Mandating Electronic Payments: SEBI’s Proposed Amendment To LODR Regulations

Posted On - 16 October, 2024 • By - Aakansha Mewar

Introduction

On September 20, 2024, SEBI issued a consultation paper proposing amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).[1] The amendment seeks to mandate electronic payments for dividends, interest, redemption, or repayment amounts, eliminating current options like cheques or warrants. This move aims to enhance payment efficiency and security for listed entities and investors. Public comments are invited on the proposal, and SEBI encourages stakeholders to submit their feedback by October 11, 2024. The proposed amendment emphasizes the importance of investors keeping their bank and account details updated with their Depository Participants for smooth transactions.

Objective

The objective of this consultation paper is to seek public comments on a proposed amendment to the LODR Regulations, 2015. The amendment aims to mandate the use of electronic payment methods for dividend, interest, redemption, or repayment amounts, replacing physical modes like cheques.

This shift is intended to enhance transparency, reduce delays, and align with India’s digitalization efforts. SEBI invites feedback from stakeholders on the feasibility and potential impact of this change.

Understanding the Proposal

The proposal seeks to amend the LODR Regulations, 2015 to mandate the exclusive use of electronic payment methods for dividends, interest, redemption, or repayment amounts.

Current Regulatory Framework (Existing Provisions)

The existing regulatory framework governing the payment of dividends, interest, redemption, or repayment is provided under Regulation 12 of LODR Regulations, 2015.

  • Electronic Payment Mandate: Payments are to be made using electronic modes approved by the Reserve Bank of India (RBI), such as:
    • Dividends
    • Interest payments
    • Redemption or repayment amounts
  • Fallback Mechanism: In cases where electronic payments are not feasible, SEBI LODR allows for the issuance of ‘payable-at-par’ warrants or cheques. These instruments are to be issued under specific circumstances, such as:
    • If the security holder does not have a bank account on record with the listed entity or Registrar and Transfer Agent (RTA).
    • If the bank details provided by the security holder are incorrect, it will cause the electronic payment to fail.
    • If the payable amount exceeds INR 1,500, the payment instruments are to be sent by speed post to the security holder.

This framework provides a dual method for payment – favoring electronic transactions while allowing paper-based alternatives in exceptional cases.

Rationale for the Amendment

The rationale behind the proposal to eliminate paper-based payment methods and adopt mandatory electronic payments is based on several key considerations:

Efficiency and Convenience

  • Faster Payments: With the direct credit of payments into bank accounts, the need for manual deposit of cheques or paper instruments is eliminated. This speeds up the payment process, ensuring that security holders receive funds without delay.
  • Reduced Administrative Burden: For listed entities and RTAs, using electronic means reduces the complexity of issuing, printing, and mailing cheques, especially for large volumes of transactions.

Security and Fraud Prevention

  • Mitigating Risk of Loss: Paper-based instruments are prone to loss or theft during transit. Mandatory electronic payments will eliminate these risks, offering a more secure and reliable method.
  • Fraud Protection: By reducing the reliance on physical cheques, the proposal will minimize the risk of fraud, such as cheque interception or forgery.

Environmental Impact

  • Reduction in Paper Use: Switching to electronic payment methods would significantly decrease the usage of paper for printing cheques and warrants. This supports SEBI’s broader objective of promoting sustainable practices in the securities market.

Cost Efficiency

  • Lower Transaction Costs: By using electronic transfers, companies can avoid the costs associated with printing, postage, and cheque processing. This will result in financial savings for listed entities and ultimately benefit security holders through reduced administrative expenses.

Improved Tracking and Record-keeping

  • Easier for Investors: Investors can easily track their dividend and interest payments through bank statements. This simplifies record-keeping and helps with tax filings.
  • Error Reduction: Automation of payments minimizes the chances of human errors, such as incorrect addresses or misplaced cheques.

Investor Compliance

  • The proposal is designed to encourage investors to keep their bank account details up to date with Depository Participants (DPs). It will push those who have not yet provided accurate bank information to ensure they do so to avoid missing payments.

Regulatory Developments: Impact on Physical Security Holders

SEBI Circular dated November 03, 2021 already mandated that all payments, including dividends, interest, or redemption payments, to security holders holding securities in physical form, must be made exclusively via electronic means.[2] The provisions came into effect on April 01, 2024, after several extensions.

As a result, physical security holders are now only entitled to receive payments in electronic form, marking a significant step toward fully digitizing the payment process.

Proposal for Demat Account Holders

Building on the rationale and the regulatory push for electronic payments to physical security holders, the proposal seeks to extend the same electronic payment mandate to demat account holders.

Deletion of Existing Fallback Provisions

  • The existing Regulation 12 of SEBI LODR allows listed entities to issue ‘payable-at-par’ warrants or cheques in cases where electronic payments fail. The proposed changes would delete these provisions, mandating that payments must be made only via electronic modes.
  • This includes removing the clause that allows cheques or warrants to be sent by speed post if the amount payable as a dividend exceeds INR 1,500.

Encouragement for Investors to Update Bank Details

  • The proposal emphasizes the importance of having accurate bank account details. Investors who fail to update their details with DPs would risk missing out on payments. Therefore, the proposed changes aim to nudge investors toward compliance by ensuring that the only mode of payment is electronic.
  • This aligns demat account holders with the treatment already mandated for physical security holders, creating a uniform standard across all types of securities.

Advantages of the Proposal

  • Encouraging Investor Accountability: Investors who have not updated their bank details will be incentivized to do so, ensuring smoother payment flows.
  • Uniformity Across Securities: By treating demat and physical security holders equally, the proposal simplifies the regulatory framework and eliminates discrepancies in payment methods.
  • Regulatory Compliance: The proposal builds on the existing SEBI Circular, extending the mandate to a broader range of investors.
  • Operational Streamlining: It reduces the administrative burden on listed entities and RTAs by eliminating the need to manage two payment systems (electronic and paper-based).

Impact on Stakeholders

  • Investors (Security Holders): Investors will need to ensure their bank details are up to date to avoid any payment issues.
  • Listed Entities and RTAs: These entities will experience a reduction in manual processes related to paper-based payments, leading to more efficient operations and cost savings.

Conclusion and The Way Forward

The proposed amendment to SEBI’s LODR Regulations to mandate electronic payments reflects a focused effort to modernize financial transactions, enhancing speed, security, and efficiency. By removing the option of paper-based payments, SEBI aims to address issues such as fraud risks, administrative burdens, and environmental concerns. Stakeholders, including investors and listed entities, will need to adapt to this shift, with particular emphasis on ensuring updated bank details for seamless transactions. The way forward requires a proactive approach by investors and listed entities alike to ensure compliance, which will ultimately streamline payment processes and reduce operational inefficiencies.

[1] https://www.sebi.gov.in/reports-and-statistics/reports/sep-2024/proposed-amendment-to-sebi-lodr-regulations-2015-with-respect-to-allowing-only-electronic-mode-for-payment-of-dividend-or-interest-or-redemption-or-repayment-amounts_86872.html.

[2] https://www.sebi.gov.in/legal/circulars/nov-2021/common-and-simplified-norms-for-processing-investor-s-service-request-by-rtas-and-norms-for-furnishing-pan-kyc-details-and-nomination_53787.html.

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