Basics of Registrars and Transfer Agents

What this chapter covers

Units 6 to 8 carry 25 marks between them — about 8 marks for this chapter.

LEARNING OBJECTIVES: After studying this chapter, you should know about: Importance and Need for Registrars and Transfer Agents (RTAs) · Types and Role of Registrars and Transfer Agents (RTAs) · Investor Service Centre (ISC) and Official Point of Acceptance (OPA) · Qualified Registrars and Transfer Agents (QRTAs) · Interface between Depositories and Registrars and Transfer Agents (RTAs) · Industry Overview RTA business

6.1 Introduction

Registrar & Transfer Agent (RTA) is an intermediary taking all the responsibilities of the back end process of the various financial and non-financial transactions for corporates and mutual funds. The RTA undertakes the responsibility of record keeping and maintenance of each and every transaction relevant to the corporate or fund house. Also, the registrar & transfer agent helps investors to get information about corporate actions.

The two distinct roles

The RTA has 2 distinct roles:

a) As a custodian of data: It acts as the repository of information of investor data.

b) As a facilitator and enabler of various financial and non-financial transactions: It helps investors in processing of both financial and non-financial transactions.

The first sample question tests the first role — the RTA is the repository of investor data.

All the RTAs appointed by the corporates or mutual fund houses are registered with SEBI.

The tasks it handles

Security dematerialization · Payout of dividend / interest · Investor record keeping and share transfer · Processing purchase and redemption transactions for a MF · Inquiry handling via phone, mail & online · Regulatory reporting · Issuance of duplicate share certificate · Investor Education and Protection Fund (IEPF) claim settlement · Change of name/ name deletion/ transposition/ transmission · Signature and address change

Ten tasks.

As this workbook deals with the RTAs working for mutual funds, we will focus our discussion on RTAs servicing mutual funds only.

6.1.1 Why RTAs are needed

Every day a large number of transactions, like buying, selling or switching units are done by mutual fund investors. Some of the transactions are financial transactions, while others are non-financial in nature like a change in bank details, change in contact details or address etc. Each such request needs to be recorded and maintained by the fund houses.

Since most mutual funds may not want to invest in these processes nor do they have the expertise to handle these huge transactions on a professional manner, they outsource this work to the registrar and transfer agents (RTA). By outsourcing these back end activities, a fund house is able to focus on its core activities.

Two reasons — cost and expertise; one result — focus on core activities.

6.1.2 Types of RTAs

Broadly, there are 2 types of RTAs functioning in securities markets:

a) Those serving corporates and their investors; and

b) Those serving mutual funds, their investors and distributors.

The focus of this module is on the latter segment.

What each stakeholder gains

1. Mutual Fund Companies

Reduction in cost of maintenance of huge investor data · RTA offices present in different cities serves as mutual fund offices · Sending of account statements, consolidated transaction details, portfolio statements to investor on behalf of mutual fund companies · Facilitating the data for consolidated account statements · Providing one-point customer service to the customers of mutual fund companies · Facilitates various regulatory and other MIS reporting for Mutual Fund companies for submission to regulatory/statutory authorities or for internal decision-making purpose · Maintenance of original documents of investor applications, transaction requests and other investor correspondence

2. Distributors

Helps distributors to buy and sell mutual funds on behalf of their clients · Helps distributors to get a consolidated statement of sales done by them in any given month · Assist the AMC in Calculation of commission and facilitating the payment to distributors · Assisting them with the queries on various processes / regulatory changes

3. Investors

Provides detailed information related to new offers, NAV of funds, pay-out of income distribution cum capital withdrawal (IDCW) or maturity details etc. · Makes servicing related forms and information easily available to the customers · Processes customer service requests, both financial and non-financial in nature · Provides investors with account statements periodically, facilitates capital gains statement and self-service options · Replying to the queries, complaints received from the investors · Assisting AMCs in sending periodic communication like portfolio statements, risk-o-meter, TER changes, annual account statements, etc.

The seventh sample question draws on this — providing consolidated account statements is a value-added service of an RTA.

6.1.3 The role of RTAs

Record-keeping of investor data

The RTA is the custodian of the investor data, both for a fund house or a corporate. RTAs are responsible to record and maintain data, both financial and non-financial, either in physical or in electronic form. RTAs ensure that the integrity of the data processing systems is maintained at all times and take necessary precautionary measures to ensure that the records are not lost, destroyed or tampered with and ensure that sufficient backup of records is available at all times at a different place.

Backup at a different place — an off-site copy.

The Depositories Act makes a distinction between a registered owner and a beneficial owner. In case of shares/mutual fund units held in demat form, the depository is the registered owner. The depository maintains its own records of the beneficial owners. When mutual fund units are transferred in electronic mode within the same depository, the beneficial owner changes but the registered owner does not change.

The depository provides the details of the mutual fund holdings of the beneficial owners electronically to the Issuer or its Registrar and Transfer Agent (RTA) as of the relevant record date/ book closure for the purpose of corporate actions and distribution of corporate benefits.

