CHAPTER
DEPOSITORIES IN INDIA
INTRODUCTION:
In the pre-liberalization era, the Indian stock marketS were infamous for
antiquated ways of doing business. But the capital markets were alleviated when Natient
Stock Exchange (NSE) and Bombay Stock Exchange (BSE) had converted the
scream based
trading system to screen based. Technology has transforned the face of Indian stocl,
markets. Growing competition among stock exchanges, rise in the number of
players,
transitions in the tradingsystem have resulted in a tremendous increase in the volumeandof
activity. The clumsy procedures of handling share certificates, the recurring problem of
bad deliveries, long settlement cycles, and delays in transfers made life atrocious not iust
for an amateur investor but even for a professional broker. The securities business was
never a pleasant job with the paper work nightmare soaring out. The operational
inefficiencies of traditional settlement and clearing system have forced the development
of anew system for securities business and as a result the traditional system was replaced
with anew system called 'depository systenm'.
MEANING AND DEFINITIONS:
In the simplest terms, depository means a place where something is deposited for
safekeeping. It is an organization responsible for holding and handling securities on behalf
of investors. Adepository is an organisation which holds securities (like shares, debentures,
bonds, government securities, mutual fund units'etc.) of investors in electronic form and
facilitates transfer of ownership of securities on the date of settlement. Adepository is an
organization which holds the securities of an investor in an electronic form through a
registered depository participant.
According to Section 2(e) of the Depositories Act, 1996, "Depository means a
company formed and registered under the Companies Act, 1.956 and which has been
Dpositoniesi India
151
grantedac
la certificate of registration under Section 12(1 A) of the
Act, 1992"
Securities and Exchange
BoardofIndia
Depositoryis attechnology driven electronic storage
system. It completely eliminates
cumbersome paper work relating to share certificates, transfer forms
etc., involved in
securities business. It caters to investor's transactions with
with all
greater speed, efficiency and
easeas it deals stocks in just a book entry mode and not in their physical
Adepository like abank, sate keepsthe
form.
securities in electronic form. It works more
likeai bank
for. securities where you can open asecurities account, deposit all
your stocks,
withdraw your securities and instruct it to deliver or receive stocks on your behalf.
e securities, it provides various Besides
services related to transactions in
ancitory system is all about paperless or scripless trading because securities. The
securities in a
Jannsitory are held in the form of electronic accounts or in dematerialized form. An
bank deals directly with the bank while an investor
investor deals through a depository
nticipant in adepository. The depository system has effectively
atificates which were prone to be fake, forged, counterfeit resulting eliminated paper based
in bad deliveries.
The developed capital markets allover the world have
depositories. In India,
Securities Depository Limited (NSDL)as a joint venture between IDBI, UTIand the National
Stock Exchange has set up the first depository. The second National
Central Depository Services Limited (CDSL), which was
depository has been set up by
promoted by the Bombay Stock
Eychange and Bank of India. Both the depositories have a
network of
Participarnts (DPs) who are electronically connected to the depository and serveDepository
as contact
points with the investors.
(ii) Dematerialization
Dematerialization is the process of converting physical securities into electronic
form. The investor applies to the DPin a dematerializationrequestform (DRE) to convert
his physical holdings of securities into the dematerialized form. Within seven days, the Do
forwards the form, along with the security certificates, to the issuer or its registrar and
transfer agent after electronically registering the request with the depository.
The depository electronically forwards the demat request to the respective issuer
or its registrar and transfer agent, who verifies the validity of the security certificates as
well as the fact that the DRF has been made by a person recorded as a member in ite
register of members. After verification, the issuer or its registrar and transfer agent
authorises an electronic credit for the security in favour of the client. After that, the
depository makes the credit entries to be made in the account of the client.
PROCESS OF DEMATERIALIZATION:
1. Dematerialization starts with opening a Demat account. For demat account
opening, youneed to shortlist a Depository Participant (DP) that offers Demat
services.
2. Toconvert the physical shares intoelectronic/demat form, ADematerialization
Request Form (DRF), which is available with the Depository Participant (DP),
has to be filled in anddeposited along with share certificates.On each share
certificate, 'Surrendered for Dematerialization' needs to be mentioned.
