1. CHAPTER- I
INDUSTRY PROFILE
The origin of stock market in India goes back to the later part of the 18th century.
The earliest security dealing was transactions in securities of the east India Company, the
dominant institution of those days. Corporate shares came to the picture by 1830's and
assumed significance with the enactment of the companies’ act 1850. The introduction of
limited liability marked the beginning of the era of modern joint stock enterprises. The
American civil war followed this in 1860-65. However, the bubble burst with the end of
civil war and disastrous slump followed. It was long and severe. It also resulted in
complete ostracism of the broker community. The tremendous social pressure on the
brokers led to their forming an informal association which later gave birth to "the native
share & stock brokers association", on 9th July, 1875, which is now known as Bombay
Stock Exchange Ltd.
The main contribution made for the Bombay Stock Exchange Ltd was by the
cotton textile industry that was also the prime factor in the development of the
Ahmedabad as a center for dealing in stocks and shares. As new cotton textile mills
floated and volume of business grew, the "Ahmedabad share and stock brokers
association" was formed in 1894. This later came to known as the Ahmedabad stock
exchange.
The next stock exchange was established in Calcutta in 1908. The industries that
contributed to its birth and subsequent development were jute, coal and mining. Like the
Bombay stock exchange Ltd, it was born out of a crisis when the boom of 1904-08 broke
and a need was felt for an organized body for mutual protection of brokers and safety of
the trade.
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2. With the World War I, all imports into India ceased and the Indian manufactures
were faced with a boom. The three stock exchanges flourished during the period of
Prosperity.
However, the boom also led to the formation of many rival stock exchanges. The
World War II also resulted in a boom and mushroom growth of stock exchanges.
However, many of them perished during the slump that followed.
Most of the other stock exchanges languished till 1956 when government came
out with a comprehensive legislation called the "Securities contract (regulation) act", to
regulate the functioning of stock exchanges. This legislation made it mandatory on the
part of stock exchanges to secure recognition from the central Govt, only the established
stock exchanges in Mumbai, Ahmedabad, Calcutta, Chennai, Delhi, Hyderabad and
Indore were recognized under the act. More stock exchanges were recognized
subsequently.
At present the stock market consists of 23 regional stock exchanges and three
National stock exchanges known as NSE, BSE and OTCEI (over the counter exchange of
India).
Stock/Securities Market:
Stock markets are markets of financial assets or Negotiable instruments. Business
organizations, corporate units and the Governments, central or state, issue these. Public
sector undertakings also issue these Securities. These Securities are used to finance their
investment and current expenditure. These are thus one of the important sources of funds
to the issuers of the securities.
2

3. Securities are the claims on money and are like promissory note or I.O.U. (I Owe
You) securities are source of fund for companies, Govt. etc. the external sources of funds
of the companies are as follows:
The Securities market is classified into:
1)Primary Market:
A primary market is market where Securities are issued to the public for the first
time. New issues are dealt in this market. The new issues market has three functions to
perform organization, underwriting, and distribution. There are three ways by which
company may raise capital in primary market.
1)Public issue
2)Right issue
3)Private placement
The Merchant Bankers, Collecting Bankers, Registrars and Transfer Agents,
Brokers, Underwriters, Advertising agencies, Printers, Sub-Brokers and Solicitors and
Mailing agents act as Intermediaries in the Primary Market.
2)Secondary Market:
The market's where securities, which have already issued in the primary market,
are traded is called a Secondary Market. This market consists of all stock exchange
recognized by the Govt, of India, are regulated under the Securities contract (regulation)
act 1956. The Bombay Stock Exchange (BSE) is the principle stock exchange in India,
which sets the tone of the other stock market.
3

4. The Brokers, Jobbers, Dealers, Arbitrators, Investment Advisors, Portfolio Managers
and Sub-Brokers act as Intermediaries in Secondary Market. STOCK EXCHANGE
stands for
Security provider for investor
Tax benefits, planning and exemptions
Optimum return on investment
Cautious approach
Knowledge of market
Eligibility for accruals
X change of Securities transactions
Cyclopedia of listed companies
High yield
Authentic information
New entrepreneurs
Guidance to investors & companies
Equity cult
The Securities Exchange Regulation act 1956
A bill was introduced in the parliament in December 1954 by the Gorawalla
committee and recommended on the lines of functioning of stock exchanges.
4

5. Securities and Exchange Board of India(SEBI)
Securities and Exchanges Board of India (SEBI) was set up in 1988 and given
statutory status in January 1992 for healthy regulation of capital markets. The controller
of capital issue (CCI) was abolished and companies have to approach market directly,
subject to SEBI guidelines relating to disclosures and other measures of investor
protection.