In case of securities/mutual fund units held in physical form, the registered owner and the beneficial owner are the same.

Physical — one person is both. Demat — the depository is registered owner and the investor beneficial owner.

Corporate actions

A corporate action is an event carried out by a company that materially impacts its stakeholders (e.g. shareholders or creditors). Common corporate actions include the payment of dividends, issue of bonus shares, stock splits, buy-back of shares, rights issue and mergers & acquisitions. Corporate actions are approved by the company's shareholders and its board of directors.

The second sample question asks which is not a corporate action — the purchase and sale of stocks and mutual fund units. That is an investor's transaction, not an act of the company.

In each of these, the RTA has a critical role to play:

i. Determining the beneficiaries of the Corporate action based on book closure and record date

ii. Transfer of dividend through NEFT / RTGS. Dispatch of payment instruments in case bank details are not available

iii. Credit of new shares to demat account of the investor in case of stock split or bonus

iv. Reconciliation of funds with bankers in case of a rights issue.

v. Assistance to company for finalizing allotment and post allotment activities such as credit of shares to demat account of investor and refund of excess money if any.

Five roles, and the fifth sample question tests the second of them — all of NEFT, RTGS and dispatch of instruments where bank details are missing.

General operations

In case the shares/ mutual fund units are held in electronic mode (demat), the RTA provides the interface between the corporate / fund house, investor and the Depository; whereas, in case of shares/ mutual fund units held in traditional physical format, the RTA provides the interface between the corporate / fund house and the investor.

Three parties in demat; two in physical.

The RTA is also responsible for conversion of physical mutual fund units to demat and vice versa (if needed under any circumstances). RTAs also accept grievance redressal requests from the investors and maintain detailed records of the same.

On winding up: in case of winding up of mutual fund schemes, such units can be listed and traded on a recognized stock exchange, providing investors an optional channel to exit. Initially, the trading of such units to be done in demat form. However, stock exchanges along with RTAs shall have a mechanism in place for trading and settlement of such units held in form of Statement of Accounts/ Certificate (physical form).

6.2 Investor Service Centre and Official Point of Acceptance

RTAs have a wide network of branches across the country. These branches act as Investor Service Centers (ISCs) for the mutual fund houses serviced by the RTAs and thereby help in cost reduction. ISCs are the points of contact for all financial and non-financial transactions in mutual funds.

The sixth sample question tests this — an ISC is an RTA branch serving financial and non-financial requests.

ISCs are equipped with state-of-the-art infrastructure to allow easy access to information on need to know basis, products and services by the investors. Operations and customer interaction are facilitated by skilled and dedicated manpower to deliver quality service, customer satisfaction and maintain standards across branches.

Note what is not mentioned — AMC staff. The fourth sample question turns on that: availability of AMC staff to assist investors is not necessary for an ISC, since the ISC is run by the RTA.

Why investors use them: investors may invest in multiple schemes offered by various fund houses and they further perform transactions (purchases/ redemptions) on a continuous basis. As per SEBI guidelines, there is a cut-off time by when the investment has to be made to be eligible for that day's NAV. So, to make multiple investments, an investor avails the services of RTAs to conduct all his transactions. RTAs act as a single window system to investors where all the work and transaction related to various mutual funds are carried out at the ease of the investor through various Investor Service Centres.

A single window across many fund houses.

In addition to the ISC, which are usually managed by an RTA, a fund house may specify other locations as Official Point of Acceptance (OPA). Any transactions received at these locations are deemed to have been submitted to the fund house or RTA for processing.

"Deemed to have been submitted" — which matters for the cut-off time.

What an ISC or OPA does

Providing sale necessities like forms for investors and distributors · Providing KIM · Providing statement of account on regular basis to distributors and investors · Providing information to investors regarding new offers, pay-out of IDCW, maturity dates, etc. · Accepting all investor transactions such as purchase, redemption, switch etc. · Banking of cheques and facilitating electronic feeds to the banks to enable them to send the reverse feeds with updated information to the respective MF(s) · Accepting requests for non-financial transactions such as change in bank mandate, signature update etc.

Note the division in that list. Purchase, redemption, switch are financial transactions; change in bank mandate, signature update are non-financial. The eighth sample question tests it — change of bank details is not a financial transaction.

6.3 Qualified Registrars and Transfer Agents

Market Infrastructure Institutions (MIIs) are those institutions (such as stock exchanges, depositories, clearing corporations etc.) that are systemically important for the country's financial development and serve as the infrastructure necessary for the securities market. Government has issued various Acts and SEBI has prescribed various Regulations from time to time for the smooth functioning of these MIIs.

SEBI constituted a Committee and held meeting in 2018 to review the regulations and relevant circulars pertaining to MIIs. The Committee also looked into the desirability of extending the MII framework to certain market intermediaries including Registrar and Transfer Agents (RTAs) servicing more than 2 crore folios. These RTAs are known as Qualified Registrars and Transfer Agents (QRTAs).

