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Dr.Nitin Thapar_SOMC_ITFM Department of Business Management and Commerce 1
 Topic Discussed
Depository System in India –
• Introduction
• Depository participants in India
• Functioning of depository
• Benefits of depository system
• Process of switching over depository

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 History of Depository system
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 History of Depository system in India
A significant development of the 20th century particularly in its later part is expansion of financial market
world over which mostly was driven by globalization, technology, innovations and increasing trade volume.

Earlier before 20th Century

• Less Nos. of Listed Companies: India has not been an exception with probably largest number of listed
companies with a very large investor population and ever-increasing volumes of trades. However, this
continuous growth in activities increased problems associated with stock trading.
• Paper-based trading and settlement: Most of these problems arose due to the intrinsic nature of paper-
based trading and settlement, like theft or loss of share certificates. This system required handling of
huge volumes of paper leading to increased costs and inefficiencies.
• Time consuming: The cost and time spent by the brokers for rectification of these bad deliveries tends to
be higher with the geographical spread of the clients.
• Increase in trade volumes: The increase in trade volume lead to exponential rise in the back-office
operations thus limiting the growth potential of the broking members.
• Risk exposure of the investor: It also increased due to this trading in paper. Some of these associated
risks were: delay in transfer of shares, possibility of forgery on various documents leading to bad
deliveries, legal disputes etc., and possibility of theft of share certificates, prevalence of fake certificates
in the market, mutilation or loss of share certificates in transit.

Thus, the system of security transactions was not as investor-friendly as it ought to be. In this scenario
dematerialized trading under depository system is certainly a welcome move. This popular financial
service emerged
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 Introduction-Depository system

In the early times, securities used to be in the form of physical certificates leading to settlement delays, forgery,
theft, etc., which made the settlement system on the Indian Stock Exchange inefficient. To solve these issues,
• .
the Depository Act, 1996 was passed in India. The purpose of this Act was to ensure the free transferability of
securities with security, accuracy, and speed. A depository is an organisation holding securities such as bonds,
shares, debentures, etc., of the investors in electronic form. The depository holds these securities on the request of
the investors through a registered Depository Participant.
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 • .

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 Meaning
• .

ABC

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Meaning of Depository System
Under Depository System, securities are held in electronic form.
The transfer and settlement of securities are done electronically.
The Depository System maintains accounts of the shareholder,
enables transfer, collects dividends, bonus shares, etc. on behalf
of the shareholder. This system is also called as scripless trading
system.
In India the Depository System was introduced by passing the
Depository Act in 1996. Under this Act, a competitive multi-
depository system consisting of two depositories, viz. NSDL and
CDSL was set up. It will be of interest to note that the world’s first
Depository was set up in 1947 in Germany. The Depository
System resembles the Banking system in many aspects.
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Meaning of Depository System
An institution which holds securities in a dematerialized form is called as Depository.
• Depository is an institution which holds Shares, Government Bonds, Mutual funds etc on
behalf of investor just like a Bank (holds Fixed deposits, cash and deposits etc) .
Besides Depository, the Depository system also includes the following three players:
• Depository Participant (DP): A depository agent through which it interfaces with the
investors and provides depository services is known as Depository Participant (DP). A
Depositor Participant acts as an agent or a link between the depository and the owner of
securities. For example, ICICI Bank, HDFC Bank, PNB Bank, and various other private
financial companies offer services as a Depository Participant.
• Beneficial Owner: The real owner of the securities who has lodged the securities with the
depository in the form of book entry is known as a Beneficial Owner. A Beneficial Owner
enjoys every right associated with the lodged securities.
• Issuer: The company that has issued the securities is known as an Issuer. For
example, Reliance Industries Ltd. is the issuer for shares issued by it.
• 2. At present, two depositories are registered with SEBI; namely, National Securities
Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).Both
depositories, NSDL and CDSL have a network of Depository Participants connected
electronically to their clients. Therefore, the Depository Participants act as a link between
depositories and the clients.
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 Definition
• According to section 2(e) of the Depository Act, 1996, “Depository
means a company formed and registered under the Companies Act,
1956 and which has been granted a certificate of registration under
section 12(1A) of Securities and Exchanges Board of India Act,
1992”
• The Germany Depository defines “A Depository has a file or a set
of files in which data is stored for the purpose of safe keeping or
identity authentication”.
• According to the Bank for International Settlements (BIS),
depository is “a facility for holding securities which enables
securities transactions to be processed by book entry, physical
securities may be immobilized by the depository or securities may
be dematerialized (so that they exists only as electronic records)”
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education for life www.rimt.ac.in Department of Business Management and Commerce
 ABC

