I. Long-term third party insurance cover decoded: (Source -The Economic Times)

While the move will ensure compliance, the cost component will be steep for new vehicle buyers.

If you are planning to buy a car or a two-wheeler, be prepared to spend more on insurance. The Insurance Regulatory and Development Authority of India (IRDAI) has directed insurers to start offering three and five year third party liability covers for new four and two wheelers respectively and has spelt out the premiums.

The regulator's move is in line with a Supreme Court order that mandated long term third party covers, considering that only six crore out of the total 18 crore registered vehicles on Indian roads are insured. It is a positive move, given that many forget to renew their policy after the initial years.

The implications

As with any major regulatory change, this move, too, comes with its share of advantages and drawbacks. It will offer price stability and convenience as customers will not need to renew their policy every year and will also be insulated from yearly hikes in third-party premiums. It will minimise the presence of non-insured vehicles.

A comprehensive motor insurance policy comprises third party (TP) cover, own damage (OD) component and add-ons, out of which, only the third-party element is mandated by law. For two wheeler owners, this is a good move. This segment slips up on renewing policies every year and premiums are lower. But for car owners, it will mean a steep one time premium outgo.

For insurers, offering a combination of say a three year third party cover and an annually renewable own damage component could be complicated. The challenge lies in pricing and ensuring easy administration in case of a bundled product as it has a long term TP cover and yearly OD part. Affordability therefore, will be majorly affected. While most insurers have largely welcomed the move, some players argue that though this move was necessary for the two-wheeler segment, for the private car category, it will only mean higher costs with little or no benefits. As per Insurance Information Bureau (IIB) data for 2016-17, the insurance renewal rate for the private car segment is upwards of 90% in the first three years, so there is no problem of compliance. Why is the customer being burdened by being asked to pay for three years and being robbed of the freedom of switching insurers?

Providing long term insurance will only increase the cost to customer and potentially act as deterrent. The onus of ensuring the vehicle is insured ought to be on law enforcement agencies. Why can’t the authorities check the third party insurance too? If not available, there should be a fine. Gap in enforcement is the problem, but it is being solved by placing a burden on the customer.

The intricacies

A clear picture on the workings will emerge only after insurers fine tune the nitty gritties. Premiums and no claim bonus for the own damage component will have to be worked out. It is too early to comment on what shape the new structure will take. Insurers should follow a uniform approach.

Two insurance companies, New India Assurance and ICICI Lombard have been offering long-term covers for two wheelers since 2015. Now, IRDAI has allowed insurers to offer comprehensive long-term packages offering both third party and OD policies as well as bundled products where the third party element will carry the applicable long-term tenure while the OD component can be renewed yearly.

The OD pricing will be decided by the insurers. It has also allowed insurers to issue long term add ons. Policyholders will have the long term third party cover in place for five years and will only need to renew the own damage cover every year. If they choose a five year own damage cover, the no claim bonus will come into play after the end of this period.

Given that the long term third party covers are now compulsory as per law, you have little choice in the matter. However, you can exercise your choice in case of the own damage and add on covers.

II. Open that demat account if you have not already: (Source-The Economic Times)

SEBI will not allow shares to be bought or sold in physical format after 5 December.

Not too many years ago, stock broking in India was predominantly a family business. While those who were good in maths handled the numbers and those with attitude did the trading. One had to carry bundles of share certificates to the stock exchange, sit down on the floor, verify the lists and hand over physical share certificates as settlement.

This how things worked before 1996 when NSDL was set up as the first depository for dematerialised shares. Those were very risky times. Someone who bought shares on the stock exchange paid good money as settlement, but could end up with bad delivery of shares. Bad delivery was a long list over 100 situations had been listed by then. Unscrupulous operators simply printed fake share certificates, or offered torn, patched up, or grievously altered pieces of paper in exchange of good money. There were too many instances of fraud and manipulation, especially if there was an IPO that was popular. Investors would pay for their shares and get an allotment, but the share certificates that were dispatched to them would be stolen by a cartel working in collusion with various agencies, and sold off in the market place. The buyer would lodge the certificate for transfer in his name, and at that time it would be found that the signatures were forged, and that the seller was a fraud. Meanwhile, the original buyer would be lodging complaints about not getting allotment of shares. It was a mess, to say the least.