3. TheDP needs to process this request along with the share certificates tothe
company and simultaneously to registrars and transfer agents through the
depository.
4. Once the request is approved, the share certificates in the physical form will
be destroyed and aconfirmation of dematerialization will be sent to the
depository.
5. The depository willthen confirm the dematerialization of shares to the DP.
Once this is done, a credit in the holding of shares willreflect in the investor's
account electronically.
MERITS OF DEPOSITORY :
In the depository system, the ownership and transfer of securities takes place hy
means electronic book entries. At the very beginning, this system gets rid of the dangers
relating to handling of papers. But this system has also numerous other merits which are
as follows:
(a) Eliminates bad deliveries: In the depository environment, once the holdings
of an investor are dematerialized, the problem of bad deliveries does not arise. It means
that the securities cannot be held under objection.
(b) Elimination of all risks: There are many risks and problems associated with
the traditional physical securities like security risks of theft of stocks, mutilation of
certificates, and loss of certificates during movements through and from the registrars
etc. These are being wiped out in the new depository system.
(c) No stamp duty: No stamp duty is charged for transfer of any kind of securities
in the depository. It is applied to equity shares, debt instruments, and units of mutua
funds.
(d) Immediate transfer and registration: In the traditional environment, geti5
monthscausing
the ownership and registration of securities takes around three to four depository
sit. But, in the
opportunity cost of delayin transfer and the risk of loss in transit.
DgpositoiesinIndia 157
environmnent,once
the securities are credited to the investor's account on pay out, he
legal owner of the securities. There is no further need to send it to the
becomesthe
reegistrarfor registration.
company's
Faster settlemnent cycle:The demat trading segment in India follows a rolling
(e) T+2, i.e. the settlement of trades will be on the 2nd working day after
of
settlementcycle of stock and ensure more liquidity for the investor.
This enables faster turnover
trade.
a () Otherbenefits:
Loan against the pledged demat shares at low rate.
Halsoprovides nomination facility to the investors.
Hage number of transactions can be settled at a very short time
It reduces trading cost.
Since it is paperless trading, no share certificate and deed etc. are reguired.
It reduces the risk of fraudulent activities.
t avoids the checking of shares, deeds and various papers.
No share certificate is issued as the securities are divisible.
It reduces the various costs which require secretarial help.
It supplies better communication facilities.
Easy availability of information on issue of bonus share, right share, dividend
declaration, etc. which helps the shareholder to take decisions.
DEMERITS OF DEPOSITORY:
The following are few limitation of depository system:
(a) Lack of control: Trading in securities may become uncontrolled in case of
dematerialized securities as transacting in demat form is very easy and it leads increase in
transactions which can sometimes get out of control.
(b) Need for greater supervision: It is incumbent upon the capital market regulator
to keep a close watch on the trading in dematerialized securities and see to it that trading
does not act as a detriment to investors. The role of key market players in case of
dematerialized securities,such as stock brokers, needs to be supervised as they have the
capability of manipulating the market.
(c) Complexity of the system: Multiple regulatory frameworks have to be
Confirmed to including the Depositories Act, Regulations and the various Bye Laws of
various depositories. Additionally, agreements are entered at variouslevels in the prccess
dematerialization. These may cause anxiety to the investor desirous of simplicity in
eIms of transactions in dematerialized securities.
Merchant Banking &
158
(d)
Pin ancial Services
Agency risk: The major issue which keeps the retail investor away from the
of
risk. Fromthe view point fthe investor,the risk
agency
depository system isthe
less thanthat in the
present system of trading and perception
Itinthe depository system is no
dsettlement
is true to say that in the present system, the agency risk is diversified among various
players like brokers, registrar, postal system etc. In the depository system, though the
depository participant is a reputed bank, the retail investor does not feel confident until
provided.
effective insurance coverage is
(e) Lack of awareness: It is estimated that in India retail investors hold about 30%
of the market capitalization. In spite of their considerable share in the capital market,
they do not show adequate interest in demat trading. Thissis mainly due to lack of
awareness among the retail investors or the fear of being caught in the tax net. Most of
investors are not aware of the benefits of demat trading.
the
of cash benefits accruing to investors can
(f) Risk of loss in transit: Distribution
cannot be disbursed electronicall.
be expedited under depository system. But cash benefits
loss in transit is to be borne by th
Stillthey have to be sent by post. So, the risk of
investor.
