1.A PROJECT REPORT ONDEPOSITORYIn partial fulfilment of the degree in Master of Business Administration(MBA) 1

2. 2 3. 3 4. IndexSerial Particulars PageNo.No.1About Ludhiana stock exchange 72Introduction to capital market 163Introduction to depository 294DEPOSITORY SYSTEM 355LEGAL FRAMEWORK 446DEPOSITORY ABOUT CDSL and NSDL 517Types of AccountsSYSTEM 588DEMAT & REMAT 71 Bibliography79 Annexures 80APPLICATION Form FOR OPENING AN ACCOUNTFor Individuals OnlyFor Corporates/Clearing Members onlyAPPLICATION Form FOR CLOSING AN ACCOUNT4 5. Chapter-1About Ludhiana stock exchange: 5 6. About Ludhiana stock exchange:The Ludhiana Stock Exchange Limited was established in 1981, by Sh. S.P. Oswalof Vardhman Group and Sh. B.M. Lal Munjal of Hero Group, leading industrialluminaries, to fulfil a vital need of having a Stock Exchange in the region of Punjab,Himachal Pradesh, Jammu & Kashmir and Union Territory of Chandigarh. Since itsinception, the Stock Exchange has grown phenomenally. The Stock Exchange hasplayed an important role in channelizing savings into capital for the various industrialand commercial units of the State of Punjab and other parts of the country. TheExchange has facilitated the mobilization of funds by entrepreneurs from the publicand thereby contributed in the overall, economic, industrial and social developmentof the States under its jurisdiction.Ludhiana Stock Exchange is one of the leading Regional Stock Exchange and hasbeen in the forefront of other Stock Exchange in every spheres, whether it isformation of subsidiary for providing the platform of trading to investors, for brokersetc. in the era of Screen based trading introduced by National Stock Exchange andBombay Stock Exchange, entering into the field of Commodities trading or impartingeducation to the Public at large by way of starting Certification Programmes inCapital Market.The vision and mission of Stock Exchange is:"Reaching small investors by providing services relating to Capital Market includingTrading, Depository Operations etc. and creating Mass Awareness by way ofeducation and training in the field of Capital Market.To create educated investors and fulfilling the gap of skilled work force in the domainin Capital Market."Further, the Exchange has 295 members out of which 162 are registered withNational Stock Exchange as Sub-brokers and 121 with Bombay Stock Exchange assub-brokers through our subsidiary. 6 7. DETAILS OF PRESIDENTS AND VICE PRESIDENTSLSE SALUTES ITS PRESIDENT/ CHAIRMEN VICE PRESIDENT/ VICE CHAIRMENPRESIDENTS/ CHAIRMENSr. No. Name of the person Tenure1 Sh. S.P. Oswal 16.08.1983 to 27.07.19862 Sh. B.M. Lal Munjal28.07.1986 to 15.10.1989 16.10.1989 to 30.10.19923 Sh. V.N. Dhiri 30.09.1998 to 04.10.20004 Sh. G.S. Dhodi 31.10.1992 to 22.12.1993 23.12.1993 to 05.10.19955 Sh. Jaspal Singh 01.10.1996 to 29.09.1998 06.10.2001 to 01.07.20026 Sh. M.S. Gandhi06.10.1995 to 30.09.19967 Sh. R.C. Singal05.10.2000 to 05.10.20018 Dr. B. B. Tandon, Chairman 25.06.2007 to 10.12.20079 Sh. S.P. Sharma, Chairman15.07.2007 to 23.09.200810Sh. Jagmohan Krishan 23.09.2008 to 29.09.200911Prof Padam Parkash Kansal30.09.2009 to till dateVICE PRESIDENTS/ VICE CHAIRMENSr. No. Name of the person Tenure1 Sh. Rajinder Verma 14.07.1984 to 08.08.1987 09.08.1987 to 15.10.19892 Sh. B.K. Arora 31.10.1992 to 22.12.19933 Sh. G.S. Dhodi 28.10.1991 to 30.10.1992 16.10.1989 to 27.10.19914 Sh. B.S. Sidhu 23.12.1993 to 05.10.19955 Sh. D.P. Gandhi06.10.1995 to 26.09.19976 Sh. M. S. Sarna27.09.1997 to 29.09.19987 Sh. T.S. Thapar30.09.1998 to 04.10.20008 Sh. Tarvinder Dhingra05.10.2000 to 05.10.2001 7 8. 9 Dr. Rajiv Kalra06.10.2001 to 01.07.200210Sh. D.K. Malhotra, Vice Chairman 025.06.2007 to 10.12.2007Sh. Jagmohan Krishan, Vice11 15.07.2007 to 23.09.2008Chairman12Sh. Ravinder Nath Sethi23.09.2008 to 08.10.200813Prof Padam Parkash Kansal09.10.2008 to 29.09.200914Sh. Joginder Kumar 30.09.2009 to till dateGovernance and management:LSE has a strong governance and administration, which encompasses a rightbalance of Industry Experts with highest level educational background, practicingprofessionals and independent experts in various fields of Financial Sector. Theadministration is presently headed by Sr. General Manager CUM CompanySecretary and team of persons having in-depth knowledge of Secretarial, Legal andEducation & Training.The Governing Board of our Exchange comprises of eleven members, out of whichtwo are Public Interest Directors, who are eminent persons in the fields of Financeand Accounts, Education, Law, Capital Markets and other related fields, Six areShareholder Directors, and Three are Broker Member Director and the Exchangehas four Statutory Committees namely Disciplinary Committee, ArbitrationCommittee, Defaults Committee and Investor Services Committee. In addition, it hasadvisory and standing committees to assist the administration.LSE has a Code of Conduct in place that governs the elected Board Members andthe Senior Management Team. The same is monitored through periodic disclosureprocedures. The Exchange has an Ethics Committee, which looks into any issue ofconflict of interest and has in place general code of conduct for the Senior Officials.The composition of the Governing Board is as under:- 8 9. Composition of the Governing BoardSr. No. Name of Director Category Chairman1 Prof. Padam Parkash Kansal (Shareholder Director) Vice Chairman2 Sh. Joginder Kumar (Shareholder Director)3 Sh. Rajinder Mohan SinglaShareholder Director4 Sh. Satish NagpalShareholder Director5 Sh. Vikas BatraShareholder Director6 Sh. Varun ChhabraShareholder Director Registrar of Companies (Public7 Dr. Raj Singh Interest Director)8 Sh. Ashwani KumarPublic Interest Director9 Sh. V.P. GaurPublic Interest Director10Sh. Jaspal Singh Trading member Director11Sh. Sunil GuptaTrading Member Director12Sh. Sanjay Anand Trading member DirectorStrength of LSE group 9 10. 1. LSE brand is popular among masses. The brand image of LSE can becapitalized.2. We have requisite infrastructure for the Capital Market activities which includes amulti-storeyed, centrally air conditioned building situated in the financial hub of thecity i.e. Feroze Gandhi Market.3. We have well experienced staff handling operations of Stock Exchange.4. We have competent Board and professional management.5. We have much needed networking of sub brokers in the entire region, who arehaving rich experience in Stock Market operations for the last 25 years.6. We have more than 40,000 clients spread across Punjab, Himachal Pardesh,Jammu & Kashmir and adjoining areas of Haryana and Rajasthan.7. The turnover of our subsidiary is the highest amongst all subsidiaries of RegionalStock Exchanges in India.Infrastructure and asset base at Ludhiana stock exchange10 11. The Exchange building is situated at Feroze Gandhi Market, Ferozepur Road,Ludhiana. It is a six storeyed building, which is centrally air-conditioned. The buildinghas 262 rooms, which are located on various floors ranging from second to fifth. Thefirst floor of the building houses the administrative office and rooms from second tofifth floors have been leased out to brokers. The first floor also has canteen andbanking facilities. Investor Service Centre is also located at first floor which houses awell-equipped library and view-terminals to provide live rates of NSE and BSE toinvestors. Investors are also provided with Cable TV for the purpose of viewing thelatest happenings in the Capital Market and around. Basement of the building hasair-conditioning plant and Generators to provide air-conditioned environment andtwenty-four hours power back up.The Exchange has also an additional plot of land measuring 2333 sq. yards in theprime location of city, to enhance its infrastructure and source of income.Status of subsidiary LSE Securities LimitedDue to Nation-wide reach of bigger Stock Exchanges, the trading volumes atLudhiana Stock Exchange declined and ultimately, the trading stopped in February,2002, but the Stock Exchange converted the threat of bigger Exchanges intoopportunities and acquired the corporate membership of these exchanges throughits subsidiary company i.e. LSE Securities Limited.We have now been providing Trading Platforms of Bigger Stock Exchanges to theInvestors of the region. The vast network of Brokers of the Exchange is servicingmillions of Investors. The subsidiary company is also providing depository services inthe State of Punjab and Himachal Pradesh. The allied services like PAN Service 11 12. Centre, Investor Service Centres are also being provided at major locations of theregion.The turnover of subsidiary is highest amongst all the subsidiaries of Regional StockExchanges. The growth of subsidiary is swift and it has been providing a range ofservices to the public at large such as Trading, Depository, and IPO biddingcollection Centre.The Company in its continuous endeavour to provide qualitative services to itsvalued clients, has started e-broking trading services for its clients, therebyincreasing the geographical reach of the company.LISTING OF SECURITIES OF COMPANIES AT LUDHIANA STOCK EXCHANGEAt present, Ludhiana Stock Exchange has 330 listed companies, out of which 214are regional and 116 are Non-regional. The total listed capital of aforesaidcompanies is Rs. 3168.91 Crores approx. The market capitalization of the saidcompanies is more than Rs. 3372.34 crores. The Stock Exchange is covering thevast investor base through the listing of above said companies, which are situated inthe region comprising of Punjab, Himachal Pardesh, Jammu & Kashmir, andChandigarh.Despite the fact, the implementation of SEBI (Delisting of Securities) guidelines,2003 has resulted into the Delisting of good companies listed at Exchange, howeverstill there are leading Companies listed with our Exchange, notable among them areUnited Breweries Limited, Vardhman Acrylics Limited, SMC global securities limited,Himachal Futuristic Communications Limited etc.Ludhiana Stock Exchange has facilitated the capital generation for agro basedindustries as Punjab is an agricultural led economy. It will continue to do so, once it12 13. gets approval for a tie up with bigger Exchanges for commencing trading operations.INVESTOR RELATED SERVICESThe Exchange has been providing a variety of services for the benefit of investingpublic. The services include Investor Service Centres, Investor Protection fund andInvestor Educational Seminars.(i).Investor Service CentresThe Exchange has set-up Investor Service Centres at various DP branches of itssubsidiary for providing information relating to Capital Market to the general public.The Centres subscribe to leading economic, financial dailies and periodicals. Theyalso store the Annual Reports of the companies listed at the Stock Exchange. TheInvestor Service Centres are also equipped with a Terminal for providing live ratesof trading at NSE and BSE. A large number of the investors visit the centres to utilizethe services being provided by the Exchange.