Deepak group hands out Medallions

Deepak Fertilisers & Petrochemicals Corporation Ltd (DFPCL) have embarked on a validation exercise for share certificates. The company has sent out what are called 'Certificate Medallions' to shareholders, with instructions to affix them on share certificates. The Medallions are sticker labels containing encrypted information, designed to help identify genuine certificates quickly and efficiently.

In an earlier communiqu to its shareholders, the company had expressed its intention to implement such a 'Securities Validation and Guarantee Programme', with the objective of "protecting investors against faked/forged/counterfeit/invalid certificates, and the problems of rejection of transfer due to signature mismatch."

But with DEMAT going on in full swing, and the entry of Internet trading, how relevant is a certificate authentication exercise? Ajay Mehta, director of SignAssure Services (India) Ltd, the Deepak group company providing the SVGP/Medallion solution, avers, "The Medallions, based on software technology, enables electronic checking. This will help in smooth transition into the DEMAT process. In fact, the securities validation being undertaken at DFPCL at this juncture is precisely intended to facilitate this process." ().

DFPCL has gone on the DEMAT for institutional investors from November 29, 1999. It is expected that SEBI will, sooner than later, extend compulsory DEMAT trading for other investors as well. "It is important to ensure that a proper inventory and audit is conducted of all share certificates before even part of the total lot gets dematerialised. Once shares get dematerialised and destroyed due to the fungible nature of dematted shares, there is no way any correction can be made," says Mehta.

Past experience has also shown that when companies go on compulsory DEMAT, they find it difficult to complete the process within the required time. This is because dematerialisation involves a painful process of verification and authentication of certificates, prior to dematerialising them. This is compounded by the large volumes of certificates that need to get processed.

Presently, this checking is conducted manually. Even where scanning systems are used, with signatures scanned and stored electronically, the final check is a visual one, where the signature on the DEMAT (or transfer) request is matched with that on the company's records.

"Even after the certificates get dematted, it will be necessary to provide document security and overcome problems of signature forgery," says Mehta. He refers to signatures on instruction slips for buying and selling dematted shares, matched against signatures maintained on the depository participants' (DP) records. He maintains that as long as there is a need to match signatures, there is always the danger of fraud through forgery.

"There have been any number of cases of fraud and misappropriation of instruments such as dividend warrants, bank drafts, which have more security features than the depository instruction slips which are flimsy pieces of paper with hardly any built-in security," he points out.

DPs agree that the problem exists but believe they have taken all the necessary steps to make the DEMAT transactions secure. Stock Holding Corporation of India Ltd (SHCIL), one of the largest DPs which has the Maker Checker system for security, for example, conducts two kinds of checks -- one for the details, and another for signatures which are scanned and matched with those captured and stored in the system.

"We have had no problems so far. We follow the same practices that banks do. If we are open to the dangers of signature forgery, so are banks," says SHCIL chairman and CEO, Virupaksha Goud. But, he admits, "there is no foolproof answer to the ingenuity of people," referring to those bent upon fraud. "The more advanced your methods are, the more advanced their ways get to overcome them."

But some concern has surfaced over the issue of security in DEMAT trading. SEBI has constituted a committee headed by SCHIL to look at the issue. Goud, however, explains that the committee has been set up "just in case" -- to be on hand if a situation that warrants it occurs. "We have had no problems so far."

All the same, the regulator seems to be seized of the necessity to keep up with constantly changing technology. The committee will be examining a number of options to bring in greater security into DEMAT trading. "The committee will look at all transactions in the depository environment and see if a better solution that can be uniform and standardised, and acceptable in terms of cost, can be found," says Goud.