(g) Multiplicity of charges: Under depository system, there are charges for opening
of account,dematerialization, rematerialisation, etc. Apart from
this, investors who intend
to the
to hold their investments in dematerialised form have to pay custody charges
taking
depository participant. All these charges may deter the retail investors from
advantages of the system.
opt for
(h) Reluctance for trading: Most of the existing shareholders do not
depository system. They intendto keep their securities only in physical form.
(i) Fear of tax liability: A large number of transactions related tosecurities are
comfortable with their
not accounted for, because most of the buyers and sellers are not
tax net. This
names appearing in computer print-outs as they fear being brought into
aspect prevents the investors from taking advantage of the depository system.
G) Inadequate infrastructure: In India, the infrastructure available for trading in
demat shares is inadequate. The Depository Act and SEBI have overlooked the role of
Clearing and Settlement Corporation. For the successful operations of the depoStory,
there should be a centralized clearing and settlement corporation handling the trade n
all exchanges. The establishment of such a central institution will effectively faciltele
smooth interaction with the various exchanges. Another problem is that the investo
living in smaller towns will find it impossible to open a demat account.
165
Dpositoriesin India
GHIGHTS OF SEBI(DEPOSITORIES
AND PARTICIPANTS) REGULATIONS, 1996
REGISTRATION OF DEPOSITORY
Anapplication for the grant of acertificate of registration a sadepository shall be
made to
the Board by the spons or in Form A, shall be accompanied by the fee
in the manner specified in
specifiedin Part Aof the Second Schedule and bepaid
of.
PartB there
oa0plicationshallbeaccompaniedbydraftbye-lawsoft he depository that is
proposed to beset-up.
unless the sponsor
The Board shall not consider an application under regulation 3,
3 belongs to one of the following categories, namely:
a public financial institution as defined in section 4 Aof the
Companies Act,
1956 (1of1956);
Bank
abank included for the time being in the Second Schedule to the Reserve
of India Act, 1934 (2 of1934);
Bank of
a foreign bank operating in India with the approval of the Reserve
India;
section 2 of
a recognised stock exchange with in the meaning of clause n of
the Securities Contracts (Regulation)Act, 1956 (42 of 1956);
than
abody corporate engaged in providing financial services where not less
seventy-fivepercentof the equity capitalisheld by any of the institutions
mentionedin sub-clause (), (i),(if) o r(iv) jointhy or severally;
abody corporate constituted or recognisedunder any law for the timebeing
inforce in a foreign country for providing custodial, cdearing or settlement
services in the securities market and approved by the Central Government;
C an institution engaged in providing financial services established outside India
and approved by the Central Government; or
The Board shall not consider an application under regulation 3, unless the
applicant /sponsor is a fit and properperson.
4 After considering the application under regulation3, with reference to the
qualifications specifiein regulation6, if the Board is satisfied that the companye
Stablished by the sponsor is eligible to actas depository, it may granta certificateof
registration inForm Bto the deposit or subject to the following, namely:
the depository shall pay the registration fee specified in Part Aof the Second
Schedule in the manner specified in Part Bthere of, within fifteen days of receipt
of intimation from the Board;
166 Merchant Banking & Financial
Services
shall comply with the provisions of the Act,
the depository shall Act, the
(Act), the bye-laws,agreements and the seregulations; Depositories
the depository shall not carry on any activity other than that of a
unless the activityis incidental to the activity of the depository depository
the sponsor shall, atalltimes, hold atleastfifty-one percent of the equity share
capitalof the depository
noparticipantshallat any time, hold more than five percent of the eguity canis.
of the depository;
no personother than a sponsor, whetherresidentin India or not, shallat any
time, either individually or together with persons acting inconcert, hold rnore
than five percent of the eguity sharecapital in the depository;
5. Subject to the limitsas otherwise prescribed by the Central Government from
time to time,the combined holding of all persons resident out side India in the
equity share capital of the depository shall not exceed, at any time,forty
ninepercent.ofits total equitysharecapital