(ii).Investor Awareness SeminarsThe Exchange has been organizing Investor Awareness Seminars for the benefit ofInvestors of the region comprising State of Punjab, Himachal Pradesh, Jammu &Kashmir, Chandigarh and adjoining areas of Haryana and Rajasthan. This massiveexercise of organizing Investor Awareness Seminars has been launched as a part ofSecurities Market Awareness Campaign launched by SEBI in January, 2003. TheExchange apprises the investors about Dos and Donts to be observed while dealingin Securities Market. Till date, Exchange has organized more than 200 workshops inthe region mentioned above.(iii).Website of the Exchange: www.lse.co.inThe Exchange has its own website with the domain name www.lse.co.in. Thewebsite provides valuable information about the latest market commentary, researchreports about companies, daily status of International markets, a separate module forInternet trading, information about listed companies and brokers and sub-brokers ofthe Exchange and its subsidiary. The website also contains many useful links on13 14. portfolio management, investor education, frequently asked questions about varioustopics relating to Primary and Secondary Market, information about Mutual Funds,Financials of the Company including Quarterly Results, Share Prices, Profit and LossAccounts, Balance Sheet and Many More. The website also contains daily TechnicalCharts of various scripts being traded in BSE and NSEEDUCATIONAL INITIATIVES OF EXCHANGELSE has carved out its unique position among the Stock Exchanges of the country for theKnowledge Management. It has set up an Education and Training Cell and the same hasemerged as a leading facility in various Financial Services in India. The Exchange has beenconducting a unique certification programme in Capital Market in association with Centre forIndustry Institute Partnership Programme Punjab University, Chandigarh for the last threeyear. This programme has widened the horizons of participants vis--vis Capital MarketOperations as practical skill based knowledge is provided by Stock Brokers, Stock ExchangeOfficials, Professors of Finance and Business Management and above all Professionalsworking in different areas of Capital Market. We have completed series of batches of thisprogramme and we now want to scale up this programme and are planning to launch variousother programmes on areas relating to Securities Market.We have edge over others as far as Education and Training in Financial Services isconcerned due to following factors:a. Directly connected with the Industry as Regional Stock Exchange.b. Connected with large base of Investors as they use the Stock Exchange as a TradingPlatform for their liquidity needsc. Presence in the region of Punjab, Himachal Pradesh, Jammu & Kashmir and Chandigarhthrough our branches Network and the area being under the jurisdiction of our Exchange.d. Already running Certification programmes in Capital Market successfully.e. Continuously holding Investor Awareness Programmes for Investors & Investor Groupsthrough association with Brokers, Sub-brokers, Colleges, Universities and ConsumerGroups. 14 15. Chapter-2Introduction to Capital Markets 15 16. Capital MarketsIntroductionMarkets exist to facilitate the purchase and sale of goods and services. The financialmarket exists to facilitate sale and purchase of financial instruments and comprisesof two major markets, namely the capital market and the money market. Thedistinction between capital market and money market is that capital market mainlydeals in medium and long-term investments (maturity more than a year) while themoney market deals in short term investments (maturity up to a year).Capital market can be divided into two segments viz. primary and secondary. Theprimary market is mainly used by issuers for raising fresh capital from the investorsby making initial public offers or rights issues or offers for sale of equity or debt. Thesecondary market provides liquidity to these instruments, through trading andsettlement on the stock exchanges.Capital market is, thus, important for raising funds for capital formation andinvestments and forms a very vital link for economic development of any country.The capital market provides a means for issuers to raise capital from investors (whohave surplus money available from saving for investment). Thus, the savingsnormally flow from household sector to business or Government sector, whichnormally invest more than they save.A vibrant and efficient capital market is the most important parameter for evaluatinghealth of any economy.16 17. Functions of the capital marketThe major objectives of capital market are: To mobilize resources for investments. To facilitate buying and selling of securities. To facilitate the process of efficient price discovery. To facilitate settlement of transactions in accordance with the predetermined timeSchedules.Investment InstrumentsInvestment is a deployment of funds in one or more types of assets that will be heldover a period of time. Various forms of investment options are available to aninvestor. They cover bank deposits, term deposits, recurring deposits, companydeposits, postal savings schemes, deposits with non-bank financial intermediaries,government and corporate bonds, life insurance and provident funds, equity shares,mutual funds, tangible assets like gold, silver and jewellery, real estate and work ofarts, etc.Capital market instruments can be broadly divided into two categories namely Debt, Equity and Hybrid instruments. Derivative Products like Futures, Options, Forward rate agreements and Swaps.Debt: Instruments that are issued by the issuers for borrowing monies from theinvestors with a defined tenure and mutually agreed terms and conditions forpayment of interest and repayment of principal.Debt instruments are basically obligations undertaken by the issuer of the instrumentas regards certain future cash flows representing interest and principal, which theissuer would pay to the legal owner of the instrument. Debt instruments are of 17 18. various types. The key terms that distinguish one debt instrument from another areas follows: Issuer of the instrument Face value of the instrument Interest rate and payment terms Repayment terms (and therefore maturity period / tenor) Security or collateral provided by the issuerDifferent kinds of money market instruments, which represent debt, are commercialpapers (CP), certificates of deposit (CD), treasury bills (T-Bills), Govt. of India datedsecurities (GOISECs), etc.Equity: Instruments that grant the investor a specified share of ownership of assetsof a company and right to proportionate part of any dividend declared. Shares issuedby a company represent the equity. The shares could generally be either ordinaryshares or preference shares.Major difference between Equity and Debt: Share represents the smallest unit ofOwnership of a company. If a company has issued 1, 00,000 shares, and a personowns 10of them, he owns 0.01% of the company. A debenture or a bond representsthe smallest unit of lending. The bond or debenture holder gets an assured interestonly for the period of holding and repayment of principal at the expiry thereof, whilethe shareholder is part-owner of the issuer company and has invested in its future,with a corresponding share in its profit or loss. The loss is, however, limited to thevalue of the shares owned by him.Hybrids: Instruments that include features of both debt and equity, such as bondswith equity warrants e.g. convertible debentures and bonds.Derivatives: Derivative is defined as a contract or instrument, whose value is derivedfrom the underlying asset, as it has no independent value. Underlying asset can be18 19. securities, commodities, bullion, currency, etc. The two derivative products traded onthe Indian stock exchanges are Futures and Options.Futures (Index and Stock): Futures are the standardised contracts in terms ofquantity, delivery time and place for settlement on a pre-determined date in future. Itis a legally binding agreement between a seller and a buyer, which requires theseller to deliver to the buyer, a specified quantity of security at a specified time in thefuture, at a specified price. Such contracts are traded on the exchanges.Options (Index and Stock): These are deferred delivery contracts that give the buyerthe right, but not the obligation to buy or sell a specified security at a specified priceon or before a specified future date. At present in India, both Futures and Optionsare cash settled.Segments of capital marketThe Capital Market consists ofA) Primary MarketB) Secondary MarketPrimary Market: A market where the issuers access the prospective investorsdirectly for funds required by them either for expansion or for meeting the workingcapital needs. This process is called disintermediation where the funds flow directlyfrom investors to issuers.The other alternative for issuers is to access the financial institutions and banks forfunds. This process is called intermediation where the money flows from investors tobanks/ financial institutions and then to issuers.Primary market comprises of a market for new issues of shares and debentures,where investors apply directly to the issuer for allotment of shares/ debentures andpay application money to the issuer. Primary market is one where issuers contactdirectly to the public at large in search of capital and is distinguished from thesecondary market, where investors buy/ sell listed shares / debentures on the stockexchange from / to new / existing investors.19 20. Primary market helps public limited companies as well as Government organizationsto issue their securities to the new / existing shareholders by making a public issue /rights issue. Issuers increase capital by expanding their capital base. This enablesthem to finance their growth plans or meet their working capital requirements, etc.After the public issue, the securities of the issuer are listed on a stock exchange(s)provided it complies with requirements prescribed by the stock exchange(s) in thisregard. The securities, thereafter, become marketable. The issuers generally gettheir securities listed on one or more than one stock exchange. Listing of securitieson more than one stock exchange enhances liquidity of the securities and results inincreased volume of trading.A formal public offer consists of an invitation to the public for subscription to theequity shares, preference shares or debentures has to be made by a companyhighlighting the details such as future prospects, financial viability and analyse therisk factors so that an investor can take an informed decision to make an investment.For this purpose, the company issues a prospectus in case of public issue and aletter of offer in case of rights issue, which is essentially made to its existingshareholders. This document is generally known as Offer document. It has theinformation about business of the company, promoters and business collaboration,management, the board of directors, cost of the project and the means of finance,status of the project, business prospects and profitability, the size of the issue,listing, tax benefits if any, and the names of underwriters and managers to the issue,Etc.The issuers are, thus, required to make adequate disclosures in the offer documentsto enable the investors to decide about the investment.Making public