The third sample question tests this — RTAs servicing more than 2 crore folios are Qualified RTAs.

SEBI has clarified that an RTA shall be categorized as QRTA if at any time during the financial year, the folios being covered exceeds 2 crores. In case of an RTA being categorized as QRTA, they shall inform SEBI of the same within 5 working days. A QRTA shall be considered a QRTA for next 3 financial years even if there is a fall in folios below 2 crores.

Given the large number of transactions handled by QRTAs, the Committee therefore recommended compliance of enhanced monitoring requirements through adoption and implementation of internal policy framework. This is discussed in detail in Unit 7.

6.4 RTA and depository interface

Securities are created by the issuer (corporate / MF) through an IPO or NFO or other corporate actions. They may be held in physical form or electronic mode. Earlier, all securities were created in physical form. In recent times, electronic issuance is the norm. Further, an investor has an option to switch between physical and electronic mode.

SEBI has prescribed detail process of converting the physical securities to demat / electronic mode and vice versa. This process has to have strict protocols and process to ensure against creation of duplicate securities and any other fraud.

A recent easing: to facilitate ease of investments for investors, SEBI increased the simplified documentation threshold from Rs.Five Lakhs to Rs.Ten Lakhs, allowing for streamlined processing of lower-value claims. Further it may be noted, strict protocols remain mandatory, requiring standardized affidavit-cum-indemnity bonds and the necessity to issue securities in dematerialised form/electronic mode for preventing fraudulence.

Rs. 5 lakh raised to Rs. 10 lakh.

Connectivity

Companies who wish to admit their securities into the electronic mode must obtain electronic connectivity with both depositories, NSDL and CDSL. Alternately, they may use the services of an RTA for the same. The cost for setting up RTA connectivity is significantly less without compromising in any manner on security and safety of the system. The centralized architecture also allows the RTAs to provide the companies with a real time status of the holdings of their shareholders / MF unit holders.

All leading RTAs are currently connected to both NSDL and CDSL and are providing services to a number of companies across the country. A company can also obtain direct in-house connectivity with CDSL, the procedure and the cost for doing so is similar to that of a RTA.

The single-point rule

SEBI, vide its circular on 'Appointment of common agency for share registry work' dated December 27, 2002, has advised issuers that "all the work related to share registry in terms of both physical and electronic should be maintained at a single point i.e either in-house by the company or by a SEBI registered R & T Agent". Thus, a company may either keep the record keeping in-house, or outsource to an RTA, but not both.

One or the other, never both.

Why real-time interface matters

Converting physical securities to demat form · Converting demat securities to physical form · Creation of new securities due to an IPO, bonus issue or other corporate action · Extinguishing the securities due to winding up of company, actions under Insolvency and Bankruptcy code, merger of MF schemes, winding up of a close ended scheme etc.

Four situations.

6.5 Financial Information Provider to the Account Aggregator network

Government of India introduced a financial data-sharing system amongst financial institutions through the Account Aggregator (AA) network. An Account Aggregator (AA) is an RBI regulated Non-Banking Finance Company (NBFC) that facilitates retrieval or collection of financial information, pertaining to a customer, from Financial Information Providers (FIP) on basis of explicit consent of the customer.

An RBI-regulated NBFC, acting only on explicit consent.

RBI has notified list of eligible entities who can act as FIPs. Out of the list, AMCs through their RTAs and the Depositories are specified as FIPs in the securities markets for sharing of information.

The FIPs in the securities markets shall share the 'Financial Information' pertaining to securities markets, through the AA, only on receipt of a valid consent artefact (electronic consent as defined in RBI Master Guidelines) from the customer through the AA. Post verification of the consent artefact, the FIPs in the securities markets shall digitally sign the financial information and securely transmit the same to the AA.

Consent artefact first; then digital signature and secure transmission.

The financial information shared through the Account Aggregator is not stored by the AA, and it shall not be the property of the AA. This information is not to be used in any other manner except for the purpose of providing it to the customer or consented Financial Information User (FIU).

Not stored, not owned, not used for anything else.

6.6 Industry overview

The two leading Registrar and Transfer Agent (RTA) companies in India that are servicing in the mutual fund segment are Computer Age Management Services (CAMS) and KFin Technologies Private Limited (KFintech). Both these companies are instrumental in the smooth functioning of the mutual fund companies in India. CAMS and KFintech provide services to all fund houses.

RTAs also provide the facility of transacting online through their individual portals as well as a common portal such as MF Central.

The chapter's sample questions confirm that the RTA as custodian of data is the repository of investor data; that the purchase and sale of stocks and mutual fund units is not a corporate action; that RTAs servicing more than 2 crore folios are Qualified RTAs; that availability of AMC staff is not necessary for an ISC; that the RTA's corporate action role covers all of NEFT, RTGS and dispatch of dividend where bank details are unavailable; that an ISC is an RTA branch serving financial and non-financial requests; that providing consolidated account statements is a value-added service of an RTA; and that change of bank details is not a financial transaction.