Functions of SEBI
•To regulate the business in stock exchanges.
•To register and regulate intermediaries associated with securities market as well as
working of mutual funds.
•Promote and regulate self-regulating organization.
•Prohibit fraudulent and unfair trade practices relating to securities transactions.
SEBI-footmarks
SEBI has taken several steps, since its establishment, to reform the Securities
markets. Some of the important ones are summarized below:
•All companies, which access the capital markets, are free to price their issue, subject to
certain conditions.
•Restrictions on rights and bonus issues have been removed.
•Issuers are required to meet SEBI guidelines for disclosure and investor protection.
•The minimum application has been reduced to Rs.2000 from earlier level of Rs.5000.
•The use of "Stock Invest" by individuals and mutual funds, to mitigate the locking in of
funds.
•In case of over subscription, SEBI has directed the following of the system of
proportionate allotment.
•SEBI has permitted the substantial firm allotment to institutions in public issue as 24%
to foreign institutional investors, 20% to Indian financial institutions.
•Number of collection centers has been reduced to a minimum of 30.
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6. CHAPTER- II
PROFILE OF THE HYDERABAD STOCK EXCHANGE LIMITED
History:
India capital market has witnessing rapid growth in recent past; the key indicators on
capital market have proven this point. However, this growth volume of paper that has
flooded the market checking out existing system, as the market grows there is a need for
better system to ensure that such restrictions to growth are removed. The foreign
investors seeking to invest in India are also apprehensive about their liability of the post
trade settlement mechanism used in India.
The biggest deterrent or bottleneck in India capital market is largely manual and paper
based settlement system in Indian stock exchange have been under constant review.
The main deficiencies have been identified in two broad areas
 The clearing and settlement system in stock exchange where by delivery of
shares by seller and payment by the purchaser is made and
 Procedure for transfer of shares in the name of the purchaser current procedure
result in excessive paper work, delays in cleaning and settlement, work
duplication, bad delivery, on transference in costs and prices at which customer’s
orders are executed have promoted setting up of depositors
Objectives:
 Promote, develop and maintain a well-regulated market for dealing in securities.
 Safe guard the interest of the members and the investing public.
 Establish and promote honourable and fair practices in the securities tranctions.
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7. Growth:
The Hyderabad Stock Exchange Ltd., established in 1943 as a Non-profit making
organization, catering to the needs of investing population started its operations in a small
way in a rented building in Koti area. It had shifted into Aiyangar Plaza, Bank Street in
1987. In September 1989, the then Vice-President of India, Hon’ble Dr. Shankar Dayal
Sharma had inaugurated the own building of the Stock exchange at Himayathnagar,
Hyderabad. Later in order to bring all the trading members under one roof, the exchange
acquired still a larger premises situated 6-3-654/A; Somajiguda, Hyderabad – 82, with a
six storied building and a constructed area of about 4,86,842 sft (including cellar of
70,857 sft). Considerably, there has been a tremendous perceptible growth, which could
be observed from the statistics.
The number of members of the Exchange was 55 in 1943, 117 in 1993 and
increased to 300 with 869 listed companies having paid up capital of Rs.19128.95 crores
as on 31/03/2000. The business turnover has also substantially increased to Rs. 1236.51
crores in 1999-2000. The Exchange has got a very smooth settlement system.
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8. Governing board:
At present, the Governing Board consists of the following:
Members of the Exchange
Smt. Meena H. Bhattad
Sri. Hari Kishan Attal
Sebi Nominee Directors
Sri. N.S. Ponnunambi Registrar of Companies [Govt. of India.]
Public Nominee Directors
Dr. N.R. Sivaswamy (Chairman, HSE)
FormarCBDT Chairman
Justice V. Bhaskara Rao Retd. Judge High Court
Sri P. Muralimohan Rao Mogili&Co.-Chartered Accountants
Dr B. Brahmaiah G.M. JNIDB
Executive director
Sri S SARVESHWAR
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9. HSE FEATURES:
1. Computerization:
The Stock Exchange business operations are equipped with modern
communication systems. Online computerization for simultaneously carrying out the
trading transactions, monitoring functions have been introduced at this Exchange since
1988 and the Settlement and Delivery System has become simple and easy to the
Exchange members.