issue of securities is fraught with risk. There is always a possibility thatthe issue may not attract minimum subscription stipulated in the prospectus. The riskmay be high or low depending upon promoters making the issue, the track record ofthe company, the size of the issue, the nature of project for which the issue is beingmade, the general economic conditions, etc. Issuers would like to free themselves ofthis worry and attend to their operations wholeheartedly if they could have someone 20 21. else to worry on their behalf. For this purpose the companies approach underwriterswho provide this service.Normally, whenever an existing company comes out with a further issue ofsecurities, the existing holders have the first right to subscribe to the issue inproportion to their existing holdings. Such an issue to the existing holders is calledRights issue. The price of the security before the entitlement of rights issue isknown as the cum-rights price. The price after the entitlement of rights issue isknown as the ex-rights price. The difference between the two is a measure of themarket value of a right entitlement. An existing holder, besides subscribing to suchan issue, can let his rights lapse, or renounce his rights in favour of another person(free, or for a consideration) by signing the renunciation form.The companies declare dividends, interim as well as final, generally from the profitsafter the tax. The dividend is declared on the face value or par value of a share, andnot on its market price. A company may choose to capitalize part of its reserves byissuing bonus shares to existing shareholders in proportion to their holdings, toconvert the reserves into equity. The management of the company may do this bytransferring some amount from the reserves account to the share capital account bya mere book entry. Bonus shares are issued free of cost and the number ofshareholders remains the same. Their proportionate holdings do not change. Afteran issue of bonus shares, the price of a companys share drops generally inproportion to the issue.Activities in the Primary Market1. Appointment of merchant bankers2. Pricing of securities being issued3. Communication/ Marketing of the issue4. Information on credit risk5. Making public issues6. Collection of money7. Minimum subscription8. Listing on the stock exchange(s)9. Allotment of securities in demat / physical mode10. Record keeping 21 22. Secondary Market:In the secondary market the investors buy / sell securities through stock exchanges.Trading of securities on stock exchange results in exchange of money and securitiesbetween the investors.Secondary market provides liquidity to the securities on the exchange(s) and thisactivity commences subsequent to the original issue. For example, havingsubscribed to the securities of a company, if one wishes to sell the same, it can bedone through the secondary market.Similarly one can also buy the securities of a company from the secondary market.A stock exchange is the single most important institution in the secondary market forProviding a platform to the investors for buying and selling of securities through itsmembers. In other words, the stock exchange is the place where already issuedsecurities of companies are bought and sold by investors. Thus, secondary marketactivity is different from the primary market in which the issuers issue securitiesdirectly to the investors.Traditionally, a stock exchange has been an association of its members or stockbrokers, formed for the purpose of facilitating the buying and selling of securities bythe public and institutions at large and regulating its day to day operations. Of latehowever, stock exchanges in India now operate with due recognition from Securitiesand Exchange Board of India (SEBI) / the Government of India under the SecuritiesContracts (Regulation) Act, 1956.The stock exchanges are either association of persons or are formed as companies.There are 24 recognized stock exchanges in India out of which one has notcommenced its operations. Out of the 23 remaining stock exchanges, currently onlyon four stock exchanges, the trading volumes are recorded. Most of regional stockexchanges have formed subsidiary companies and obtained membership of BombayStock Exchange, (BSE) or National Stock Exchange (NSE) or both. Members ofthese stock exchanges are now working as sub-brokers of BSE / NSE brokers.22 23. Securities listed on the stock exchange(s) have the following advantages: The stock exchange(s) provides a fair market place. It enhances liquidity. Their price is determined fairly. There is continuous reporting of their prices. Full information is available on the companies. Rights of investors are protected.Stockbroker is a member of the stock exchange and is licensed to buy or sellsecurities for his own or on behalf of his clients. He charges a commission(brokerage) to the clients on the gross value of the transactions done by them.However, some of the stockbrokers, apart from buying and selling of securities fortheir clients for a commission, offer facilities such as safekeeping clients shares andbonds, offering investment advice, planning clients portfolio of investments,managing clients portfolio. There are experts who believe that by identifying andprocessing relevant information pertaining to financials of the companies "correctly"and quickly (as compared to the market as whole), they can predict the share pricemovement faster than the market and thus outperform the market. Such experts areknown as fundamental analysts. These experts use the fundamental approach tosecurity valuation, for estimating the fundamental price (or fundamental price-earnings multiple) of a security.Fundamental Analysis refers to scientific study of the basic factors, which determinea shares value. The fundamental analyst studies the industry and the companyssales, assets, liabilities, debt structure, earnings, products, market share; evaluatesthe companys management, compares the company with its competitors, and thenestimates the shares intrinsic worth. The fundamental analysts tools are financialratios arrived at by studying a companys balance sheet and profit and loss accountover a number of years. Fundamental analysis is more effective in fulfilling long-termgrowth objectives of shares, rather than their short-term price fluctuations. 23 24. Ratios of values obtained from a companys financial statements are used to studyits health and the price of its securities. The most important among these are currentratio, price earning (P/E) ratio, earnings to equity ratio, price-book value ratio, profitbefore tax to sales ratio, and quick ratio. Accounting figures, which help to arrive atthese ratios, include book value, dividend, current yield, earning per share (EPS),volatility, etc.Unlike the fundamental analysts, there are other experts who believe that largely theforces of demand and supply of securities determine the security prices, though thefactors governing the demand and supply may themselves be both objective andsubjective. They also believe that notwithstanding the day-to-day fluctuations, shareprices move in a discernible pattern, and that these patterns last for long periods tobe identified by them. Such analysts are called as Technical Analysts.Technical analysis is a method of prediction of share price movement based on astudy of price graphs or charts on the assumption that share price trends arerepetitive, and that since investor psychology follows certain pattern, what is seen tohave happened before is likely to be repeated. The technical analyst is notconcerned with the fundamental strength or weakness of a company or an industry;he studies investor and price behaviour.A stock market operator who expects share prices to fall in the immediate future andkeeps selling (with the intention to pick up the shares later at a lower price for actualdelivery), causing selling pressure and lowering the prices further is called a "Bear.The term is derived from the attacking posture of the bear, pushing downwards.A stock market operator who expects share prices to rise and keeps buying (to sellthe shares later at higher price), causing buying pressure and increasing the pricesfurther is called a Bull. The term is derived from the attacking posture of the bull,pushing upwards.Stag is a person who subscribes to a new issue with the primary objective of sellingat profits no sooner than he gets the allotment.Contract Note is a document given by the stockbroker to his clients giving particularsof the securities bought / sold, rate and date of transaction and the brokers 24 25. commission. The broker sends the contract note after executing the clients order asan agreement. The contract note must be carefully preserved, as it is a primarydocumentary evidence of clients transactions being executed by a member of astock exchange. In case of any dispute between them, this can be used for thepurpose of arbitration or filing claims / compensation against the member of thestock exchange who has executed the transaction. It also serves as evidence to theincome tax authorities in verification of computations of short-term or long-termcapital gains or losses.Buying or selling of securities of a particular company with an expectation that theprices will increase or decrease in a span of short duration with an objective togenerate income on account of such fluctuations in price is called Speculation. Thisis an activity in which a person assumes high risks, often without regard for thesafety of his invested principal, to achieve capital gains in a short time. Investing insecurities with the intention of holding them for long term for realizing appreciation inthe value of the securities should be the aim of the investors who wish to derivebenefits from holding investments for long term.Arbitrage means buying shares on one stock exchange at a lower rate and sellingthe same on other stock exchange at a higher rate.Activities in the Secondary Market1. Trading of securities2. Risk management3. Clearing and settlement of trades4. Delivery of securities and funds25 26. Major entities involved in the capital market:ENTITIES SEBI (REGULATOR) STOCK EXCHANGES CLEARING CORPORATIONS (CC)/ CLEARING HOUSES (CH) DEPOSITORIES AND DEPOSITORY PARTICIPANTS CUSTODIANS STOCK-BROKERS AND THEIR SUB-BROKERS MUTUAL FUNDS MERCHANT BANKERS CREDIT RATING AGENCIES FINANCIAL INSTITUTUIONS FOREIGN INSTITUTIONAL INVESTORS NON-BANKING INSTITUTIONS ISSUERS/ REGISTRAR AND TRANSFER AGENTS INVESTO 26 27. Chapter-3Introduction to depository:27 28. INTRODUCTION TO DEPOSITORYA significant development of the 20th century particularly in its later part is expansionof financial market world over which mostly was driven by globalization, technology,innovations and increasing trade volume. India has not been an exception withprobably largest number of listed companies with a very large investor populationand ever increasing volumes of trades.However, this continuous growth in activities increased problems associated withstock trading. Most of these problems arose due to the intrinsic nature of paperbased trading and settlement, like theft or loss of share