Investors and new traders in Nepal have been receiving fines for failing to transfer shares on time. Those who have been fined have been claiming they do not have an idea of how to transfer shares to the person who has bought them. Additionally, some investors have been penalised with fines exceeding the profits made from selling the shares.
The most recent example of this is investors being required to pay Rs 27 million within just six months, between July 2023 and January 2024, as reported by CDS and Clearing.
Such a penalty is referred to as a closeout penalty. According to the data from CDS, investors paid a closeout penalty of Rs 9.3 million in December/January alone. In the last fiscal year 2022/23, investors paid over Rs 40 million as a closeout penalty. Considering the growth rate of the current year, it appears that the penalty amount will increase compared to last year.
Threshold
Investors now buy and sell shares through the Trade Management System (TMS) from the comfort of their homes.
After selling shares through this system, the shares must be transferred by the next day. Upon transferring the shares, they are deducted from the Demat account of the seller, while the buyer receives the shares in their Demat account.
Following the sale of shares, the broker company sends a message to the investor’s phones, indicating that WACC and EDIS, confirm that the sale of the shares will be conducted. After that, if the transfer is not completed by the following day, the broker company requests via email and phone.
However, those who sell shares but do not transfer them must pay a penalty of 20 per cent of the same amount as the shares sold for closeout. A total of 25 per cent of the fine goes to the government, and the rest goes to the person buying the share.
So for instance, if the shares are sold for Rs 100,000 and not transferred, then the person selling the shares has to pay a penalty of Rs 20,000. The government will then take 25 per cent of that amount (Rs 5,000), while the remaining Rs 15,000 will be received by the person who did not receive the purchased shares.
If the shares are transferred on time, there is no need to pay a 20 per cent penalty.
Once the shares are sold, a message will be sent to the mobile phone, and only upon receipt of this message can the shares be transferred from Meroshare. Occasionally, there are also issues with the Meroshare online system. If there is a technical problem, some leeway is provided during the share transfer process.
Know the rules
Purna Prasad Acharya, Chief Executive Officer (CEO) of CDS & Clearing, says that investors should first be aware to avoid the closeout penalty.
“After entering the stock market, investors should be aware of this matter. They cannot excuse themselves by saying that they do not know the process of selling shares or the process to be completed after selling,” he said, adding, “Broker companies should also inform everyone who comes to open an account about the process.”
Currently, the person who buys the shares automatically receives them in the account, but the person who sells them has to transfer them. He mentioned that determining the weighted average cost of capital (WACC) of the shares and the holding period of the shares is essential for capital gains tax calculation.
Acharya stated that due to structural complications related to the act, law, and share calculation, the automatic transfer process cannot be executed after the sale of shares.
If the shares are sold and not transferred, the buyer does not receive them. In the failure to obtain the shares, the buyer can visit the broker’s office and claim compensation for the amount. The broker company will impose a penalty on the party who fails to transfer the shares and use this penalty amount as compensation for the party who did not receive the shares.
According to Krishan Giri, Chairman of Sun Securities, both new and old investors face closeout penalties. “After selling shares to new investors, they are unaware that they need to transfer their shares from the online system, and as a result, they incur fines,” said Giri. “Especially those who sell IPOs are penalised if they fail to transfer. They assume that there will be an automatic transfer after selling the shares.
Both new and existing investors have been fined. “Especially during the book closure period (lasting 3 to 7 days), EDIS is not generated. Investors fail to understand that EDIS is unavailable during this time,” Giri explained. “However, after the book closure, EDIS becomes active. Investors should initiate transfers at that point. If they still fail to do so, they will incur a closeout penalty.”
How to transfer shares?
WACC represents the average cost of a company’s shares. So, the first step after selling the shares and before you transfer shares is to determine the WACC. Following the WACC calculation, the average cost per share of purchasing shares with broker commission is computed.
Once the WACC is determined, the shareholding duration is established. Shareholders holding shares for more than a year (365 days) are subject to a capital gains tax of only 5 per cent, whereas those holding for less than a year are taxed at 7.5 per cent.
For this reason, the system automatically indicates the days of shareholding. Subsequently, the shares are transferred through EDIS.
Calculating WACC
To calculate the WACC, initially, the shareholder must log in to Meroshare via their Demat account and navigate to ‘My Purchase Source’ to identify the shares they have sold.
Once the shares are identified, they will be listed based on the date and method of acquisition. A checkbox is provided on the left-hand side to select each share. Each checkbox must be selected. After this, the purchase price of the company is recorded. If there are any adjustments to be made to the recorded price, changes can be made accordingly.
After making such changes, the rationale for altering the purchase price should be explained in the right-hand remark space. These modifications may occur particularly during mergers and acquisitions, “BO to BO” transitions, or as a result of household name changes or changes in ownership due to death, or if additional shares are received as a bonus or entitlement. Otherwise, it would be unlawful to amend such a value.
Once you have self-declared the average purchase price, you must click on the proceed button. Following this step, you need to click on the ‘Declare button’ and then proceed to click on the ‘Confirm Update’ button. Subsequently, the process of announcing the price of the shares sold will be completed.
Determine the second holding period
To declare the holding period, you have to log in to Meroshare and click on the “Myholding” tab inside “MyPurchase Source.”
The list of my holding companies will appear only after the purchase source is announced and EDIS is obtained after the sale is complete. After seeing the list of companies in MyHolding, you have to select the company to see the details of the shares received in the Demat account. You can select dates and the number of days the shares are held in the Demat account will be displayed.
Then you have to select the shares in the list sequentially or you can select all at once.
After selecting in this way, the number of days of shareholding is displayed in the next column. If there is any change in the number of days of hold, the day number should be changed, and a remark should be placed in the box on the right.
Thus, after this process is completed, the number of holding days can be declared by clicking on the “proceed” button again and clicking on the “declaration” button in the next step.
EIDS
After completing this procedure, the WACC process and self-declaration of the holding period will conclude, and you can proceed to the ‘My EDIS’ menu, where the Transfer Share tab will be displayed.
There will be a list of EDIS tasks to be completed. Upon selecting it, the list of shares sold as per the sales bill will appear. You can choose to select them one by one or all at once by clicking on ‘select all’ and then proceed by clicking on the button labelled ‘proceed’.
Following this, upon clicking on the declaration and subsequently hitting the submit button, the EDIS process will be finalised.
