A Comparative Study on Depository and Depository ... › MIJBR › A Comparative...the depository...

MIJBR | Vol. 1 | Issue 2 | July-December 2014

MIJBR - MITS International Journal of Business Research 7

IntroductionA Depository is an organization where the

securities of share holders are held in the electronicformat the request of the share holder through themedium of a depository participant. In September,1995 the Government have accepted in principlethe proposed law for settling up of depositories andof a central depository for immobilization ofphysical certificates. The central depository is tobe set up as trust to hold the physical custody of

shared and effect transfers by book entries withoutthe need to deal and transfer the physical certificatesbetween parties. This is to be sponsored by publicfinancial institutions and banks and will have aminimum net worth of Rs. 50-100 Crores asproposed by the SEBI. A national securitiesdepository corporation was set up in November,1996. In the Depository system, the Depositoryextends its services to investors throughintermediaries called depository participants (DP)

A Comparative Study on Depository and DepositoryParticipants with Reference ROI and ROA

Dr.B.Venu Gopal 1, Dr. Ch.Rama Prasada Rao2

1 UGC Post Doctrol Fellow, Department of SKIM, S.K.University, Email ID:[email protected] Dean & Professor in Department of Management, Madanapalli Institute of Technology,

Email : [email protected]

Abstract

Depository is an institution or a kind of organization which holds securities with it, inwhich trading is done among shares, debentures, mutual funds, derivatives, F&O andcommodities. The intermediaries perform their actions in variety of securities at Depository onthe behalf of their clients. These intermediaries are known as Depositories Participants.Fundamentally, there are two sorts of depositories in India. One is the National SecuritiesDepository Limited (NSDL) and the other is the Central Depository Service (India) Limited(CDSL).In this research paper attempt to bee made objectives (i) To analyze proportionalstudy on ROI of CDSL and NSDL.(ii) To study return on assets ofKBSL(Karvey),IIFL(Indiainfloline),PCS and NSBL(Net worth). that F-cal (0.006) is less than F-table (11.26) at 0.01 level of significance for degrees of freedom ?1= 1 and ?2 = 8. Alternativehypothesis (H1) is rejected and hence, Ho is accepted .Therefore it is concluded that there isuniformity in Return on Investment (ROI) earning of CDSL and NSDL and it is not significantstatistically. To test whether there is significance difference in the return on assets (ROA) ofIIFL, PCS, NSBL and KSBL or not. The F-test / Anova is conducted and result is given in thetable 5.3 It reveals that F-cal (1.139) is less than F-table (7.59) at 0.01 level of significance fordegrees of freedom ?1=3 and ?2 = 8. Alternative hypothesis (H1) is rejected and hence, Ho isaccepted .Therefore it is concluded that there is no significant difference in the return onassets (ROA) of IIFL, PCS, NSBL and KSBCL.

Keywords: Depository, Depository Participants, ROI, ROA,

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MIJBR - MITS International Journal of Business Research8

who as per SEBI regulations could be organizationsimplicated in the business of providing financialservices like banks, broker, custodians and financialinstitutions. The admission of the DPs involve anevaluation by Depository of their capability to meetwith the strict services standards of Depository anda further evaluation and approval by SEBI. Towards,the end of the twentieth century three was twointeresting prognostications about India's potential.The first was by a professor of business managementin the United States (Rosenweig, 1998). Heestimated that by 2025, India would be the thirdlargest economy in the world (After the US andChina). The second projection was by a well-knownIndian Economist (Parikh, 1999). It was projectedthat India would reach a per capita income of U.S.$ 30,000 or higher by 2047, making it one of thefastest growing countries in the world. Indian capitalmarket has been linked to the International FinancialMarket, and the standard has been increased in termsof efficiency and transparency throughDematerialization of the Indian Capital Market. Inthis context dematerialization is one of the right stepstaken by the Government to make the share transferprocess easier and on other hand the earlier demeritsof the paper transfer process can be rectified.Dematerialization is a process in which the companytakes the physical certificates of an investor backand equivalent number of shares is credited in theelectronic holdings of the investor.