certificates. This systemrequired handling of huge volumes of paper leading to increased costs andinefficiencies. The process beginning from buying shares through the stockexchanges till getting the certificates duly endorsed in the buyers name was indeedquite complex and time-consuming and was riddled with a variety of problems.Growing number of investors participating in the capital market has increased thepossibility of being hit by a bad delivery, The cost and time spent by the brokers forrectification of these bad deliveries tends to be higher with the geographical spreadof the clients. The increase in trade volumes lead to exponential rise in the backoffice operations thus limiting the growth potential of the broking members. Theinconvenience faced by investors (in areas that are far flung and away from the mainmetros) in settlement of trade also limits the opportunity for such investors,especially in participating in auction trading. The physical form of holding and tradingin securities also acted as a bottleneck for broking community in capital marketoperations. Risk exposure of the investor also increased due to this trading in paper.Some of these associated risks were: delay in transfer of shares, possibility offorgery on various documents leading to bad deliveries, legal disputes etc., andpossibility of theft of share certificates, prevalence of fake certificates in the market,mutilation or loss of share certificates in transit. Thus, the system of securitytransactions was not as investor-friendly as it ought to be. In this scenariodematerialized trading under depository system is certainly a welcome move. Thispopular financial service emerged in Germany first time. 28 29. Meaning of depositoryA depository is an organisation which holds securities (like shares, debentures,bonds, government securities, mutual fund units etc.) of investors in electronic format the request of the investors through a registered Depository Participant. It alsoprovides services related to transactions in securities.Comparison between banks and depositorySimilarity: 1. Promoted by reputed persons and institutions : promoters of both bank and depository are reputed persons and institutions 2. Renders safe keeping services: both banks and depository provide safe keeping services. Banks provides safe custody of cash and locker facility for keeping valuable articles to its clients. Depositories also provide safe keeping of shares, debentures, bonds, government securities, mutual fund units to its clients. 3. Central office and braches 4. Charge of fees 5. Transfer of funds and securities : Funds/securities are transferred only at the instruction of the account holder 6. Written confirmation of transfer (of shares and currencies ) 7. Account is operated by power of attorney: a person under power of attorney can operate the account. 8. Customers are entitled to get statement s of accounts 9. Nomination facility : customer can nominate any person to whom account will be transferred in case of death of the person 10. Currencies (in case of banks ) and shares (in case of depositories) when held do not have any distinctive number 29 30. Differentiation:Bank Account Vs. Demat AccountS.Basis Of Differentiation Bank Account DepositoryNo.Form of1. FundsSecuritiesHoldings/Deposits2.Used for Safekeeping of money Safekeeping of shares Transfer of money (without Transfer of shares (without3.Facilitates actually handling money) actually handling shares)A DP of choice (can be a4.Where to openA bank of choicebank)Requirement of PANMandatory (effective from5. Not MandatoryNumberApril 01, 2006) Interest income is subject No interest accruals onInterest accrual on6. to the applicable rate ofsecurities held in dematholdings interest account AQB*( Average QuarterlyMinimum balanceBalance)7.No such requirementrequirement maintenance is specified for certain bank accountsEither or Survivor8. AvailableNot availablefacility30 31. Immobilization and DematerializationConversion of securities from physical (paper) form to electronic form can beachieved by two methods Immobilization or Dematerialization.Under the immobilization method, after giving credit of the securities in electronicform, physical certificates are stored or lodged with an organization, which acts as acustodian a securities depository. Subsequent transactions in such immobilizedsecurities take place through book-entries.Under the dematerialization method, the securities, issued in physical form aredestroyed and exactly equal numbers of securities are created in the depositorysystem, which are credited into the account of the investor. Unlike physicalsecurities, the securities converted into electronic form do not have any distinctivenumbers and they are treated as equal and replaceable in all ways i.e. securities inelectronic form are fungible. All subsequent transactions (transfer of ownership) ofsuch securities take place in book-entry form.India has adopted dematerialization method whereas immobilization has beenadopted by some of the countries like Hong Kong and USA. Japan has adoptedboth, dematerialization as well as immobilization for achieving a paper-less securitiesmarket.Whether a country has adopted immobilization or dematerialization, the investor hasa right to get the securities converted back into physical form through a processcalled as rematerialisation, in case of need.Availing of various services offered by a depositoryA depository in India cannot open a demat account of an investor and / or provideservices to such a person directly. For opening a demat account or availing theservices offered by the depository, a person is required to approach a DepositoryParticipant (DP) who is an agent of the depository, complete the account openingformalities as per the Depositories Act, SEBI regulations, depository byelaws.Thereafter, the investor can receive securities in the demat account as well as tenderthe securities held by him / her in physical form for dematerialization to the DP (as 31 32. explained in the subsequent part) and hold the same in book entry form in theaccount.When an investor holds securities in physical form, his / her name is recorded asregistered owner in the books of the company. As per the laws currently in force inIndia, when the securities are converted in electronic form by way ofdematerialization, name of the depository is registered in the books of the companyas registered owner. However, the investor continues to be the real owner of thesecurities and is entitled to receive all the benefits such as dividend, interest, bonusshares etc. in respect of the said security and as such is called as Beneficial Owner(BO) under the depository system.Today demat has become a common word. The institutional and individualinvestors spread all over India are found to be making an extensive use of thedepository participant services for holding their securities in electronic form.32 33. Chapter-4DEPOSITORY SYSTEM 33 34. DEPOSITORY SYSTEMDepository system essentially aims at eliminating the voluminous and cumbersomepaper work involved in the scrip-based system and offers scope for paperlesstrading through state-of-the-art technology. It is an institution which maintains anelectronic record of ownership or securities. The storage and handling of certificatesis hence immediately eliminated which generates a reduction in costs like back officecost for handling, transporting and storing certificates.Depositary participant is an institution akin to bank for securities. When an investorhands over securities to a depository participant, investors account is credited. Theinvestors depository system account will show their holdings. His account is updatedfor his transactions of sale and purchase but without physical movement of scripts ortransfer deeds. In depository system, share certificates belonging to the investorsare dematerialised (demats). Dematerialisation or Demat is a process wherebyinvestors securities like shares, debentures etc., are converted into electronic dataand stored in computers by a Depository. Securities registered in investors nameare surrendered to depository participant (DP) and these are sent to the respectivecompanies who will cancel them after Dematerialization and credit investorsdepository account with the DP. The securities on Dematerialization appear asbalances in ones depository account. These balances are transferable like physicalshares. If at a later date, investors wish to have these demat securities convertedback into paper certificates, the Depository does this and their names are entered inthe records of depository as beneficial owners. The beneficial ownership will be withinvestor but legal ownership will be with the depository. Consequently, benefits likeinterest, dividend, and rights: bonus and voting rights will be with investors. Sincedepository is to get securities transferred in its name, the depository name will beregistered in the ownership register maintained by the company. Thus, instead ofname of several owners, the name of depository figures in the register of company.Since transfer will be affected only in depository, register of company need not beupdated on every transactions of sale or purchase of companys share. It alleviatesthe hardships currently faced by the investors and it also offers option for convertingthe shares from electronic to physical or paper form through a process of34 35. rematerialisation (remat). Depository system is, indeed, time tested and longprevalent in many advance countries and has been playing a significant role in stockmarkets around the world.Constituents of Depository SystemThe depository system comprises of:i) Depositoryii) Depository Participants (DPs)iii) Companies/issueriv) Investors 1) Depository:Depository functions like a securities bank, where the dematerialized physicalsecurities are traded and held in custody. This facilitates faster risk free and low costsettlement. Depository is much like a bank and performs many activities that aresimilar to a bank depository:a) Enables surrender and withdrawal of securities to and from the depository throughthe process of demat and remat,B) maintains investors holdings in electronic form,c) Effects settlement of securities traded in depository mode on the stock exchanges,D) carries out settlement of trades not done on the stock exchanges (off markettrades).In India a depository has to be promoted as a corporate body under Companies Act,1956. It is also to be registered as a depository with SEBI. It starts operations afterobtaining a certificate of commencement of business from SEBI. It has to developautomatic data processing systems to protect against unauthorised access. Anetwork to link up with depository participants, issuers and issuers agent has to beCreated. 