Corporate actions - Rights - Major issue with Zerodha system

Zerodha
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If you happen to sell the ex-Rights and during the No-delivery period / Book Closure Period, Zerodha transfers the shares you sold to their pool account.

Problem 1 - Pool Account delay
The Rights Entitement (RE) is not credited to the shareholders accounts on time. I have seen a delay of 4 days after trading in RE has started - Seen it in both Deepak Fertilizers Rights issue and with EIH Ltd. Rights issue.

I confirmed with the registrar if they had any delay in sending the RE out - They confirmed they did not - The RE is sent at least 1 working day before they are listed.

Outcome = Lost 4 trading days and the RE was down by 40% from the time it listed; this amount of money these 2 rights from day 1 to day 4

Problem 2 - Customer Service are clueless
Multiple emails, phones and tickets (and social media posts)- The customer service folks have no idea - They need to contact “backend” team. The customer service have no tools to get the right status and who is accountable to get this sorted. There is NO ACCOUNTABILITY, NO SLA, NO ESCALATION MECHANISM, the CEO does not bother to reply to email/twitter - SYSTEMIC ISSUE.

Outcome = “I dont care” attitude, too big now and BLACK BOX in Zerodha visible

Problem 3 - Considered Renounce / you don’t get any additional rights
Since the RE were transferred into your account from the pool account of Zerodha, you are no longer considered as a shareholder on the record date. Any additional rights shares you apply for are not allotted to you. Huge loss since a lot of times you get 10-40% more at a lower price. (see attached Basis of allotment - Same with other Rights issues)

EIH-Rights
EIH-Rights1152×951 289 KB

Outcome - Loss of another 10-40%

I hope @nithin and Zerodha team look into this process seriously to implement a solution that would not debit the shares during the no-delivery period/book closure period.

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Checking on this.

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Hey, firstly apologies for the kind of experience you’ve had with the customer support team. Those are not the usual standards we’re known for, we’ve escalated the matter internally and will take necessary actions.

With regard to the query you’ve raised, here’s a detailed explanation:

SEBI mandated the collection of upfront margins in the Equity segment from the 1st of September 2020, this meant that if someone did not bring in adequate margins, a penalty would be levied. While this didn’t have an impact on purchase trades (since we would ask for 100% of the purchase value upfront), we did have to change the way we settle sell trades. We had two options:

(a) Ask the client to bring in money if they wanted to sell stock (20% of the value)
(b) Debit stocks the day that the sale was made and do an Early Payin (EPI) to the Exchange, which gave two benefits:

 (i) the need for upfront margin wasn't required (as stated in point a above)
 (ii) the credit from sale could be allowed to carry out other trades

We opted for (b) and this is the reason it’s imperative that we debit the stock on the same day.

Coming to the specific issue you’ve raised: When we debit stock, we don’t keep it with us, we move it to an ‘Early Payin’ demat account maintained with the Clearing Corporation (CC). Because the stocks are in their possession and thus the risk of default is covered, the CC & the Exchanges give us the benefit as explained in point b (i) and (ii) above. When a Corporate action (CA) is announced on a scrip which is lying in the EPI account, the beneficiary of the CA is also the holder of the said demat account - the CC. So the Rights Entitlement get credited to this account under a temporary frozen ISIN. When the ISIN is frozen, they can’t be transferred out.

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Source: https://www.bseindia.com/downloads1/FAQs_on_Rights_Entilement_Trading.pdf

The day the ISIN is activated (the listing day), is when the CC is required to credit these shares from the EPI account to the Broker Pool account, the broker is then required to transfer them to the respective clients.

In the said cases, there have been delays from the CCs side in crediting these shares to the Broker. While I’m not pinning the blame on anybody, we have escalated the matter to CC too. But at times, there are things that are beyond our control. In the case of Deepak Fertilizer, we’ve been following up with CC from the 28th, but were given credit only on the 30th, this delayed the onward credit to clients.

Does that mean investors lose out?

Absolutely no. To counter this we will escalate the matter to the CCs right away and get them to credit the units on the listing day, before market hours. This way, the units will be shown to the client on the same day prior to listing which they’re free to trade.

Additionally, the depositories are also working on a model whereby instead of debiting, the stocks can be irreversibly earmarked for payin. This way, the stocks will continue to vest in the investor’s account and will be debited on the day of payin and thus the corporate action benefit will come directly to the investor’s account. This is likely to get done by the start of the next year.

Also, this issue isn’t limited to Zerodha. This is with all brokers who are debiting shares on T day and moving them to EPI.

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