Review of LiteratureThis section covers the review of literature of

some of the important studies, research papers andarticles on the various aspects of depository system.

Shah (1996)1 highlighted that resolution of thesingle vs. multiple depositories, immobilization vs.dematerialization and role of capital adequacy normsfor the custodians which is helpful in quickimplementation of depository system in India.

Aggarwal and Dixit (1996)2 expressed theirviews about the legal framework for depository

system in India. They also explained the benefits ofthe paperless trading, responsibilities of depositoryor participants and eligibility criteria, etc.

Sarkar (1996)3 analyzed the implications of thescrip less trading and share transfer based on bookentry merely due to the existence of the depositoryordinance 1995.

George (1996)4 explained the role of the NSDLin revolutionizing the paperless stock settlementsystem of the country. He also examined the stepstaken by the depository to ensure that the scrip lesstrading system is a success and stressed on theimportance of the role of the regulator in makingthe depository system successful.

Gurusamy (1996)5 explained that theintroduction of depository system would help intransfer of securities in the capital market by a merebook entry. He also pointed out the advantages ofdepository system such as delay in transfer,registration, fake certificates, soaring cost oftransactions, more paper work, non availability ofdepositories in when the transfer of securities takeplace by physical delivery.

Hurkat and Ved (1999)6 discussed the role ofdepository system in many advanced countries inthe stock and capital markets the world over. Theyalso analyzed the services offered by NSDL,dematerialization, re-materialization, trading and feeor charges, comparison of a bank and a depositoryfor the benefits of the depository.

Ravi Shah (2002)7 highlighted that NSDL andCDSL have changed the face of the Indian capitalmarket. The move from an account periodsettlement in paper form only to a T+3 settlementin pure electronic form has been achieved in a recordspan of few years, whereas it took anywherebetween 10-20 years in most of the developedcountries.

Schmiedel et. al. (2006)8 analyzed the existenceand extent of economies of scale in depository and

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settlement systems. The study indicated theexistence of significant economies of scale butdegree of such economies differs by settlement,institution and region.

Kanan (2008)9 highlighted that dematerializationhas certainly brought about lot of improvement inthe investment habits in our country and is bane forthe companies and has created havoc in maintainingthe members register and in conducting themembers meeting.

Sultan Sing (2011)10 tried to study the factorsaffecting the decision making of the investors indepository system. Most of the investors are of theview that shorter settlement period, safety ofsecurities with the depositories, attitude of the staffavailable with the DPs, timely services provided bythe DPs to the investors, reduction in transactioncost, repatriation of sales proceeds of shares/debentures by NRIs are some of the factors whichaffects the decision making of the investors indepository system.

Dr. Dhiraj jain,P.Mehta (2012)11 The investorslevel of awareness about services offered bydepository participants and about closing andtermination of demat account is moderate throughthe vary in their education qualification will be asort of feedback for the investor, brokers andregulatory bodies as to what extent have theinvestors educate programme reached.

The earlier studies covered the depositorysystem and environment, which mainly pertain todepository legislation, how a viable alternative ofdepository, implications of depositories ordinance,internal audit of depository participants, an overviewof the Depositories Act, responsibilities of auditingprofession, role of depository in stock and capitalmarket, SEBI guidelines in the depository system,services provided by different depositories oraccessibility of depositories to retail investors. Butit is very important to study the Role andperformance of depositories itself. Therefore, the

present study is an attempt to fill this gap.

Need for the StudyIndian stock exchanges nowadays are following

screen based trading and electronic settlementsystem. The market width are also enlarged, quantityof investors spread to various distance places fromtrading and settlement place. There are someproblems arising in the settlement and transfersystem, in stock and share trading. In thiscircumstance there are a limited number of studiesin this area. Hence there is a need for evaluation ofdepository system with in the area of investor'sperspective. The present study is in this directionof research analysis covering role and performanceof depository participants and the factors affectingthe decision making of investor towards depositoryparticipant.