35 36. Depository, operating in India, shall have a net worth of rupees one hundred croreand instruments for which depository mode is open need not be a security as definedin the Securities Contract (Regulations) Act 1956. The depository, holding securities,shall maintain ownership records in the name of each participant. Despite the factthat legal ownership is with depository, it does not have any voting right against thesecurities held by it. Rights are intact with investors.There are two depositories in India at present i.e. 1. NSDL: National Securities Depository limited 2. CDSL: Central Depository Services (India) Limitedii) Depository Participants (DP):A DP is investors representative in the depository system and as per the SEBIguidelines, financial institutions/banks/custodians/stock brokers etc. can becomeDPs provided they meet the necessary requirements prescribed by SEBI. DP is alsoan agent of depository which functions as a link between the depository and thebeneficial owner of the securities. DP has to get itself registered as such under theSEBI Act. The relationship between the depository and the DP will be of a principaland agent and their relation will be governed by the bye-laws of the depository andthe agreement between them. Application for registration as DP is to be submitted toa depository with which it wants to be associated. The registration granted is valid forfive years and can be renewed. As depository holding the securities shall maintainownership records in the name of each DP, DP in return as an agent of depository,Shall maintain ownership records of every beneficial owner (investor) in book entryform.A DP is the first point of contact with the investor and serves as a link between theinvestor and the company through depository in dematerialisation of shares andother electronic transactions. A company is not allowed to entertain a demat requestfrom investors directly and investors have to necessarily initiate the process througha DP.36 37. Eligibility criteria for depository participants:The following entities are eligible for becoming depository participant in accordancewithRegulation 19 of the SEBI (Depositories and Participants) Regulations, 1996. A public financial institution as defined in Section 4A of the Companies Act, 1056. A bank included in the second schedule of the Reserve Bank of India Act, 1934. A foreign bank, operating in India with the approval of Reserve Bank of India. A state financial corporation established under the provisions of section 3 of theState Financial Corporations Act, 1951. An institution engaged in providing financial services, promoted by any of the fourinstitutions mentioned above. A custodian of securities, who has been granted a certificate of registration by SEBIunder Section 12(1A) of the SEBI Act, 1992. A clearing corporation or a clearing house of a stock exchange. A stockbroker having a minimum net worth of rupees TWO CRORES. Theaggregate value of the portfolio of securities, of the BOs, held in dematerialized formin a depository through him, shall not exceed 100 times of the net worth of thestockbroker. (Not applicable for DPs whos net worth is Rs. ten crores). In case thestockbroker seeks to act as a participant in more than one depository, he shallcomply with the net worth criteria separately with each such depository. A non-banking finance company, having a net worth of not less than rupees fiftylakhs provided that such company shall act as a participant only on behalf of itselfand not on behalf of any other person. Provided further that a non-banking financecompany may act as a participant on behalf of any other entity, if it has a net worth ofRs. fifty crores in addition to the net worth specified by any other authority. A registrar to an issue or share transfer agent who has a minimum net worth ofRupees ten crores and who has been granted a certificate of registration by SEBI37 38. Characteristics of depository participant:1. Acts as an Agent of Depository2. Directly deal with customer3. Functions like Securities Bank4. Account opening5. Facilitates dematerialization6. Instant transfer on pay out7. Credits to investor in IPO, rights, bonus8. Settles trades in electronic segment iii) ISSUER / Companies:The issuer is the co. which issues the securities. It maintains a register forrecording the names of the registered owners of securities and thedepositories. The issuer sends a list of shareholders who opt for thedepository system. And only those co.s can issue the securities which areregistered under stock exchanges iv)BENEFICIAL OWNER/ INVESTER:Beneficial owner is a person whose name is recorded as such with adepository. It means a person who is engaged in buying and selling ofsecurities issued by the companies and is registered his/ her securitieswith the depository in the form of book entry. And he/ she has all the rightsand liabilities associated with the securities 38 39. Facilities offered by depository system: 1. Dematerialization: It is a process of conversion of physical share certificate into electronic form. So, when a shareholder uses the dematerialization facility, company take back the shares, through depository system and equal numbers of shares are credited in his account in e-form. 2. Rematerialization: Rematerialization is the exact reverse of Dematerialization. It refers to the process of issuing physical securities in place of the securities held electronically in book-entry form with a depository.Other Servicesa) Pledging Dematerialized Shares: Dematerialized shares could be pledged; in fact,this is more advantageous as compared to pledging share certificates. After loan isrepaid one can request for a closure of pledge by instructing ones DP through astandard format. The pledgee on receiving the repayment as well as the request forclosure of pledge will instruct his DP accordingly. Even the locked-in securities canbe pledged. The pledger continues to remain the beneficiary holder of thosesecurities even after the securities are pledged.b) Initial Public Offerings: Credits for public offers can be directly received into demataccount. In the public issue application form of depository eligible companies, therewill be a provision to indicate the manner in which securities should be allotted to theapplicant. One is to mention ones client account number and the name andidentification number of DP. All allotment due to investor will be credited into requiredaccount.c) Receipt of Cash/non-cash Benefits: When any corporate event such as rights orbonus or dividend is announced for a particular security, depository will give thedetails of all the clients having electronic holdings in that security as of the recorddate to the registrar. The registrar will then calculate the corporate benefits due to allthe shareholders. The disbursement of cash benefits such as dividend/ interest willbe done directly by the registrar. In case of non-cash benefits, depository will directlycredit the securities entitlements in the depository accounts of all those clients who39 40. have opted for electronic allotment based on the information provided by theregistrar.d) Stock Lending and Borrowing: Through the depository account securities in thedemat form can be easily lent/ borrowed. Securities can be lent or borrowed inelectronic form through an approved intermediary, who has opened a specialintermediary account with a DP. Instructions are to be given to DP through astandard format (which is available with DP) to deposit securities with theintermediary. Similarly to borrow securities from the intermediary, one has to instructDP through a standard format (which is available with your DP).e) Transmission of Securities: Transmission of securities due to death, lunacy,bankruptcy, insolvency or by any other lawful means other than transfer is alsopossible in the depository system. In the case of transmission, the claimant will haveto fill in a transmission request form, (which is available with the DP) supported byvalid documents.f) Freezing Account with DP: If at any time as a security measure one wishes that notransaction should be effected in ones account, one may advise ones DPaccordingly. DP will ensure that account of such investor is totally frozen until furtherinstructions from him.Benefits of Depository System:1. This system will eliminate paper work as the book entry system does not needphysical movement of certificates for transfer process.2. The risk of bad deliveries, fraud and misplaced, mutilated and lost sharecertificates will not exist.3. The electronic media will shorten settlement time and hence the investor can savetime and increase the velocity of security movement.4. Investors will be able to change portfolio more frequently. 40 41. 5. The capital market will be more transparent as the trading, clearing and settlementmechanism have to be highly automated and interlinked with the depository amongthem.6. The market will be highly automated and efficient due to the usage of computingand telecommunication technology for the back office activities for all the capitalmarket players. 41 42. Chapter- 5LEGAL FRAMEWORK 42 43. LEGAL FRAMEWORKIntroductionThe depositories in India are regulated under the following legal framework: The Depositories Act, 1996 SEBI (Depositories and Participants) Regulations, 1996 Companies Act, 1956 Securities and Exchange Board of India Act, 1992 Prevention of Money Laundering Act, 2002Apart from the above-mentioned Acts and Regulations, following govern thebusiness and operations of a depository. Bye Laws of the depository Operating Instructions of the depository 43 44. The Depositories Act, 1996 gives power to depositories to make bye-lawsBut such bye laws should be consistent with the provisions of this Act and the SEBIRegulations. Such bye-laws shall provide for:a) The eligibility criteria for admission and removal of securities in the depository;b) The conditions subject to which the securities shall be dealt with;c) The eligibility criteria for admission of any person as a participant;d) The manner and procedure for dematerialisation of securities;e) The procedure for transactions within the depository;f) The manner in which securities shall be dealt with or withdrawn from a depository;g) The procedure for ensuring safeguards to protect the interests of participants andbeneficial owners;h) The conditions of admission into and withdrawal from a participant by beneficialowner;i) The procedure for conveying information to the participants and beneficial ownerson dividend declaration, shareholder meetings and other matters of interest to thebeneficial owners;j) The manner of distribution of dividends, interest and monetary benefits receivedfrom the company among beneficial owners;k) The manner of creating pledge or hypothecation in respect of securities held witha depository;l) Inter se rights and obligations among the depository, issuer, participants, andbeneficial owners;m) The manner and the periodicity of furnishing information to the Board, issuer andother persons;n) The procedure for resolving disputes involving depository, issuer, company or abeneficial owner;o) The procedure for proceeding against the participant committing breach of theregulations and provisions for suspension and expulsion of participants from thedepository and cancellation of agreements entered with the depository;p) The internal control standards including procedure for auditing, and monitoring.Reviewing44 45. SEBI (Depositories and Participants) Regulations, 1996Board (SEBI) grants a certificate of registration to a