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 Features of Depository System in India
1) Securities in Dematerialized Form
2) Fungibility
3) No Risk
4) Free Transferability of Shares
5) No Stamp Duty
6) Parties Involved-
• The depository – custodian of his clients
• The depository participant (DP) – deemed agent of depository
• The beneficial owner (BO) – the real owner of security
• The issuer – the company which issue the security

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 Features of Depository System in India
1) Securities in Dematerialized Form – Depository system
provides for maintenance of ownership record of the
securities of the investor in a book entry form. The system
immobilizes physical securities, so that there is no physical
certificate in existence.
2) Fungibility - In the depository system, the securities
dematerialized are not identified by distinctive numbers or
certificate numbers as in the physical environment. Thus all
securities in the same class are identical and
interchangeable.
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 Features of Depository System in India
3) Parties Involved - In a depository system, the parties involved are:
I. The depository
II. The depository participant (DP)
III. The beneficial owner
IV. IV. The issuer.
The depository renders service connected with the recording of allotment of
securities or transfer of ownership of securities in its record. A depository
functions through depository participants who are the agent of the
depository through whom the investors avail of the depository service. In
the depository system, the ownership of securities dematerialized is
bifurcated between Registered Owner and Beneficial Owner. For the
securities dematerialized, depository is the Registered Owner in the books of
the issuer (i.e. company)
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 Features of Depository System in India
4) Free Transferability of Shares: Transfer of shares held in
dematerialized form takes place freely through electronic book-entry
system. The system dispenses with the transfer deed and other
procedural requirements with respect to transfer of securities.
5) No Stamp Duty: No stamp duty for transfer of securities in the
electronic form is payable. In case of transfer of physical shares,
stamp duty of 0.5 percent is payable on the market value of shares
transferred.
6) No Risk: All risks associated with physical certificates such as
delays, loss in transit, theft, bad deliveries, etc. eliminated in the
depository system. Depositories curb the irregularities in the capital
market and protect the interests of the investors and pave a way for
an orderly conduct of the financial markets through the free
transferability of securities with speed, accuracy, transparency etc
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 Depository participants in India
Depository Participant (DP) :
1. It is the agent of Depository
2. DP is registered under the SEBI Act. It enjoys rights and obligations as
specified under SEBI (Depository and Participants) Regulations of 1996.
3. It is an intermediary appointed by Depository.
4. DP acts as a link between Depository and the investor.
5. It directly deals with customers. It sends statement of accounts
periodically.
6. It functions like a securities bank.
7. It facilitates Demateralisation. It credits securities in the event of Rights
Issue, Bonus Issue, etc.
8. It handles instant transfers of pay-outs like dividend, interest, etc.
9. It settles trade electronically.
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education for life www.rimt.ac.in Department of Business Management and Commerce
education for life www.rimt.ac.in Department of Business Management and Commerce
education for life www.rimt.ac.in Department of Business Management and Commerce
 NSDL ( National Securities Depository Limited)

1) It is the first and the largest depository in India established in November, 1996.
2) 2) It is promoted by IDBI (Industrial Development Bank of India), Unit Trust of India
(UTI) and National Stock Exchange (NSE).
3) 3) NSDL has its headquarters in Mumbai. Depository DP I Seller Buyer Broker Broker DP
II Clearing House 136
4) 4) NSDL is a public limited company registered under the Companies Act. 5)
5) NSDL provides various services to investors and other players in the capital market like
Stock Exchanges, Banks, Issuers, Clearing Members, etc.
6) 6) It renders services like account maintenance, dematerialization and
rematerialization, settlement of trades through market transfers and off market
transfer, nomination, transmission, distribution of non-cash corporate actions, dividend
distributions, facility of freezing or locking of investors’ accounts, Investor grievances,
etc. for life
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 CDSL : The Central Depository Services Limited :

1) CDSL began its operations in February 1999.

