositories & Participants)
Regulations, 2018 and circulars issued thereon.
3. The freeze and unfreeze instructions executed by the Participant for recording all
encumbrances will be subject to 100% concurrent audit.
4. The Depository Participant shall not facilitate or be party to any type of encumbrance
outside the Depository system as outlined herein.
5. The Depositories shall implement the provisions of this circular within one month from
the date of this circular.
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Securities and Exchange Board of India
6. The Depositories are advised to:
i. make amendments to the relevant bye-laws, rules and regulations for the
implementation of the above decision, as may be applicable/necessary;
ii. to carry out system changes if any to implement the above;
iii. disseminate the provisions of this circular on their website;
iv. communicate to SEBI, the status of implementation of the provisions of this circular
in their Monthly Development Report.
7. This circular is being issued in exercise of the powers conferred by Section 11(1) of
Securities and Exchange Board of India Act, 1992 and section 19 of the Depositories
Act, 1996 to protect the interest of investors in securities and to promote the
development of, and to regulate the securities market.
Yours faithfully,
Versha Agarwal
Deputy General Manager
Market Regulation Department
Email: vershaa@sebi.gov.in
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