Scope of the StudyThe present study covers the role and

performance of the DP's and investor's Factors,attitudes towards depository participants and thefour listed depository participants with specialreference to a Rayalaseema region of AndhraPradesh. The scope of the study is very wide anddeep of a role of depository participants andinvestors factors affecting and comparative analysisamong listed four depository participants, impactsof concept as far as Indian Capital market isconcerned. Further, globalization has given a newfillip into financial markets and varied financialcompetitive Environment.

Statement of the ProblemThe studies have explored the various aspects

in the depository system like cost aspects.Difficulties faced by the investor and others of thebenefits available to the investor. The Indian capitalmarket has witnessed numerous changes in therecent past as seen earlier. Traditionally stock marketbooms and decline have resulted in a number ofproblems for the lay investor. A close introspection

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of these problems will reveal that most of them are

and settlement system. The capital market exposedthe limitation of handling and dealing in securities inphysical/paper mode. The short learning's of themarket became manifest in terms of bad deliveries,delays in transfer and irregular settlement. Theremedial measure for this may be the system ofdematerialization (also called demat) underdepositary system. Hence it is an attempt to studyabout The Role of Depository Participants andPresent scenario Working Frame work ofNSDL(national securities depository limited)andCDSL(central depository system limited), factorsaffecting to investors perception towards depositoryparticipants, performance, comparative analysisamong listed depository participants in RayalaseemaRegion.

The Objectives of the Study Are• To analyze comparative study on ROI of CDSL

and NSDL

• To study return on assets of KBSL(Karvey),IIFL(Indiainfloline),PCS andNSBL(Net worth)

Research HypothesesThe main hypotheses formulated for the study

are as given below.

• H8: There is significance difference in the returnon investment (ROI) of CDSL and NSDL.

• H9: There is significant difference in the returnon assets (ROA) of KSBL (Karvy),

IIFL (India Info line), PCS and NSBL(Networth). .

Research MethodologyIn order to achieve the objectives stated above

data and information have been collected from boththe primary and secondary sources. The primarydata have been collected through two structuredquestionnaires to investors (Annexure-I) and

intermediaries (Annexure-II). Apart from the

with the stock market specialists to elicit their opinionon various matters relating to depository systemand investment decisions. Secondary data have beencollected from reports, bulletins of RBI, bulletinsof SEBI, books, journals, magazines, conferencepapers etc.

SamplingFour listed depository participant companies are

selected purposively for the study via. 1. KarvySecurities Ltd. 2. India Infoline Finance Ltd. 3. PCSSecurities Ltd. 4. Net Worth Securities Ltd.Rayalaseema region is taken for the study. All thefour districts via. Anantapuramu, Kurnool, Kadapaand Chittore districts are covered for the study. Inorder to understand the attitude of the investorstowards depository system, depository participantsand investment, a sample of 300 investors are takenfor the study on the basis of simple random samplingmethod covering 160 investors in four urban areas,100 investors in four semi urban areas and 40investors in four rural areas in all the four districtsof rayalaseema region. The places covred areAnantapuram, Dharmavaram, Kalyandurgam,Kurnool, Nandyal, Arlagadha, Kadapa, Prodhuture,Mydhukure, Tirupathi, Chittoore, and Madanapalli.

A sample of 50 branches and franchises of theselect four depository participants in urban, semi-urban and rural areas are taken for the study tounderstand the attitude of DPs on depository system.

The data and information collected throughquestionnaire and from all the available sources areproperly analyzed and inferred to identify theproblems in depository system to the investors andstock brokers by using the following statistical tools.

Statistical Tools UsedThe data is analyzed based on the following

statistical Tools

• ANOVA, SD, Ratio, Covariance.