2) It was promoted by Bombay Stock Exchange jointly with several banks.
i) It has its headquarters in Mumbai.
ii) CDSL has a wide DP network and offers the Demat services similar to
NSDL across the country Both these institutions have played a tremendous
role in success of Depository System in India

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education for life www.rimt.ac.in Department of Business Management and Commerce
 Functioning of Depository System
1. Serves as a link between public companies and
investors/shareholders :
2. Eliminates risk related to owning physical financial securities
3. Allows the provision of loans of mortgages to interested
parties.
4. Reduced paperwork and accelerates the process of
transferring securities.
5. To regulate smooth transactions.
6. Corporate Actions
7. Pledge and Hypothecation
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 Functioning of Depository System
1. Serves as a link between public companies and investors/shareholders :
A depository functions as a connecting link between the public companies
that issue financial securities, and the investors or shareholders. The
securities are issued by agents associated with depositories, who are known
as depository participants. The agents are responsible for transferring the
securities from the depositories to the investors. A depository participant can
be a bank, an institution, or a brokerage
2. Eliminates risk related to owning physical financial securities
A depository allows traders and investors to hold securities in dematerialized
form; thus, eliminating the risk related to holding physical financial securities.
The buyers and sellers now do not need to check whether the securities have
been transferred successfully without any loss or theft. Thus depository
system reduces such risks by allowing the securities to be held and
transferred in electronic form.

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 Functioning of Depository System
3. Allows the provision of loans of mortgages to interested parties
A depository holds the securities of customers and gives them back
when the customers want. The customers receive interest on the
deposits, while the depository earns even more interest by lending the
deposits to other people or businesses in the form of loans
or mortgages.
4. Reduced paperwork and accelerates the process of transferring
securities
When a trade occurs, a depository transfers the ownership of
securities from the account of one investor to another. It helps in
reducing the paperwork associated with the finalization of a trade and
accelerates the process of transfer of securities.

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Functioning of Depository System
5. To regulate smooth transactions.
• In case of physical share certificates, investors had to constantly
enquire if the shares were transferred under their name or not.
Today because of depositories the transfer takes place automatically
in two working days after the trade. This ensures smooth and timely
transactions.
6. Corporate Actions
• When companies issue bonus shares or dividends to its
shareholders, it automatically gets transferred to your Demat
account. This process is smoothly done by the Depository.
7. Pledge and Hypothecation
• Securities held by an investor can be used as collateral for loans.
The depositories provide a collateral account in which pledged
securities are held till the time the borrowed money is repaid.
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 Benefits of Depository System
1. Elimination of risks associated with physical certificates.
2. Immediate transfer and registration of securities
3. Reduction in brokerage
4. Periodic status reports
5. Elimination of problems related to change of address and
bank accounts.
6. Safety of Investors

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Benefits of Depository System
1. Elimination of risks associated with physical certificates.
Formerly, investors were exposed to various risks when it came to dealing with physical
shares like –
• Risk of theft of stocks
• Loss of certificates during transit
• Electronic trading via a demat account has made the process a lot more convenient.
2. Immediate transfer and registration of securities
Before depositories came into existence, it took around 15 days to 1 month to transfer
shares. You had to fill a transfer form and courier it to the SEBI’s office. But today the
settlement is done electronically after-market hours within a few days.
3. Reduction in brokerage
Electronic trading has multiple benefits such as,
• Reduced paperwork
• Easy and quick transactions
• No courier charges and a lot more.
• As the broker’s costs are reduced, this benefit is passed on to investors in the form of
low brokerages.
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 Benefits of Depository System
4.Periodic status reports
• Easily download and view the status of your portfolio digitally anytime and
anywhere.
5. Elimination of problems related to change of address and bank accounts.
• Previously, for any small update, need to courier documents to each company and
keep the same in safe custody.
• But today it is simply update the information in Demat account and the depository
will get it updated for all the companies in portfolio.
6. Safety of Investors
• Depositories constantly monitor and review various things for the safety of investors.
This includes:
• Periodic inspections on the activities of DP.
• The transactions on the platform are end to end encrypted.
• Insurance policies are taken by the Depositories. It helps DP to cover investors for
the loss accrued due to errors, omissions or negligence.
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 Process of switching over depository
• .

