A share that is being traded on the stock exchanges can become illiquid for one or more of three reasons. First, if trading of the stock is blocked/suspended by the stock exchanges (Bombay Stock Exchange, National Stock Exchange, etc). The second reason is suspension of trading of the share by depositories. The third reason is that there may be news or an event relating to the company that has made the share illiquid as there are no buyers for it in the stock market (due to the news). Depending on the reason for which the share has become illiquid, an investor may or may not be able to transfer the share out of their demat account via an off-market transfer. Needless to say, an illiquid share cannot be sold on stock exchanges.
One thing an investor should note is that a demat account cannot be closed until all the shares in the demat account, including the shares that are blocked/suspended, are disposed off i.e., the demat account is empty. This disposal can either be done by transferring the said shares free of cost to somebody else or asking one's stockbroker to find buyers for such illiquid shares.
"Demat account can't be closed if blocked shares are lying in the demat account. The broker can change the status of the demat account to 'To be closed / Freeze for debit & credit' as per depository guidelines," says Roshan Moondra, Executive Vice President - Operations, Anand Rathi Shares and Stock Brokers, a Mumbai- based stockbroker.
What are the types of blocked shares?
According to Tejas Khoday, Co-Founder and CEO of FYERS, a Bengaluru-based stockbroker, broadly speaking there are two types of blocks/suspension of shares: one that is placed by exchanges and another by depositories. "There is a third type of block called 'trading halt' that occurs for a short time period - from a few hours to a few days which is initiated on request from the company," he says.
"If any stock is suspended from trading, then the investor will not be able to sell the stock through the exchange platform," says Sandip Raichura - CEO and Executive Director, Prabhudas Lilladher Pvt Ltd, a Mumbai- based stockbroker.
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Stock exchanges generally block a particular share for trading due to a violation in any Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations 2015. For example, in January 2020, the stock exchanges suspended trading of Cafe Coffee Enterprise shares (the operator of CCD coffee shops) due to non-compliance with SEBI LODR Regulations, 2015, number 33.
Depositories block shares only following orders issued by the government/regulatory authorities/ court, says Moondra. Following such orders, the depositories can block shares held by a particular client (individual) or all the shares of a particular company depending on what the order says.
There is no restriction on the transfer of illiquid shares from one demat account to another in case the shares become illiquid due to any reason other than the one mentioned above.
How to get rid of blocked/suspended shares?
Since the blocked/suspended shares cannot be sold on the open market (stock exchanges) the only way out is to transfer them to somebody else. However, in case the shares were blocked/suspended by depositories, then transferring them to somebody else is not an option.
"When an Exchange blocks/suspends a stock, trading for that security freezes. This means investors cannot buy or sell the stock on the open market until the suspension lifts. However, even if a stock is suspended by the Exchange, it can potentially be transferred through off-market transactions," says Khoday.
Raichura further says that in the case of shares that have been suspended/blocked by the exchanges, one should enquire with one's broker whether the share is also blocked by depositories or not. If it is, then an off-market transfer would not be possible.
Khoday also resonates with the viewpoint of Raichura and says, "A suspension of shares by depositories primarily affects the ability to transfer shares out of demat accounts. If a stock is suspended by the depository, off-market transfers become impossible."
To re-iterate if a share is blocked by exchanges and not depositories, then off-market transfers can be done. Raichura explains how to do an off-market transfer.
"Stocks suspended/blocked by exchanges can be transferred to another person's demat account through an off-market process by submission of Debit Instruction Slip (DIS) to depository participant (DP) or through online platforms of the depositories (easiest/speedier), if the transferor is registered for online transaction facility. As per regulatory requirements, the transferor will also have to provide the reason for off-market transfers of the stocks. Such off-market transfers are subject to surveillance by the depositories," he says.
A depository participant (DP) is an agent of the depository who help in running demat accounts of individuals. In India there two depositories: Central Depository Services Limited (CDSL) and National Security Depository Limited (NSDL). Usually, the stockbroking company is also a DP, however, that is not a mandatory requirement.