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due to intrinsic nature of the paper based trading questionnaires, discussions have been undertaken



Limitations of the StudyAny research by its inherent nature is bound to

have some limitations and this study is not anexception to that rule. The major limitation of thestudy is that it is restricted to the Rayalaseema Regiononly and the size of the sample is also limited.However an effort is being made to minimize theimpact of this limitation by selecting investors fromdifferent areas of all the districts of rayalaseemaregion. As this study is based on the responses ofthe investors and intermediaries there is a possibilityof personal bias. Care has taken to bring down theimpact by asking cross reference questions. Someof the investors could not relate themselves to therole of depository participants, depository servicesas they were new entrants to the market. Theinvestment activity is the outcome of innumerablefactors. Where as in this study only a limited numberof factors are considered. With all these limitationsall the efforts are made to evaluate the situation asaccurately and objectively as possible.

Return on Investment Ratio of CDSLand NSDL

This ratio shows the percentage return receivedby depositories on their total share holder's fundduring the study period. This ratio helps to assessdepositories' Profitability from the view point ofshare holder's fund. Higher ratio affects positivelyto the profitability of depositories' income earningcapacity. Total share holder fund includes sharecapital and reserve and surplus during one financialyear. The formula of the ratio is as under.

ROI =

Profit after Tax * 100

Total Share Holders Fund

Table 1 Return on Investment Ratio of CDSL andNSDL

(Figures in %)

Year CDSL NSDL 2007-2008 20.83 20.36 2008-2009 17.17 9.54 2009-2010 20.58 22.01 2010=2011 18.16 19.51 2011-2012 16.16 20.52 Average 18.58 18.39 Standard deviation

1.85 4.49

Co-efficient variance 9.94 24.45

Source: calculated from the Published Annual Reportsof the Depositories

Return on Investment is an important measureof performance of any organization. ROI isimportant for the owners of the organization. Thetable 1 shows that Return on Investment ratio ofCDSL and NSDL during the period under review.This ratio reveals that returns earned by depositorieson their investment during study period. The profitwhich is taken as post tax. It reveals from the abovetable that CDSL ratio represents fluctuating trendduring the study period of 2007-12 except in 2008-09 which shows that its profitability was not stable.CDSL has achieved its highest level of 20.83 % inthe financial year 2007-08. The average ROI ofCDSL obtained during the study is 18.58%. TheNSDL also registered fluctuating trend during thestudy period which also affects negatively to itsprofitability. The Return on Investment ratiorecorded 9.54% which was the lowest during theperiod 2007-12 which affects negatively tocompany's operational efficiency. NSDL achievedhighest ROI of 22.01 % in the year 2009-10.Comparing the CV of CDSL and NSDL; the CDSLhas registered with lower CV than NSDL whichshows that NSDL has less stability in term of Returnon Investment ratio during the study period. It is

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found that both the depositories have almost earnedequally to the extent of 18 % of ROI during thestudy from 2007-12 and more over CDSL has moreconsistency in ROI when compared with NSDL.NSDL has high business risk due to fluctuating trendin ROI and but its ROI is increased to 20.52 % in

2011-12 from 19.51 in 2010-11. In this regard, it issuggested to the depositories to improve theiroperating and other incomes and simultaneouslycontrol the total expenses and thus enhances theconsistency in ROI.

Fig 1 Return on Investment Ratio of CDSL and NSDL

• H0: There is no significance difference in the return on investment (ROI) of CDSL and NSDL.

• H1: There is no significance difference in the return on investment (ROI) of CDSL and NSDL.

Table 2: Return on Investment (One Way ANOVA)

Sum of Squares

Df Mean Square

F-Cal Sig. F-table @0.01 L.O.S

Decision

Between Groups Within Groups Total

.092

118.182

118.275

1 8 9

.92

14.773

.006 .939ns 11.26 H0 is Accepted and H1 is Rejected

Source: SPSS and ns- not significant at 0.01 level of significance.

The table 5.2 indicates that F-cal (0.006) is lessthan F-table (11.26) at 0.01 level of significancefor degrees of freedom ?1= 1 and ?2 = 8. Alternativehypothesis (H1) is rejected and hence, Ho is accepted.Therefore it is concluded that there is uniformityin Return on Investment (ROI) earning of CDSLand NSDL and it is not significant statistically. Both

the depositories have earned equally to the extentof 18 % only. It is suggested to depositories of CDSLand NSDL to enhance their efforts in improving theoperating incomes and other incomes and bysimultaneously the controlling expenses and thatimproves the consistency in Return on Investmentratio.

