The Hindu Business Line : A number to count on

"OUR vision: To be the most dynamic and respected regulator — globally" This is the citation which is prominently displayed on the Web site of the Securities and Exchange Board of India (SEBI). Keeping to the spirit, SEBI inked the SEBI (Central Database of Market Participants) Regulations, 2003, which was promulgated by way of notification dated November 20, 2003.

The objective is to bring in a system similar to the Permanent Account Number (PAN) of the Income-Tax Department. This will facilitate keeping tabs on the securities market much to the protection of investors' interest.

The Regulation requires all the players in the securities market to obtain a Unique Identification Number (UIN). This includes all the intermediaries, other entities, investors (whether corporate or otherwise), listed companies and companies which intend to get their securities listed.

The requirement, in the beginning, was made compulsory only for market intermediaries by way of separate notification. This has been extended now to investing companies vide notifications dated July 30, 2004 and August 16, 2004. SEBI is expected to gradually cover other market players defined in the Regulation hitherto not within the requirement.

Investing companies

"Investing companies" is intended to mean a body corporate which buys, sells or deals (or intends to do so) in any security listed on any recognised stock exchange or in units of a mutual fund or a collective investment scheme. It includes companies which intend to subscribe to even those securities which are proposed to be listed on any recognised stock exchange or units of mutual fund or a collective investment scheme. The requirement is applicable to all such companies irrespective of whether they are listed or not and whether they are private limited or public limited companies.

The dimension of this requirement extends also to the directors and promoters of such investing companies. The definition of "promoter" in the Regulation adopts the meaning as the persons named as promoters by the company (if already listed) in the shareholding pattern submitted to the stock exchanges. Additionally, it includes certain other category of persons. Clause 35 of the Listing Agreement, pursuant to which the shareholding pattern is disclosed by the companies, in turn, adopts the definition as given under the takeover code.

Effectively, "promoter" = definition under regulation 2(1)(h) of the takeover code + certain other persons depending on whether they are individuals or body corporates.

As per the aforesaid notifications dated July 30 and August 16, the investing companies would be forbidden from dealing in the said securities/mutual funds, and so on, with effect from January 1, 2005, unless UIN is obtained. The last date to obtain UIN is December 31, 2004. Further, Reg. 13 (1) of the Regulation provides that the time taken for granting UIN on a valid application is a maximum of 30 days. Therefore, on harmonious interpretation, the effective last date to apply for UIN is November 30, 2004.

The notification authorises the National Securities Depository Ltd (NSDL) to administer grant of UIN. It further appoints points of service (POS) situated locally, to whom application may be submitted. These POS will, in turn, forward the application to NSDL, after due processing. There are two points of service designated in Chennai. The fees charged for the purpose is Rs 300 per application. The application shall be in the format provided in the Regulations as annexure.

Unresolved issues

This Regulation, however, leaves many questions unanswered. Important among them are:

The language of the notification suggests that it is not obligatory for the directors and the promoters to obtain UIN, whereas the company will be forbidden from dealing in the securities in the event of failure by its directors/promoters to obtain UIN. To avoid complications in implementation, it is advisable that the responsibility be fixed on the directors and the promoters individually.

Usually, most of the directors hold multiple directorships. This raises a fundamental question as to which company should initiate for UIN for such a director, in case the director himself does not apply for it (the director is not under obligation to obtain UIN). This is potent with the risk of bringing about a state of quandary. SEBI would do well by clarifying this point. Individual responsibility of the directors/promoters will help address this issue also. SEBI should also consider excluding independent directors from this requirement till the stage they can be classified as independent. Being independent, they do not have material pecuniary interest in the company. Therefore, there is no point in tracking transactions of independent directors.

Unnumbered director

What happens when a company inducts a new director who does not have UIN? In such case, there will be a time lag before the director obtains UIN.

During this lag, the company temporarily loses the eligibility to continue dealing in the securities by virtue of the requirement that all the directors shall have UIN to enable the company to deal in aforementioned securities. This should be addressed by SEBI, for it may have serious implications on the investment decisions of its subjects. On such new inductions of directors, SEBI should consider allowing a time gap of two months for complying with the requirement.

There is one important link which is being consistently missed by the regulators. It is observed that the regulators are gradually recognising the need and, hence, slowly introducing the requirement of Unique Number to be obtained by their subjects. For example, the I-T Department has introduced Permanent Account Number (PAN). Various other departments viz. Central Excise, sales tax, Customs, and so on, have come out with their own Unique Numbers.

This is resulting in multiplicity of floating Unique Numbers. This can be reduced if these regulators act cohesively to bring about a Unique Number which would be common for all the departments. This would require integration of the systems of all these regulators.

Admitted, it requires colossal investment. However, given the advantages which would be derived, it is increasingly important to integrate the systems of such regulators. The biggest advantage is that the Government would be able to keep tabs more comprehensively.

In case of different Unique Numbers, the activities of the subjects are checked in isolation of their other activities. No doubt, all the activities when viewed in an integrated way will serve the purpose of Unique Number better.

(The author is Company Secretary, Polaris Software Lab Ltd, Chennai.)

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