depository subject to thefollowing conditions, namely:a) The depository shall pay the registration fee specified within fifteen days of receiptof intimation from the Board;b) The depository shall comply with the provisions of the Act, the DepositoriesOrdinance, the bye-laws, agreements and these regulations;c) The depository shall not carryon any activity other than that of a depository unlessthe activity is incidental to the activity of the depository;d) the sponsor shall, at all times, hold at least fifty one per cent of the equity capitalof the depository and the balance of the equity capital of the depository shall be heldby its participants;e) No participant shall at any time, hold more than five per cent of the equity capitalof the depository;f) If any information previously submitted by the depository or the sponsor to theBoard is found to be false or misleading in any material particular, or if there is anychange in such information, the depository shall forthwith inform the Board in writing;g) The depository shall redress the grievances of the participants and the beneficialowners within thirty days of the date of receipt of any complaint from aParticipant or a beneficial owner and keep the Board informed about the number andthe nature of redressals:h) The depository shall make an application for commencement of business underregulation 14 within one year from the date of grant of certificate of registration underthis regulation; andi) The depository shall amend its bye-laws as directed by SEBI.Certificate of Commencement of BusinessThe Board shall take into account for considering grant of certificate ofcommencement of business, the following points, namely, whethera) The depository has a net worth of not less than rupees one hundred crore;b) The bye-laws of the depository have been approved by the Board;45 46. c) The automatic data processing systems of the depository have been protectedagainst unauthorised access, alteration, destruction, disclosure or dissemination ofrecords and data:d) the network through which continuous electronic means of communications areestablished between the depository, participants, issuers and issuers agents issecure against unauthorised entry or access;e) The depository has established standard transmission and encryption formats forelectronic communications of data between the depository, participants, issuers andissuers agents;f) the physical or electronic access to the premises, facilities, automatic dataprocessing systems, data storage sites and facilities including back up sites andfacilities and to the electronic data communication network connecting thedepository, participants, issuers and issuers agents is controlled, monitored andrecorded;g) the depository has a detailed operations manual explaining all aspects of itsfunctioning, including the interface and method of transmission of informationbetween the depository,- issuers, issuers agents, participants and beneficial owners;h) the depository has established adequate procedures and facilities to ensure thatits records are protected against loss or destruction and arrangements have beenmade for maintaining back up facilities at a location different from that of thedepository;i) the depository has made adequate arrangements including insurance forindemnifying the beneficial owners for any loss that may be caused to suchbeneficial owners by the wrongful act, negligence or default of the depository or itsparticipants or of any employee of the depository or participant; andj) The grant of certificate of commencement of business is in the interest of investorsin the securities market.The Board shall, before granting a certificate of commencement of business makes aDepositoryPhysical verification of the infrastructure facilities and systems established by theDepository. 46 47. Record of Services by Depository Participant (DP)i) Types of recordsEvery participant shall maintain the following records and documents, namely:a) Records of all the transactions entered into with a depository and with a beneficialowner;b) Details of securities dematerialised, rematerialised on behalf of beneficial ownerswith whom it has entered into an agreement;c) Records of instructions received from beneficial owners and statements ofaccount provided to beneficial owners; andd) Records of approval, notice, entry and cancellation of pledge or hypothecation, asthe case may be.Every participant shall make available for the inspection of the depository in which itis a participant all records referred above. Every participant shall allow personsauthorised by the depository in which it is a participant to enter its premises duringnormal office hours and inspect its records.Every participant shall intimate the Board the place where the records anddocuments are maintained.The participant shall preserve records and documents for a minimum period of fiveyears.ii) Where records are kept electronically by the participant, it shall ensure that theintegrity of the data processing systems is maintained at all times and take allprecautions necessary to ensure that the records are not lost. Destroyed ortampered with and in the event of loss or destruction, ensure that sufficient back upof records is available at all times at a different place.iii) If a participant enters into an agreement with more than one depository, it shallmaintain the specified records separately in respect of each depository.iv) No participant shall assign or delegate its functions as participant to any otherperson, without the prior approval of the depository.Agreement by IssuerEvery issuer whose securities have been declared as eligible to be held indematerialised form in a depository shall enter into an agreement with thedepository. 47 48. Records to be maintained by DepositoryEvery depository shall maintain the following records and documents, namely:a) Records of securities dematerialised and rematerialized;b) The names of the transferor, transferee, and the dates of transfer of securities;c) A register and an index of beneficial owners;d) Records of instructions received from and sent to participants, Issuers, issuersagents and beneficial owners;e) Records of approval, notice, entry and cancellation or pledge or hypothecation, asthe case may be;f) Details of participants; 48 49. Chapter-6ABOUT CDSL and NSDL 49 50. ABOUT CDSL and NSDLThere are two depositories in India at present i.e. 1. NSDL: National Securities Depository limited 2. CDSL: Central Depository Services (India) Limited NSDL: National Securities Depository limited:About NSDLAlthough India had a vibrant capital market which is more than a century old, thepaper-based settlement of trades caused substantial problems like bad delivery anddelayed transfer of title till recently. The enactment of Depositories Act in August1996 paved the way for establishment of NSDL, the first depository in India. Thisdepository promoted by institutions of national stature responsible for economicdevelopment of the country has since established a national infrastructure ofinternational standards that handles most of the securities held and settled indematerialised form in the Indian capital market.Using innovative and flexible technology systems, NSDL works to support theinvestors and brokers in the capital market of the country. NSDL aims at ensuringthe safety and soundness of Indian marketplaces by developing settlement solutionsthat increase efficiency, minimise risk and reduce costs. At NSDL, we play a quietbut central role in developing products and services that will continue to nurture thegrowing needs of the financial services industry.In the depository system, securities are held in depository accounts, which is more orless similar to holding funds in bank accounts. Transfer of ownership of securities isdone through simple account transfers. This method does away with all the risks andhassles normally associated with paperwork. Consequently, the cost of transacting ina depository environment is considerably lower as compared to transacting incertificates. 50 51. Promoters / ShareholdersNSDL is promoted by Industrial Development Bank of India Limited (IDBI) - thelargest development bank of India, Unit Trust of India (UTI) - the largest mutual fundin India and National Stock Exchange of India Limited (NSE) - the largest stockexchange in India. Some of the prominent banks in the country have taken a stake inNSDL.PromotersIndustrial Development Bank of India Limited (Now, IDBI Bank Limited)Unit Trust of India (Now, Administrator of the Specified Undertaking of theUnit Trust of India)National Stock Exchange of India LimitedOther ShareholdersState Bank of IndiaHDFC Bank LimitedDeutsche Bank A.G.Axis Bank LimitedCitibank N.A.Standard Chartered BankThe Hong Kong and Shanghai Banking Corporation LimitedOriental Bank of CommerceUnion Bank of IndiaDena BankCanara BankLegal FrameworkAs a part of its on-going market reforms, the Government of India promulgated theDepositories Ordinance in September 1995. Based on this ordinance, Securities and51 52. Exchange Board of India (SEBI) notified its Depositories and ParticipantsRegulations in May 1996. The enactment of the Depositories Act the followingAugust paved the way for the launch of National Securities Depository Ltd. (NSDL) inNovember 1996. The Depositories Act has provided dematerialisation route to bookentry based transfer of securities and settlement of securities trade.In exercise of the rights conferred by the Depositories Act, NSDL framed its Byelawsand Rules. The Byelaws are approved by SEBI. While the Byelaws define the scope ofthe functioning of NSDL and its business partners; the Business Rules outline theoperational procedures to be followed by NSDL and its "Business Partners." CDSL: Central Depository Services (India) Limited:It is a Depository facilitates holding of securities in the electronic form and enablessecurities transactions to be processed by book entry by a Depository Participant(DP), who as an agent of the depository, offers depository services to investors.According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers,etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO)has to open a demat account through any DP for dematerialisation of his holdingsand transferring securities.The balances in the investors account recorded and maintained with CDSL can beobtained through the DP. The DP is required to provide the investor, at regularintervals, a statement of account which gives the details of the securities holdingsand transactions. The depository system has effectively eliminated paper-basedcertificates which were prone to be fake, forged, counterfeit resulting in baddeliveries. CDSL offers an efficient and instantaneous transfer of securities. CDSLwas promoted by Bombay Stock Exchange Limited (BSE) jointly with leading bankssuch as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, StandardChartered Bank, and Union Bank of India and Centurion Bank. 52 53. CDSL was set up with the objective of providing convenient, dependableand secure depository services at affordable cost to all market participants.Some of theimportant milestones of CDSL system are:CDSL received