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Table 3 Return on Assets (One Way ANOVA)

Source Sum of Squares

Df Mean

Square F-Cal Sig.

F-table @0.01 L.O.S

Decision

Between Groups Within Groups Total

72.780

170.342

243.122

3

8

11

24.260

21.293

1.139 .390ns 7.59 H0 is Accepted and H1 is Rejected

Source : SPSS and ns - not significant at 0.01 level of significance

• H0: There is no significant difference in thereturn on assets (ROA) of KSBL,IIFL, PCS andNSBL.

• H1: There is significant difference in the returnon assets (ROA) of KSBL , IIFL, PCS and NSBL.

The return on total assets (ROA) / return oninvestment (ROI), measures the overalleffectiveness of the management in generatingprofits with its available assets. The return on assets(ROA) ratio of IIFL and PCS were in fluctuatingtrend and the ROA ratio of NSBL and KSBCLs werein declining trend during the study from 2009-12.The average return on Assets (ROA) of IIFL, PCS,NSBL and KSBCL during the study were 1.44 %,3.69. 8.2 % and 3.9 % respectively. All thedepository participants have not earned satisfactoryreturn on assets (ROA) / ROI. To test whether thereis significance difference in the return on assets(ROA) of IIFL, PCS, NSBL and KSBL or not. TheF-test / Anova is conducted and result is given inthe table 5.3 It reveals that F-cal (1.139) is lessthan F-table (7.59) at 0.01 level of significance fordegrees of freedom ?1=3 and ?2 = Alternativehypothesis (H1) is rejected and hence, Ho is accepted.Therefore it is concluded that there is no significantdifference in the return on assets (ROA) of IIFL,PCS, NSBL and KSBCL. It is suggested that all thedepository participants have to optimize the utilizationof assets and operating efficiency to achieve thesatisfactory return on Assets (ROA) which satisfies

the shareholders of the company or enhances themarket value of the company.

It can be concluded from the above that thedepositories and select depository participants (IIFL,NSBL, PCS and KSBCL) are providing wide rangeof services. All are interested in knowing thefinancial performance of depositories, CDSL andNSDL and depository participants of IIFL, PCS,NSBL and KSBCL as earning returns from theservices rendered is essential for survival in themarket. Operating Income to Total Income ratiohelps to assess the operational efficiency of the unitcompare to total income of the depositories. It isfound that NSDL is performing well when comparedwith CDSL as mean ratio of Other Income to TI(Total Income) is high and also CV is low. It issuggested to CDSL to reduce its business risk andenhance its operating efficiency so that it canachieve maximum Operating Income to TotalIncome ratio.

From the point of view of ratio of Other Incometo Total Income earned, it is observed that CDSL isnot performing its operations well even though ithas high mean of OI /TI when compared with NSDLand more over NSDL has lesser business risk thanCDSL. From the point of view of Total expenses toTotal Income, it is found that CDSL is controllingits total expenses to total income consistently andits trend is in decreasing from2008-12. The NSDLhas high level of Total expenses to Total income as

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its mean ratio is 70.14 and CV of 9.23. In this regard,it is suggested to the NSDL to control its totalexpenses effectively so that it can improve itsconsistency in total expenses to total income. It isfound that both the depositories have almost earnedequally to the extent of 18 % of ROI during thestudy from 2007-12 and more over CDSL has moreconsistency in ROI when compared with NSDL. Itis also proved statistically that two depositories havesame ROI. NSDL has high business risk due tofluctuating trend in ROI and but its ROI is increasedto 20.52 % in 2011-12 from 19.51 in 2010-11.

