Depository System in India - Class

8/10/2019 Depository System in India - Class

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An effective and fully developed depositorysystem is essential for maintaining andenhancing the efficiency of a mature capitalmarket


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Before introduction of Depository system, theproblems faced by investors and corporates inhandling large volume of paper were as follows:

Bad deliveries Fake certificates Loss of certificates in transit Mutilation of certificates Delays in transfer Long settlement cycles Mismatch of signatures Delay in refund and remission of dividend etc


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The first depository was set up way back in1947 in Germany.In India it is a relatively new concept

introduced in 1996 with the enactment ofDepositories Act 1996Their operations are carried out inaccordance with the provisions of

Depositories Act and SEBI (Depositories andParticipants) Regulations,1996


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The term Depository means a place where adeposit of money, securities, property etc.is deposited for safekeeping under theterms of depository agreement

A depository is an organization, whichassists in the allotment and transfer ofsecurities and securities lending.The shares here are held in the form ofelectronic accounts i.e. dematerialized formand the depository system revolves aroundthe concept of paper-less or scrip-lesstrading.


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It holds the securities of the investors in theform of electronic book entries avoiding risksassociated with paperIt is not mandatory and is left to the investorto decideDepositories carry out its operations throughvarious functionaries called business partners


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Indias depository system is governed by thefollowing Acts and provisionsSecurities & Exchange Board of India Act1992The SEBI (Depositories and Participants)Regulations, 1996Bye laws of DepositoryBusiness rules of DepositoryThe Companies Act 1956


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Presently there are two Depositoriesworking in India:National Securities Depository Limited

(NSDL)It was registered by the SEBI on June 1996 asIndias first Depository to facilitate tradingand settlement of securities in the dematform. It is promoted by NSE in associationwith IDBI & UTI.


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Central Depository Services (India) Limited(CSDL)It commenced its operations during feb 1999and was promoted by Stock ExchangeMumbai (BSE) in association with SBI, Bank ofBaroda, Bank of India, HDFC Bank and others


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At present 10 Stock Exchanges are connected to theDepositories NSE BSE Calcutta Stock Exchange Delhi SE Ludhiana SE Bangalore SE Over the counter exchange of India Madras SE Inter connected SE

Ahmedabad SE


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DepositoryDepository Participant (DP)Securities Issuers, and Registrars and Share

Transfer AgentsStock Exchanges and Stock BrokersInvestors


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Depository : it is an organisation where thesecurities are held in electronic form andcarries out the securities transaction by bookentry


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DP : DP is an agent of the depository and functionsas the interacting medium between the depositoryand the investorHe should be registered with the SEBIMust possess requisite qualifications prescribed bythe concerned depository of which he is aparticipantHe is responsible for maintaining the investorssecurities a/c with the depository and handlesthem as per the investors instructions He is linked to a broker who trades on behalf ofinvestors


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To avail their services an account similar to abank a/c has to be opened with the DPAs per SEBI Regulations, financial institutions,banks, stock brokers etc can become DPs

However investors may choose DPs of theirchoice and also deal with 1 or more DPs at atime


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Securities Issuers, and Registrars and ShareTransfer Agents: eg: an agreement betweenthe depository, issuer of security and thedesignated registrar/ share transfer agentsfor the underlying security in the cases ofissues like transfer of securities by theirbeneficial owners


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Stock Exchanges (SE) and Stock Brokers (SB)SE is an organized market for dealings insecurities, commonly referred as secondarymarket.SB are members of SE primarily engaged in2 main activities i.e. buy and sell securitiesfor their clients charging a commission andbuy and sell on their own a/c for tradinggains


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Investors : may be individuals or corporateswho have acquired shares either in primarymarket or in secondary market


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Opening of depository system Dematerialisation Rematerialisation Settlement of trades in dematerialised securities Account transfer Pledge and hypothecation Stock lending and borrowing Demat of debt instruments Dealing in govt securities


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Opening of depository system: SEBI hasmade compulsory trading of shares of allthe companies listed in stock exchanges indemat form w.e.f 2 nd jan 2002Hence if the investor wants to trade inrespect of the companies which haveestablished connectivity with NSDL & CSDL,

he has to open a beneficiary a/c


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Beneficiary a/c is an a/c opened by theinvestor or a broker with a DP of his choiceto hold shares in demat form and undertakescripless trading

For opening demat a/c, the followingdocuments are required: Demat opening form duly filled Address proof

Photograph PAN number Bank a/c


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Once a demat a/c is opened investor mustsign an agreement with the DP and theinvestor will be allotted an account no.called as client identity numberNo minimum balance is requiredThe investor is provided with a transactionstatement by his DP at regular intervals

based on which the investor will know hissecurity balances


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It means conversion of the physicalcertificates into dematerialised holdingsat the request of the investorOnly shares registered in the name of thea/c holder are accepted for

dematerialisation at the depository


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Procedure:First open a demat a/c or security a/c with any DP ofinvestors choice Obtain a/c no. from his DP

A dematerialisation request form (DRF) to be submitted to theDP who intimates depository of the requestDP then submits the certificate along with the DRF to theregistrar who confirms the demat requestRegistrar validates the request, updates records, destroys thecertificates and informs depository who in turn credits the DPa/cDepository participant updates the investor a/c and informsthe investor


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An investor may demat a part of his holdingsand hold the balance in physical mode for thesame securityDemat shares are fungible because they donot have any distinctive or certificatenumbers


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RematerializationIt means conversion of demat holdings backinto certificatesIf the investors wish to get the securities inphysical form, all he has to do is to requestDP for remat


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ProcedureInvestor must fill up a remat request form(RRF)The DP will forward the request to

depository after verifying that theshareholder has the necessary balancesDepository will in turn intimate the registrarRTA (registrar & transfer agent) will printthe certificates and dispatch the same tothe investor


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TransferDepository being electronically linked toDPs, issuer company and registrar &transfer agent serves as an integrated setup for maintenance of investor a/cs. It alsofacilitates transfer of securities from oneinvestor to another.Here transfer of securities occur merely bypassing book entries in the records of thedepository as and when instructed by thebeneficial owners (BO)


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Pledge and hypothecationDepositories allow the securities placed withthem to be used as collateral to secure loansand other credits

Pledging demat securities is easier andadvantageous than pledging physicalsecurities


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To the nationGrowing and more liquid marketsIncrease in competitiveness in the internationalmarket place attracting many investors

Improved prospects for privatisation of publicsector units by creating a conducive environmentConsiderable reduction in delayMinimises settlement risk and fraud restoringinvestors faith in the capital markets Easy monitoring of market by SEBI


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To issuersUp-to- date knowledge of shareholdersnames and addressesReduction in printing and distribution costs

of new issuesEasy transfer of corporate benefitsImproved ability to attract internationalinvestors without having to incurexpenditure of issuance in overseasmarkets

Depository System in India - Class

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