the certificate of commencement of business from SEBI inFebruary, 1999.Honourable Union Finance Minister, Shri Yashwant Sinha flagged off theoperations of CDSL on July 15, 1999.Settlement of trades in the demat mode through BOI ShareholdingLimited, the clearing house of BSE, started in July 1999.All leading stock exchanges like the National Stock Exchange, CalcuttaStock Exchange, Delhi Stock Exchange, The Stock Exchange,Ahmedabad, etc. have established connectivity with CDSL.As at the end of Dec 2007, over 5000 issuers have admitted theirsecurities (equities, bonds, debentures, and commercial papers), units ofmutual funds, certificate of deposits etc. into the CDSL system.Sr. Name of shareholders Value of holding% terms to totalNo (in Rupees Lacs)equity1 Bombay Stock Exchange Limited5,663.4654.202 Bank of India582.00 5.573 Bank of Baroda 530.00 5.074 State Bank of India1,000.00 9.575 HDFC Bank Limited750.00 7.186 Standard Chartered Bank750.00 7.187 Canara Bank674.46 6.458 Union Bank of India200.00 1.919 Bank of Maharashtra200.00 1.91 10 The Calcutta Stock Exchange Limited100.00 0.96 11 Others0.080.00TOTAL 10,450.00 100.0053 54. WHY A DEMAT ACCOUNT WITH CDSLConvenience:Wide DP Network: CDSL has a wide network of DPs, operating from over6000 sites, across the country, offering convenience for an investor to selecta DP based on his location.On-line DP Services: The DPs are directly connected to CDSL therebyproviding on-line and efficient depository service to investors.Wide Spectrum of Securities Available for Demat: The equity shares ofalmost all A, B1 & B2 group companies are available for dematerialisationon CDSL, consisting of Public (listed & unlisted) Limited and Private Limitedcompanies. These securities include equities, bonds, units of mutual funds,Govt. securities, Commercial papers, Certificate of deposits; etc. Thus, aninvestor can hold almost all his securities in one account with CDSL. A BOcan also hold warehouse receipts pertaining to commodities, in a demataccount. However, a separate account should be opened for holdingwarehouse receipts.Competitive Fees Structure: CDSL has kept its tariffs very competitive toprovide affordable depository services to investors.Internet Access: A DP, which registers itself with CDSL for Internet access,can in turn provide demat account holders with access to their account onthe Internet.Dependability:On-line Information to Users: CDSLs system is built on centraliseddatabase architecture and thus enables DPs to provide on-line depositoryservices with the latest status of the investors account.Convenient to DPs: The entire database of investors is stored centrally atCDSL. If there is any system-related issues at DPs end, the investor is not54 55. affected, as the entire data is available at CDSL.Contingency Arrangements: CDSL has made provisions for contingencyterminals, which enables a DP to update transactions, in case of any systemrelated problems at the DPs office.Meeting Users Requirements: Continuous updating of procedures andprocesses in tune with evolving market practices is another hallmark ofCDSLs services.Audit and Inspection: CDSL conducts regular audit of its DPs to ensurecompliance of operational and regulatory requirements.Dormant Account Monitoring: CDSL has in place a mechanism for monitoringdormant accounts.Helpdesk: DPs and investors can obtain clarifications and guidance fromCDSLs prompt and courteous helpline facility.Security:Computer Systems: All data held at CDSL and is automatically mirrored at theDisaster Recovery site and is also backed up and stored in fireproof cabinetsat the main and disaster recovery site.Unique BO Account Number: Every BO in CDSL is allotted a unique accountnumber, which prevents any erroneous entry or transfer of securities. If thetransferors account number is wrongly entered, the transaction will not gothrough the CDSL system, unless corrected.Data Security: All data and communications between CDSL and its users areencrypted to ensure its security and integrity.Claims on DP: If any DP of CDSL goes into liquidation, the creditors of the DPwill have no access to the holdings of the BO.Insurance Cover: CDSL has an insurance cover in the unlikely event of loss toa BO due to the negligence of CDSL or its DPs. 55 56. Chapter- 7Types of Accounts56 57. Types of AccountsType of depository account depends on the operations to be performed. There arethree typesOf demat accounts which can be opened with a depository participant viz.(a) Beneficiary Account(b) Clearing Member Account(c) Intermediary Account.Beneficiary AccountThis is an account opened by investors to hold their securities in dematerialised formwith a depository and to carry out the transactions of sale and purchase of suchsecurities in book entry form through the depository system. A beneficiary accountholder is legally entitled for all rights and liabilities attached to the securities (i.e.equity shares, debentures, government securities, etc.) held in that account.Therefore, the account is called beneficial owner account". 57 58. A beneficiary account can be in the name of an individual, corporate, HinduUndivided Family (HUF), minor, bank, financial institution, trust, etc. or the brokerhimself for the purpose of his personal investments in demat form. The account isopened with a DP.A new sub-type viz. "Margin Account" has been added to the Client types viz.;Resident and Body Corporate under Client Maintenance Module in DPMApplication Software (DPMAS). The new sub-type "Margin Account" is added toenable Clearing Members (CMs) to open beneficiary accounts to hold securities forclient margin purposes.New sub-types are also added to enable promoters to separately hold securitiesissued as "Promoter" of the company.House account vs. non-house account An account opened by a DP for the custody of and transactions in its owninvestments is referred to as a house account, and all other beneficiary accounts arereferred to as non-house account. DPs are required to open house accounts for theirown investments to prevent co-mingling of their assets with that of their clients.Neither the Depositories Act nor the regulations made under the Act lay down anyspecifications about who can open a beneficiary account. Since all beneficial ownersare deemed to be members of a company (under section 41(3) of the CompaniesAct), only those who are eligible to become members of a company under theCompanies Act, can open a beneficiary account with a depository. Thus, all legalentities with the exception of partnership firms can open an account in the depositorysystem.Documents for VerificationI. Non-body Corporate Investors: For the purpose of verification, all non-bodycorporate investors have to submit the following documents, as prescribed by SEBI,along with the stipulated account opening form.A beneficiary account must be opened only after obtaining a proof of identity andaddress of the applicant. An authorised official of the Participant should verify thephotocopies of any of following documents submitted with their corresponding 58 59. originals and put his/her signature on them with remarks "verified with original"before proceeding to open the account.(a) Proof of Identity (POI)-I. PassportII. Voter ID cardIII. Driving licenseIV. PAN card with photographV. MAPIN card (SEBI vide its Circular No. MRD/DoP/Cir-08/2007 dated June 25,2007 has communicated its decision to discontinue with the requirement of UniqueIdentification Number (UIN) under the SEBI (Central Database of MarketParticipants) Regulations 2005 (MAPIN regulations)/circulars.VI. Identity card/document with applicants Photo, issued bya) Central/State Government and its Departments,b) Statutory/Regulatory Authorities,c) Public Sector Undertakings,d) Scheduled Commercial Banks,e) Public Financial Institutions,f) Colleges affiliated to Universities (this can be treated as valid only till the time theapplicant is a student),g) Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to theirMembers; andh) Credit cards/Debit cards issued by Banks.(b) Proof of address (POA) I. Ration cardII. PassportIII. Voter ID cardIV. Driving licenseV. Bank passbookBank passbook is one of the Proof of Address (POA) being submitted by applicant(s) 59 60. To the DP at the time of opening depository account. In this regard, procedure is asFollows,(i) Computer generated original bank statement:DPs may accept the computer generated original bank statement as POA ifNeither obtaining the copy of bank passbook nor attestation (stamp and signature)Of the authorised official of the bank on the original bank statement is feasible.Provided such original bank statement is printed on the stationery of the bankCarries logo & name of the bank, displays the name, address and bankTransactions/holdings of the Client for the latest quarter ending.(ii) Computer generated bank statement on plain paper:DPs may accept the computer generated bank statement which is printed on aPlain paper as POA provided it clearly mentions the name, address and bankTransactions/holdings of the Client for the latest quarter ending. Provided suchA bank statement is duly attested (signed and stamped) by the authorised officialOf the bank mentioning the name and designation of such authorised official.In both the aforesaid circumstances, DPs are advised as follows:a) Obtain a cancelled cheque in original and signature of the applicant(s) (allThe holders in case of joint holdings) on the bank statement.b) The bank statement should be of the latest quarter ending e.g. depositoryAccounts opened in the month of April, May and June should be supportedBy the bank statement of the quarter ending March 31.Capturing of landmark detailsClients prefer to write landmark details viz., name of the building/mall/junction/School/garden/hotel/bank/railway station/company name/bus depot etc. with thePreceding words such as nearby, adjacent to, behind, next to, opposite toOff etc. in the account opening form as it facilitates for easy location of theirAddresses and prompt delivery of various communications to be received byThe Clients. In this context, procedure is as follows, 60 61. A. At the time of opening demat accounts:DPs should ensure compliance with the various guidelines/circulars issuedBy NSDL on account opening and after satisfying itself, may capture theAddress including landmark details in the DPM System as provided by theClients in the account opening forms.B. Change in landmark details:In case of change (addition/deletion/modification) in the landmark detailsAlready captured in the DPM system at the time of opening demat accounts,DPs may limit the changes to the landmark details after obtaining a requestFrom the Clients on a plain paper, which is signed by all the holder(s) (inCase of joint holdings). DPs are advised to note that the primary addressCaptured in the DPM system as mentioned in the proof of address, at theTime of opening demat accounts should remain intact, limiting the changesTo the landmark details.VI. Verified copies ofa) Electricity bills (not more than two months old),b) Telephone bills (not more than two months old) pertaining to only Landlinetelephones (other than Fixed Wireless Phone) irrespective of the service providercan be accepted by DPs as POA. (DP may ascertain the fact that such telephonenumber exists in the name of the entity, by making a call or by any other means) andc) Leave and License Agreement / Agreement for sale.VII. Self-declaration by High Court & Supreme Court judges, giving the new addressIn respect of their own accounts.VIII. Identity card/document with address, issued bya) Central/State Government and its Departments,b) Statutory/Regulatory Authorities,c) Public Sector Undertakings,d) Scheduled Commercial Banks,e) Public Financial Institutions,f) Colleges affiliated to Universities (this can be treated as valid only till the timeThe applicant is a student) and 61 62. g) Professional Bodies such as ICAI, ICWAI, Bar Council etc., to their Members.In case of joint holdings, POI and POA documents must be collected in respect of allAccount holders.The aforesaid documents are the minimum requirement for opening a BO Account.Participants are advised to exercise due diligence while establishing the identity ofthe person to ensure the safety and integrity of the depository system. Participantscan apply stricter criteria and accordingly, decide to accept, select documents out ofthe list of documents prescribed by SEBI, as proof of identity/address.II. for Corporate Investors: For the purpose of verification, all corporate investorshave to submit the following documents as prescribed by SEBI along with thestipulated account opening form.