Forged PAN cards, voter's ID of original shareholders sent to the companies

moneyThe recent instances of fraudulent share transfers , siphoning off of dividends by rogue employees at share transfer agent Sharepro Services may not be an isolated case. Moneycontrol.com has learnt from sources at share registrars that the problem is an industry-wide one.The issue has remained under wraps so far because in a majority of the cases, there are no claimants for the shares and dividends that were pilfered. In quite a few cases, the shares have been already disposed of by the fraudsters by the time legal heirs came forward to stake their claim.Also, these shares are in physical form and, in some instances, the share certificates (usually bonus shares) are lying with the registrar. That is because the original shareholder would have died and if there is nobody to collect the shares at the address mentioned in the company records, the shares/dividend cheques are returned to the registrar by the postal department.According to government records, unclaimed and unpaid amounts of around Rs 1,274 crore have been transferred to the Investor Education and Protection Fund (IEPF) from 2001-02 to 2015-16. When unclaimed for seven consecutive years, the dividend is transferred to the IEPF.Technically, unclaimed dividends do not always mean that the owners of the shares are untraceable. There are cases where the dividends are not directly credited to the shareholders’ bank accounts, and instead sent as cheques. If the dividend amount is insignificant, many shareholders do not take the trouble of depositing it. But there are many instances where unclaimed dividends have piled up to a few thousand or few lakh rupees, an indication that the original owners of the shares are no longer around, or have forgotten about the existence of the shares.Considering an approximate dividend yield of 2 percent, it could mean there are roughly Rs 64,000 crore worth of unclaimed shares. But the value of unclaimed shares could be much higher.Even if one were to discount the dividend unclaimed due to investor indifference, there would be instances where the dividend was being siphoned off by the fraudsters, and so would not show up as unclaimed.Also, there would be shares where the dividend would be small, or where the value of the original holdings would have increased manifold because of subsequent restructuring of the parent company.And, when the shares are fraudulently transferred, the company may not get to know of it unless somebody comes forward to complain, or the company itself carries a periodic audit of the records relating to unclaimed dividend.In the case relating to Britannia Industries, the value of shares fraudulently transferred is estimated to be around Rs 18-20 crore , and that in Asian Paints was around Rs 2 crore . The fraud at Sharepro came to light because an employee there tipped off an investigating agency, which, in turn, alerted SEBI.Sources say the fraud is not possible without the connivance of employees at the share transfer agents. Since the unclaimed shares are in physical form, the fraudsters need the specimen signatures of the original holder before they can send the shares for dematerialization. And that is most likely to come from the records at the share registrar.Asian Paints, Aptech and Britannia filed criminal complaints against the senior management of Sharepro when they got to know about the fraud. But not all companies are willing to take a tough stand even when there are strong grounds to believe that a fraud has been committed. Many companies try to pass the buck saying they are not responsible for the lapses of their share registrars. And Sharepro is not the only registrar where these irregularities are happening.CG (name withheld on request), a senior citizen, got to know very late that her father Nowroji Sorabji Sethna had owned shares in many listed companies. However, by the time she approached the companies for the details, she learnt that the shares had been fraudulently transferred and sold.Sethna owned close to 10,000 shares of Balmer Lawrie, which along with a subsequent bonus issue are worth over Rs 80 lakh at today’s market prices. In addition, he owned shares in Delhi Cloth & General Mills (the parent company from which DCM group companies were carved out in the 80s), CESC, Walchandnagar Industries, among others.When CG wrote to Balmer Lawrie seeking details, she was told that Sethna’s name was no longer there in the shareholder records. CG also got to know that there was a request for change in postal address, for issue of duplicate shares, and request for dematerialisation.The only hitch: these requests came in some time in 2011 whereas Sethna had died in 1975.The details provided by Balmer Lawrie show that between May 2011 and February 2013, some 1700 shares held by Sethna were ‘sold’. In the case of physical shares, the transfer deed accompanying the share certificate has to have the original shareholder’s signature.In May 2013, Balmer Lawrie issued a bonus share issue in the ratio of 3:4. Sethna received 5,805 shares. In September 2013, Balmer Lawrie received a ‘request’ from Sethna for dematerialization of the shares. Six months later, the company again got a ‘request’ from Sethna for duplicate share certificates for 6,340 shares, and two months later, another ‘request’ for dematerialization of those shares.And now there is no trace of any of those shares.Balmer Lawrie claims it ‘relied on representations made by the RTA and the respective depository participant as also the documents submitted by the transferor/transferees’ while processing the requests.It also wrote to CG saying that there was a sudden change in the address of Sethna.“The company has been since asking the RTA for the aforesaid details and copies of each of the documents in their possession including the reason for which the registered address of the shareholders underwent change, but no satisfactory answer has been received till date,” Balmer Lawrie wrote to CG.CG could not get her hands on the CESC shares she was entitled to, as those too had been sold off fraudulently. The Delhi Cloth and General Mills shares were jointly held by CG’s brother and mother, both of whom died in the early 80s. The company has since been restructured into three arms. On writing to one of the three group companies, CG was declined details of the shareholding, saying the two original shareholders’ names no longer figured in the record books.She luckily managed to get her shares in Walchandnagar Industries only because a letter she had written seeking details of her father’s shareholdings reached the company barely a couple of days after the fraudsters had written to the company informing about a change in registered address.Sources say the fraudsters get information about unclaimed dividends from insiders at share transfer agents. When dividends go unclaimed for years or even decades, it is safe to assume that the underlying shares may have no claimants. The next step is to send a letter with forged proof of identity/residence to the company, informing about a change in registered address. The specimen signature is provided by an insider in the registrar, and so will match when the company forwards the request to the registrar to be processed. This ensures that all future communication from the company/registrar will be to that address.The fraudsters will then start transferring small lots of the shares to themselves. If no red flags go up, they will transfer the remaining shares as well. Since the signature on the transfer deed tallies, this will not be a problem.But the shares are in physical form, and need to be dematerialized. The fraudsters will now open demat accounts using another set of forged documents. They will then write to the company with the details of the fake demat accounts, requesting that the shares be dematerialized.The FIR filed by Asian Paints at the Saki Naka Police Station mentions that the shares and dividends were transferred by opening false demat accounts, bank accounts, trading accounts and other documents.The fact that fake demat accounts can be opened goes to show rules relating to the opening of demat accounts are not being rigidly enforced by the depository participants. Laxity in account openings had led to the initial public offering (IPO) scam of 2005. In that scam, shares reserved for retail investors in IPOs were siphoned by a group of market operators by opening multiple fake demat accounts. And banks are not above blame either, considering that fake accounts could be opened despite stringent know your client (KYC) norms.In the 2005 IPO scam, the operators are estimated to have made around Rs 96 crore by depriving many retail investors of the shares reserved for them.Unless SEBI tightens the operating procedures at share transfer agents and depository participants, the illegal gains from fraudulent share transfers would well dwarf it.