Book closure
Also written Book Closure Start Date · Book Closure End Date
The period an issuer sets, with a start and end date, during which the depository determines beneficial owners entitled to a corporate benefit as those holding as of the end of the day before the start date.
In plain language
A corporate action needs a cut-off point. Somebody has to be recognised, officially, as the shareholder entitled to a dividend or a bonus, and that has to be fixed on a specific day.
One way an issuer sets this cut-off is a single day, called the record date. The other way is a short window, with a start and an end: book closure.
During book closure, the depository generates its list of eligible beneficial owners based on holdings as of a specific point just before the window opens, not during it or at its end.
How it works
Where an issuer sets up a corporate action with a book closure start date and a book closure end date, rather than a single record date, the depository system generates its holding report — the list of beneficial owners entitled to the benefit — as of the end of the day, 1 day prior to the book closure start date.
Ahead of either a book closure or a record date, DPs must take two preparatory steps: ensure changes in tax status, bank details or address in beneficial owners' accounts are updated well in advance, and ensure all positions in transit accounts — settlement and intermediary accounts — are cleared and transferred to the relevant beneficiary accounts, again well in advance of the cut-off.
On the relevant date, the depository provides the Issuer or its R&T Agent with the holdings details of eligible beneficial owners, including tax status and bank details where relevant. Balances lying in Clearing Member, Clearing Corporation or intermediary accounts on that date are also eligible for the corporate benefit, and the Issuer or R&T Agent distributes the benefit to those intermediaries for onward distribution — such benefits are held in trust on behalf of the actual beneficial owners.
A worked example
A company sets 10 May as its book closure start date and 17 May as its book closure end date, for a dividend of Rs 6 per share. Because this is a book closure rather than a single record date, the depository determines eligible holders as of the end of 9 May — the day before the start date — not as of 10 May or any date within the closure window itself.
Mr Reddy, holding 500 shares worth Rs 2,40,000 at Rs 480 each as of the close of 9 May, is entitled to the dividend of Rs 3,000 (500 × Rs 6). If Mr Reddy buys another 200 shares on 12 May, during the closure window itself, those 200 shares carry no dividend entitlement for this corporate action — only the holding as of the cut-off date matters.
Had the company instead announced a single record date of 10 May, with no separate start and end dates, the same principle of "holding as of the cut-off" would still apply, but there would be no distinct closure window at all.
Why NISM asks about it
Chapter 10, section 10.2 ("Important Terms"), introduces book closure alongside record date as the two ways an issuer fixes eligibility for a corporate action, and section 10.3 sets out the DP's preparatory obligations ahead of either cut-off.
Expect a question on exactly which date the depository uses to determine eligible holders under a book closure — the end of the day 1 day prior to the start date, not the start date itself — a detail candidates commonly get wrong.
Common exam traps
- Eligibility under book closure is fixed as of the end of the day before the start date, not the start date, the end date, or any date within the window.
- Book closure and record date are alternative mechanisms an issuer may choose between — a given corporate action uses one or the other, not both.
- Intermediary and settlement account balances are also eligible for the benefit as of the cut-off, and are distributed by the Issuer to the intermediary, held in trust, for onward payment — a candidate's own account balance is not the only place entitlement can sit.
- Do not confuse book closure with a company suspending trading — book closure fixes entitlement for a corporate benefit; it does not by itself stop trading in the security.
Check yourself
1.The record date for a corporate action is announced by:
- a)The stock exchanges
- b)The issuer
- c)The depository
- d)The shareholders
Show the answer
Answer: (b) The issuer
The issuer thus announces a cut-off date to determine the BOs of the securities as of that date. This date is referred to as the 'Record Date'.
Why it is needed: corporate actions affect the holder of the securities. Thus, whenever any corporate action takes place it is necessary to determine the eligible BOs as of a particular date who are entitled to the corporate benefits.
The mechanics that follow: the issuer/RTA set up a corporate action specifying the record date in depository system. Depository system provides holding report i.e. list of BOs having holdings in the ISIN of the issuer as of end of the day of record date.
The alternative cut-off is book closure: in certain cases, issuer may setup a corporate action specifying book closure start date and book closure end date. In such cases, the depository system generates holding report i.e. list of BOs having holdings in the ISIN of the issuer as of end of the day of one day prior to book closure start date.
Note the one-day difference — a record date takes the holding at the end of the day of record date, while book closure takes it at the end of the day of one day prior to book closure start date.
And the Bye-Laws bring both under one head: the depository Bye-Laws define corporate benefits to mean and include any action taken by the issuer relating to prescribing the dates for book closures, record dates, dates for redemption or maturity of security, dates of conversion of debentures, warrants, call-money dates and such other action from time to time.
2.The term "transmission" of securities refers to:
- a)The sale of securities on a stock exchange
- b)Devolution of title to securities, for example on death, lunacy, bankruptcy or winding-up
- c)The transfer of securities between two demat accounts of the same holder
- d)The conversion of physical certificates into electronic form
Show the answer
Answer: (b) Devolution of title to securities, for example on death, lunacy, bankruptcy or winding-up
The word 'transmission' means devolution (transfer) of title to securities, for example, in case of death of individual, lunacy, bankruptcy, winding-up (in case of corporate entity) etc.
It is title passing by operation of law, not by agreement — which is what separates it from an ordinary transfer.
Note the four examples: death is the leading one, but lunacy, bankruptcy and the winding-up of a corporate entity all count.
The claimant must prove his right: the person on whom the securities devolve has to prove his entitlement to claim the securities by submitting appropriate documents and seek transmission. If the securities are held in the depository system (electronic form), the documents have to be submitted to the DP.
Why the depository makes this so much easier: in physical form, the documents have to be sent to the company for effecting transmission. If the deceased shareholder had holdings in several companies, to effect transmission of securities, the relevant documents must be sent to each of the companies, alongwith the securities. And legal heirs have to follow-up with each of the companies in order to get the transmission effected before the book closure.
Whereas in demat: such problems are mitigated as the securities are held as account balances in the electronic form. The process of transmission through a depository is simplified and investor friendly and the legal heir to the title interacts only with one entity i.e., his DP.
Option D describes dematerialisation, which is the subject of Chapter 7.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Cash corporate actionA corporate action that distributes money - such as dividend or interest - where the depository only tells the issuer who was entitled on the record date, and the issuer or its RTA pays them directly.
- Held in trustThe status of corporate benefits an Issuer or R&T Agent pays to a Clearing Member, Clearing Corporation or intermediary holding securities on a cut-off date, pending onward distribution to the true beneficial owners.
- Non-cash corporate actionA corporate action that distributes securities or changes holdings rather than paying money - bonus, rights, conversion, split, merger - which the depository executes by crediting and debiting demat accounts.
- Rights of the pledgorThe rule that a pledgor keeps every corporate benefit on pledged securities until invocation, provided the pledge still covers at least one share on the corporate action's execution date.
- Transit accountAn NSDL-only holding account, such as a settlement or intermediary account, that must be cleared of balances well before a book closure or record date so the right beneficial owner gets the corporate benefit.