(1) Memorandum & Articles of Association (MOA & AOA), Board resolution foropening demat account and the list of authorised signatories along with theirspecimen signatures and photographs, etc.(2) Introduction by an existing account holder or by the applicants bank.(3) Proof of address of the corporate, evidenced by the document registered withRegistrar of Companies or acknowledged copy of Income Tax Return or BankStatement or Leave and License Agreement/Agreement for sale.An authorised official of the Participant shall verify the proof of address with theoriginal documents and affix his/her signature on the documents submitted by theClient, while exercising such due diligence.Common InformationThe process of opening an account with a depository, nature of such an account,and various factors to be considered for opening a depository account is explainedbelow. Some details are common to all types of accounts. These are:1. Name of the holder2. Date of birth (for individual accounts) 62 63. 3. Occupation4. Address & phone/fax number5. Bank details like name of bank, type of account (current/savings), accountnumber, branch address, MICR, etc.6. PAN number7. Details of nomination (for individual accounts only)8. Specimen signatures9. MAPIN UIN (s)10. E-mail address11. Mobile number12. Address for communicationClearing Member Account:The entities that are authorised to pay in and receive the pay out from a ClearingCorporation (CC)/ Clearing House against trades done by them or their clients areknown as clearing members (CM). CMs are identified in the system through theirCM-BP-ID. All pay-in and pay-out transactions are carried out through theiraccounts.There are two types of clearing members:1. All members of a stock exchange popularly known as brokers are clearingmembers;2. Custodians who are permitted by the stock exchange to act as a clearing member. 63 64. Procedure to Open a Clearing Member AccountThe steps undertaken to open the account are same as those of individuals,difference lies in the type of form and details to be filled in and documents to besubmitted. The only major difference is that the clearing member has to first registerit with the clearing corporation and obtain a CCCM- ID. The clearing account isidentified by the combination of CC-CM-ID given by the clearing corporation, CM-BP-ID given by the depository and the Client-ID given by the DP.Before opening a clearing account, the DP should send to the depository the clearingmembers account opening form. The Depository then allots the CM-BP-ID. Basedon the CM-BP-ID so allotted, the account gets activated. The DP then generatesClient-ID and communicates the date of opening the account in DPM system to thedepository.Details to be filled in the form are:1. Name of the Clearing Member2. Companys short name, if any3. Address of the registered office, telephone number, fax number, e-mail, if any4. Name and address of the authorised signatories, their designations and telephonenumbers, status code, sub-status code5. Bank account particulars, bank name and its branch, current account number, RBIreference number, RBI approval date, PAN/ GIR number6. Signatures of Authorised signatory (ies)Details of Introducer - If an existing client has introduced a new client to the DP hissignature is required on the form. In other cases, the DP may ask for details that it 64 65. considers appropriate. A separate enclosure has to be attached to the accountopening form specifying the following details:1. Name and address of the clearing member2. Name and address of the clearing corporation3. Clearing Corporation Id (CC-ID)4. Clearing Member Id (CM-ID)5. Stock Exchange clearing code6. SEBI Registration number7. Trade name8. Copy of Board Resolution for authorised signatories should also be submitted.Generally, there will be only one CM account per broker for a stock exchange.Checklist for a Clearing Member Account Ensure that all compulsory fields in the account opening form have been entered. Ensure that a copy of the board resolution for authorised signatories has beenenclosed in case of corporates. Ensure that required letter from Stock Exchange giving CC-ID is enclosed. Ensure CM is informed of standing instruction facility for receipt. Ensure CM is informed that in case of delivery to CC instruction, either of the joint-holders can sign the instruction. If the forms are received at the branch of a DP, ensure that the account openingform along with required references is dispatched to head office in a proper andtimely manner. If required, retain a copy. 65 66. Ensure follow up with head office in case defined deadline in respect of accountopening is not met.The clearing account should only be used for clearing and settlement purposes andnot for any other purpose, e.g., holding of securities. All the securities received in asettlement account should be transferred to respective beneficial accounts as soonas possible, but in no case later than the time prescribed by the depository/ stockexchange/SEBI in this regard. The opening of clearing member account constitutes a"standing instruction" to receive credits from the clearing corporation when there is apay-out.Intermediary Account: An intermediary account can be opened by a SEBI registeredintermediary for the purpose of stock lending and borrowing. The clearing memberaccount and the intermediary account are transitory accounts. The securities inthese accounts are held for a commercial purpose only.Client typesThere are several client types in the depository system and different codes areallotted to them.These are listed below:1. Resident _ Ordinary _ Hindu Undivided Family (HUF)2. Financial Institutions (FI) _ Government-sponsored FI _ State Financial Corporation _ Others66 67. 3. Foreign Institutional Investors (FIIs) _ Mauritius-based _ Others4. Non-resident Indian (NRI) _ Repatriable _ Non-Repatriable5. Body Corporate _ Domestic Company _ Overseas Corporate Body (OCB) _ Government Company _ Central Government _ State Government _ Co-operative Body _ Non-Banking Finance Companies (NBFC) _ Non-NBFC _ Broker _ Foreign Bodies _ Group Companies _ OCB-NonRepatriable _ Foreign Venture Capital _ Limited Liability Partnership _ Others6. Clearing Member (CM)7. Foreign National8. Mutual Fund67 68. 9. Trust10. Bank _ Foreign Bank _ Co-operative bank _ Nationalised Bank _ Others 11. Intermediary 68 69. Chapter- 8DEMAT & REMAT69 70. DEMATERIALISATIONDefinitionDematerialisation is the process of converting physical shares (share certificates)into an electronic form. Shares once converted into dematerialised form are held in aDemat account.Dematerialisation Process70 71. An investor having securities in physical form must get them dematerialised, if heintends to sell them. This requires the investor to fill a Demat Request Form(DRF) which is available with every DP and submit the same along with thephysical certificates. Every security has an ISIN (International SecuritiesIdentification Number). If there is more than one security than the equal numberof DRFs has to be filled in.The whole process goes on in the following manner:i) Appointing DPAny investor who intends to transact through depository system has to engageone depository participant (DP). He can approach a DP of his choice and openan account with him just like one opens an account with a bank. Investor gets anidentification number called Client ID (just as one gets ones bank accountnumber) which serves as a reference point for all his transactions with D.P. 71 72. Every investor before getting his holding dematerialised has to enter into anagreement with the depository through a participant. This step is necessarywhether investor already has securities or securities are yet to be issued in afresh issue. The investor contracts only with that depository which accepts hissecurity in depository mode since it is not necessary that all eligible securitiesmust be in depository mode and with all the depositories. The decision onwhether or not to hold securities within the depository mode and if in depositorymode, with which depository or participants, would be entirely with the investor.ii) Request for DematAfter any agreement is entered for getting securities dematerialised and hisaccount is opened, the investor makes an application to depository participants inform called Dematerialisation Request Form (DRF) to be provided by the DPand hands over his share certificates duly cancelled by writing surrendered fordematerialisation to them for demat. The DP will accept certificates registeredonly in investors name.The request for dematerialisation with the depository participants is sent to thedepository through depository network with which DP is connected.Simultaneously DP submits the securities certificates to the issuer company orits Registrar of transfer.iii) Approach the Company or Registrar of TransferThe depository will electronically intimate the issuer or its Registrar and transferagent of the dematerialisation request. The issuer or the Registrar and transferAgent has to verify the validity of the security certificates as well as the fact thatthe DRF has been made by the person recorded as a member in its Register of 72 73. Members. If the issuer or its Registrar is satisfied, it dematerialises the scrip andupdates its record.iv) Confirmation of DematThe Registrar to transfer or the concerned company when satisfied with the caseof demat has to inform the depository of the completion of dematerialisationauthorising an electronic credit for that security in favour of the investor.v) Crediting the Clients AccountDP credits investors account with the number of shares so dematerialised andthereafter investor hold the