ABC

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 Process of switching over depository
• Issuer : Companies which would like to issue the securities to the investor in the
form of physical or through the depository. The company over here is called as an
Issuer.
• A depository helps in holding securities in the electronic form and also their
transactions to be processed by book entry.
• The Depository participant (DP), plays a vital role in this process. The Depository
participant (DP), is an agent of the depository, offers depository services to
investors.
• According to SEBI guidelines, financial institutions, banks, custodians, etc. are
eligible to act and are called as Depository participant (DPs).
• The investors are called as Beneficial Owner (BO). The Beneficial Owner (BO) has to
open a Demat account through any Depository participant (DP) for holdings
dematerialisation and Securities transferring.
• Dematerialisation or Demat Account can be explained as an account which holds
the investor‟s securities in an electronic form. The Securities are like shares,
debentures, mutual fund etc
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 Process of switching over depository
• Step 1: Appointing Depository participants (DP)
• Step 2: Agreement with Depository participants
• Step 3: Request for Demat.
• Step 4: Registering of shares
• Step 5: Crediting the investor account
• Step 6: Trading of Shares in a Depository system
• Step 7: Exit

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 Process of switching over depository
1. Appointing Depository Participants
Any investor who intends through depository system has to engage
one depository participants. The opening of the account with
depository is as simple as opening of the account with bank. When
the investor opens an account it gets client ID number, which he has
to use for all the future references

2. Agreement with Depository

• Every investor before getting his holding dematerialized has to
entre into an agreement with the depository through a participant.
This step in necessary whether investor already has securities or
securities are yet to be issued in a fresh issue.
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 Process of switching over depository
3. Request for Demat.
• The shareholder will obtain the Dematerialisation request form from the
Depository Participant. This form will contain details about the name of the
company, folio number and the distinctive number of the shares which are given
for dematerialization. The form will be signed by either the single owner if it is
held so or by joint owners, when they are held jointly.
4. Registering of shares
• When the D.P hands over the securities to the depository, the securities will be
sent to Share Registrar who will register the depository name and the particulars
of shares. But, before doing this, the ownership of the securities should be
verified with the company and hence, this procedure will take some time.
• In case the signature in the requisition form does not tally with the specimen
signature held by the company, then the request for dematerialization will be
rejected as it amounts to bad delivery.

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5. Crediting the investor account
• In the last stage, the Depository will inform the D.P the details of shares
registered in the name of the shareholder concerned. On this basis, the
D.P will send the Statement of Account, to the customer shareholder.
• This completes the dematerialization procedure. We can explain this in
the following diagram:

We have so far discussed about the sale and purchase of securities in the secondary
market. But when a shareholder applies for a company security in the primary market,
he will mention his ID Account number in the application form.

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6. Trading of Shares in a Depository system
When a seller agrees to sell certain securities to the buyer, the seller will fill up a form known as
‘Delivery Instructions form’.

This form will contain details about the number of shares to be sold and the account number of the
shareholder with the Depository Participant. In fact, some Depository participants even print this
form with the ID Account number and name of the client.

There are two types of Delivery Instructions forms. They are

• Off-market trade and
• Market trade.
Off market trade will not be routed through the stock exchange. It may be a transfer among the
family members.
Market trades are those which are traded in the market.
• The seller signs the form and hands it over to his depository participant through the broker who
has effected the transaction. The depository participant will then send it to the Depository. The
Depository on receipt of this request, will debit the free balance of the seller and credit the
available balance of the buyer.
• The available balance of the buyer will be converted into free balance once payment for the
transaction is effected. When once the buyer has free balance, he has a right to transfer or sell to
any other person.
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 Introduction

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education for life www.rimt.ac.in Department of Business Management and Commerce
 Summary
Securities can be held either in
(a) Physical Mode or (b) Electronic / Digital / Dematerialized modes.
The physical mode has limitations like Risk of handling, Delays, Increased efforts, Time
and cost.
The paperless holding of securities is achieved by Depository System which was
introduced in India by passing The Depository Act 1996.
Depository System provides various benefits to Investors and the Issuing Company.
Constituents of Depository System are Depository,
DP, Beneficial Owner and the Issuer Company.
Dematerialization means conversion of Physical securities into electronic form and
Rematerialzation means conversion of electronically held securities into physical
certificates.
India has a Multi-Depository system. It has two Depositories (a) NSDL (1996), (b)
CDSL (1999)
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 Topics Discussed in Next Lecture
Role, Objective and Functions of Securities Exchange Board of
India and its guidelines related to depository system.

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