RE: Legal opinion regarding the procedures for dematerialising shares, pledging of dematerialised shares A/C Company 1.
We refer to your letter no. …………… dated October 01, 2007 on the above subject.
You require our legal opinion regarding the procedures for:
i. dematerialising 217,457 shares of Bank 1 and 150,000 shares of Company 2 (“Shares”);
ii. pledging of the dematerialised Shares in favour of Company 3 (“Company 3”); and
iii. selling the pledged Shares by the Pledgee without intervention of the pledgor/shareholder.
PROCEDURES FOR DEMATERIALISING SHARES
Regulation 39 of the Depository (User) Regulations 2003 states as follows:
“REGU – 38 DEPOSITING SECURITIES FOR DEMATERIALIZATION ETC. – 1)When the Depository declares any security eligible for de materialization, the owner of that security can open an account with the Depository or its Participant and deposit securities that are in his own name or in the name of his customer, if he is a custodian, to the issuer for de materialization.”
‘Depository’ means a company constituted by regulations for the purpose of maintenance and transfer of securities through book entry; and in the context of Bangladesh it means Company 4 (“COMPANY 4”).
Upon perusal of the list of eligible securities contained in the website of COMPANY 4, we found that the Shares i.e. the securities of Prime Bank Limited and Prime Finance and Investment Limited, are eligible for de materialization.
Therefore, according to the above Regulation 39, for de materialization of the Shares, the owners of the Shares, Mr. x and Mrs. A (“the Owners”) first have to open an account with COMPANY 4 or with one of its Participant (list of the participants can be found in the COMPANY 4 website).
According to Regulation 40 of the Depository (User) Regulations 2003, the procedures for de materialisation are specified in the Bye-Laws of COMPANY 4.
Bye Law 9.1 of COMPANY 4 specifies the procedure for dematerialisation of shares as follows:
Owner of Eligible Securities who holds an account with one of COMPANY 4’s Participants, may proceed to convert his Securities held in physical form into dematerialized form in the following procedure:
- by taking his share certificates and/or letters of allotments to his COMPANY 4 Participant;
- Filling up and signing a De materialisation Request Form (DRF) i.e. Form 08;
- The COMPANY 4 Participant will then take the documents representing the securities (i.e. share certificates and/or letters of allotments) to the issuer of the certificate, along with a copy of the DRF, who (if the certificate is valid) will update the company register by moving the securities from the certificated portion of the company register to the depository portion.
- The issuer will then confirm the De materialisation to COMPANY 4 and COMPANY 4 will credit the securities to the owner’s account maintained with the COMPANY 4’s Participant.
Therefore, in the instant case, the Owners of the Shares, after opening an account with one of COMPANY 4’s Participant, has to take their share certificates and/or letters of allotments to their COMPANY 4 Participant and fill up and sign a DRF. Thereafter, the COMPANY 4 Participant of the Owners will then take the documents representing the Shares to Prime Bank Limited and Prime Finance and Investment Limited, the issuers. The Shares will be de materialised in accordance with the above stated procedure provided that the share certificates are valid.
PROCEDURES FOR PLEDGING OF THE DEMATERIALISED SHARES
Regulation 44 of the Depository (User) Regulations, 2003 states as follows:
“REGU. – 44: Pledge Facilities. – 1) A Depository or Depository Participant may provide pledge facilities to its customers.
2) A Depository or Depository Participant shall execute the pledge, upon receipt of the Pledge Request Form as specified in the Depository Bye – Laws, duly signed by the pledgor and the pledgee.
3) The Security under pledge shall remain in the name of the pledgor on the Depository Register.
4) The Security while under pledge may be transferred on the instruction of the pledgee in the manner as specified in the Bye-Laws.”
Therefore, an Owner/Account Holder/Pledgor may use the shares in his COMPANY 4 Participant Account as collateral against a loan without the need to re materialise the securities by filling in the Pledge Request Form, in accordance with COMPANY 4 Bye Law 11.9.3 (provided that the pledgee agrees to take collateral in this form).
However, the Pledgee/Lender must be a participant or a COMPANY 4 account holder. In the instant case, in order for IPDC to be the Pledgee, IPDC has to be a COMPANY 4 account holder or be a COMPANY 4 Participant. The Pledgor and the Pledgee may hold accounts through two different COMPANY 4 Participants.
The Pledgor shall give instructions to his COMPANY 4 Participant to pledge his shares to the Pledgee. Both Pledgor and the Pledgee must confirm acceptance of the pledge by signing the Pledge Request Form. The shares are then ‘frozen’ in the account of the Pledgor maintained with his COMPANY 4 Participant and cannot be moved until instructions are received by that COMPANY 4 Participant from the Pledgee.
Therefore, in the instant case, the Owners of the Shares shall give instructions to their COMPANY 4 Participant to pledge their shares in favour of IPDC. Both the Owners and IPDC must confirm acceptance of the pledge by signing the Pledge Request Form. The Shares shall then be ‘frozen’ in the account of the Owners maintained with their COMPANY 4 Participant and cannot be moved until instructions are received by the COMPANY 4 Participant from IPDC.
PROCEDURES FOR SELLING THE PLEDGED SHARES BY THE PLEDGEE WITHOUT INTERVENTION OF THE PLEDGOR/SHAREHOLDER:
As stated above, the pledged shares are ‘frozen’ in the account of the Pledgor maintained with his COMPANY 4 Participant and cannot be moved until instructions are received from the Pledgee by that COMPANY 4 Participant.
The instruction from the Pledgee may be to ‘release’ the pledge (for example if the loan has been repaid) or to confiscate the shares by moving them to his own (or a third party) account (for example, if the pledgor has defaulted on his repayments).
According to COMPANY 4 Bye- Laws 11.11.1, the Pledgee may confiscate the pledged securities by forwarding a Confiscate Request Form as specified in Form 19 to COMPANY 4 through his COMPANY 4 Participant. COMPANY 4 will transfer the Securities from the Pledgor’s COMPANY 4 Participant Account to the Pledgee’s COMPANY 4 Participant Account (or the account of a third party), without intervention of the pledgor/shareholder, subject to satisfactory instructions of the Pledgee.
Therefore, after the shares have been pledged in favour of IPDC, IPDC may confiscate those shares and transfer the same to their COMPANY 4 Participant Account without intervention of the Owners, subject to satisfactory instructions being given to COMPANY 4 by the Pledgee vide the Confiscate Request Form.
If you have any further inquiries please do not hesitate to contact us.
For: “The Lawyers & Jurists”