If the problem was the risky and poor quality settlement on stock exchanges, and the unscrupulous practices of fraudsters accessing certificates, the law stipulated that such transactions will become electronic, once the depositories were established. The law did not preclude investors from holding shares in physical form if they so desired. It also allows investors to remat, or reconvert electronic entries into physical shares if that is the mode they would want to hold it in. However, they cannot transfer or sell such shares on the stock exchange, where the rules of settlement require an electronic transfer of securities.

An initial list of highly traded stocks was mandated for demat settlement only and slowly expanded to include most actively traded stocks. If one desires to sell or buy these shares on the stock exchange, one had to provide or accept securities in the demat form alone, as valid settlement. Companies joined the depository, enabled the creation of a unique identity number for their issued securities, and dematerialised into electronic entry all physical certificates that were surrendered to their registrars. New issues were made in demat mode.

Soon enough, unscrupulous operators began applying for IPOs by opening multiple demat accounts in the names of retail investors, who were renting their accounts for the purpose of getting an allotment in the retail investor quota. This scam was unearthed and plugged. However, there continues to be instances of fraud and manipulation, especially of physical shares, where the record of share transfers and the trail of transactions are difficult to trace.

While many investors chose to convert to demat, many decided to stay put with physical shares. These include legacy shares held by many families, where certificates have been inherited from forefathers, investors who have changed their names and addresses, investors who have moved abroad and become NRIs, joint holders and combinations created for IPO subscription now difficult to bring back together,and joint holders who are no more, with no nomination or paperwork to claim the shares.

Sebi has now mandated that after 5 December 2018, no transaction for transfer of securities of a listed company,at a stock exchange or as an off market transactions between buyers and sellers, can happen in physical certificate form. Exceptions have been made for transmission (transfer of shares after the death of the original shareholder) and transposition (change in the order of joint holders of securities).

This renders all paper shares held after 5 December 2018 illiquid. It primarily prevents fraudulent acquisition and transfer of these securities. They can still be bequeathed, but the new owners will have to convert them to demat if they wish to sell or further transact in such shares. This is an opportunity to clean up the paper and unlock their value.

Investors can consolidate the paperwork when they make a request for dematerialization, in a two-step process. The first step is to open a demat account if they already do not have one. At this stage, all the KYC verification procedures will be completed, incorporating the new name, contact details, address, email, bank account for electronic transfer of dividends and such details of the investors. The second step is to complete the Dematerialization Request Form (DRF) for each of the physical shares, along with all the required documents.

If the company whose shares are being held has not joined the depository, and therefore does not have a unique number, such shares cannot be dematerialized. Except these, all other physical shares can be converted into electronic entries, which make it easy to sell, pledge, transfer and otherwise easily transact with them.

Many conversations go back to the past and delve in nostalgia, and proclaim the lost pleasures of the good old days. Such indulgence sometimes misses the marvels of progress especially mindful progress like dematerialization that made stock transactions fair, efficient and qualitatively better. Do not let those paper shares of old times lie in the trunks and attics utilise this mandate to demat them so you and your family,can actually make use of the wealth locked in them.

Hope you enjoyed reading this publication

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The views of the authors/publishers should not be construed as advice. Investors must make their own investment decisions based on their specific investment objectives and financial positions and using qualified advisors as may be necessary. Opinions expressed in various articles are not necessarily those of Wealthmax Enterprises Management Private Limited(WEMPL) or any of its directors, officers, employees and personnel. Consequently, WEMPL or any of its directors, officers, employees and personnel do not accept any responsibility for the editorial content or its accuracy, completeness or reliability and hereby disclaim any liability with regard to the same. Stock picks and mutual fund snapshots are not exhaustive and should not be construed as recommendations.