Depository Participants are rendering wide rangeof services to investing community. It is necessaryto understand the service charges charged by selectdepository participants as it has impact on theperformance of the firms. It is observed thatNetworh Stock Broking Ltd and Karvey StockBroking Co.Ltd are charging less for variousservices offered to the investors when comparedwith other depository participants. The servicecharges charged by select depository participantsfor the services of security custody, equitytransaction sale and transaction statement arecompetitive. Among select the depositoryparticipants, only PCS securities is charging to theextent of 170 rupees others are providing theaccounting opening service for free of cost. IIFL ischarging to the extent of 750 rupees for accountmaintenance service where as the remaining DP'sare charging 450 rupees only..The average currentratios of IIFL, PCS, NSBL and KSBCL were 1.44,2.24, 6.29 and 1.57 respectively. IIFL and KSBCLliquidity position is not satisfactory and PCS andNSBL maintained satisfactory liquidity position.When Anova / F-test is conducted to know whetherthere is significance difference in liquidity positionof selected depository participants or not?. Fromresult, it is concluded that the liquidity position ofIIFL, PCS, NSBL and KSBCL or Current ratioposition of IIFL,PCS ,NSBL and KSBCL does notdiffer significantly. All the depository participants

have to maintain standard norm level of liquidity sothat they remain competitive and can discharge theirshort term obligations effectively.

The return on total assets (ROA) / return oninvestment (ROI), measures the overalleffectiveness of the management in generatingprofits with its available assets. The return on assets(ROA) ratio of IIFL and PCS were in fluctuatingtrend and the ROA ratio of NSBL and KSBCLs werein declining trend during the study from 2009-12.The average return on Assets (ROA) of IIFL, PCS,NSBL and KSBCL during the study were 1.44 %,3.69. 8.2 % and 3.9 % respectively. All thedepository participants have not earned satisfactoryreturn on assets (ROA) / ROI. To test whether thereis significance difference in the return on assets(ROA) of IIFL, PCS, NSBL and KSBL or not. WhenF-test / Anova is conducted .From the result , it isconcluded that there is no significant difference inthe return on assets (ROA) of IIFL, PCS, NSBLand KSBCL. It is suggested that all the depositoryparticipants have to optimize the utilization of assetsand operating efficiency to achieve the satisfactoryreturn on Assets (ROA) which satisfies theshareholders of the company or enhances themarket value of the company. From this it is clearthat Net worth Stock Broking Company Ltd hasperformed well when compared with otherdepository participants.

References1. Shah, Mahesh (1996), "A Care for Depositories in India",

The Management Accountant, April, pp. 259-261.

2 . Aggarwal, V. K. and Dixit, S. K. (1996), "The DepositoriesLegislation: A Critical Evaluation," Chartered Secretary,April, pp. 367-376.

3 . Sarkar, A. K. (1996), "Implications of DepositoriesOrdinance, 1995," The Management Accountant, June-July, pp. 473-477.

4 . George, Philip (1996), "Towards a Paperless SettlementSystem", Business World, October, pp. 134-135.

5 . Gurusamy, S. (1996), "Depository System-How a ViableAlternative", The Management Accountant, July, pp. 478-482.

6 . Hurkat, Manoj and Ved, Umesh (1999), "Depositary-AnInevitable Institution", Chartered Secretary, September, pp.991-993.

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7. 11 Ravi, Shah (2002), "Understanding Dematerialization",The Management Accountant, pp. 434.

8 . Schmiedel, HeiKo, Malkamaki, Markku and Tarkka, Juha(2006), "Economies of Scale and TechnologicalDevelopment Securities Depositories and SettlementSystem", Journal of Banking and Finance, Vol. 30, Issue-6,pp.1783-1806

9. S. Kanan (2008), "Market Comparable Approach", Journalof Financial Services Research, Vol. 24, No.2-3, pp. 121-148.

10. Prof. Sultan Sing and Sakshi Goyal (July 2011), "AnalysisFactor Affecting the decision making of the investors inDepository system", Journal of Banking, Financial Servicesand Insurance Research, Vol. 1, pp. 13-38.

Websites1. www.stockholding.com

2. www.cdslindia.com

3. www.nsdl.co.in

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