The HSE On-line Securities Trading System was built around the most
sophisticated state of the art computers, communication systems, and the proven
VECTOR Software from CMC and was one of the most powerful SBT Systems in the
country, operating in a WAN environment, connected through 9.6 KBPS 2 wire Leased
Lines from the offices of the members to the office of the Stock Exchange at Somajiguda,
where the Central System CHALLENGE-L DESK SIDE SERVER made of Silicon
Graphics (SGI Model No. D-95602-S2) was located and connected all the members who
were provided with COMPAQ DESKPRO 2000/DESKTOP 5120 Computers connected
through MOTOROLA 3265 v. 34 MANAGEABLE STAND ALONE MODEMS (28.8
kbps) for carrying out business from computer terminals located in the offices of the
members.
The HOST System enabled the Exchange to expand its operations later to other
prime trading centers outside the twin cities of Hyderabad and Secunderabad.
2. Clearinghouse:
The Exchange set-up a Clearinghouse, to collect the securities from all the
members and distribute to each member all the securities due in respect of every
settlement. The whole of the operations of the Clearing House were also computerized.
At present through DP all the settlement obligations are met.
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10. 3. Inter – connected market system (icms):
The HSE was the convener of a Committee constituted by the Federation of
Indian Stock Exchanges for implementing an Inter-connected Market System (ICMS) in
which the Screen Based Trading systems of various Stock Exchanges was inter-
connected to create a large National Market. SEBI welcomed the creation of ICMS.
The HOST provided the network for HSE to hook itself into the ISE. The ISE
provided the members of HSE and their investors, access to a large national network of
Stock Exchanges.
The Inter-connected Stock Exchange is a National Exchange and all HSE
Members could have trading terminals with access to the National Market without any
fee, which was a boon to the Members of an Exchange/Exchanges to have the trading
rights on National Exchange (ISE), without any fee or expenditure.
4. On-line surveillance:
HSE pays special attention to Market Surveillance and monitoring exposures of
the members, particularly the mark to market losses. By taking prompt steps to collect the
margins for mark to market losses, the risk of default by members is avoided. It is
heartening that there have been no defaults by members in any settlement since the
introduction of Screen Based Trading.
5. Improvement in the volumes:
It is heartening that after implementing HOST, HSE's daily turnover has fairly
stabilized at a level of Rs. 20.00 crores. This should enable in improving our ranking
among Indian Stock Exchanges for 14th position to 6th position. We shall continuously
strive to improve upon this to ensure a premier position for our Exchange and its
members and to render excellent services to investors in this region.
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11. The number of transactions, turnovers of the Exchange, number of listd companies and
the paid up capital listed have grown up substainally as may be seen from the following
figures.
NUMBER OF MARKET
TURNOVERS LISTED
YEAR TRANSACTIONS CAPIT
Rs.IN Crores COMPANIES
IN Thousands Rs.IN Crores
1991-92 515.949 587.75 236 2740.56
1992-93 421.985 676.00 274 10228.48
1993-94 603.635 984.46 372 13156.15
1994-95 860.642 1160.48 668 18588.71
1995-96 720.521 1107.30 727 20159.31
1996-97 240.64 479.98 851 22050.69
1997-98 427.83 1860.86 852 18705.10
1998-99 513.168 1269.90 856 18753.93
1999-00 513.440 1236.51 869 19128.95
2000-01 427.205 977.83 934 14717.08
2001-02 34.326 41.26 . .
2002-03 4.203 4.58 . .
2003-04 2.277 2.73 856 22126.65
2004-05 4.401 14.13 820 14456.95
6. Settlement guarantee fund:
The Exchange has introduced Trade Guarantee Fund on 25/01/2000. This will
insulate the trading member from the counter-party risks while trading with another
member. In other words, the trading member and his investors will be assured of the
timely completion of the pay-out of funds and securities notwithstanding the default, if
any, of any trading member of the Exchange. The shortfalls, if any, arising from the the
default of any member will be met out of the Trade Guarantee Fund. several pay-ins
worth of crores of rupees in all the settlements have been successfully completed after
the introduction of Trade Guarantee Fund ,without utilizing any amount from the Trade
Guarantee Fund.
The Trade Guarantee Fund will be a major step in re-building this confidence of
the members and the investors in HSE. HSE's Trade Guarantee Fund has a corpus of Rs.
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12. 2.00 crores initially which will later be raised to Rs. 5.00 crores. At present Rs. 3.20
Crores is stood in the credit of SGF.
The Trade Guarantee Fund had strict rules and regulations to be complied with by the
members to avail the guarantee facility. The HOST system facilitated monitoring the
compliance of members in respect of such rules and regulations.
Current diversifications:
1. Depository participant:
The Exchange has also become a Depository Participant with National Securities
Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Our own
DP is fully operational and the execution time will come down substantially. The
Exchange undertakes the depository functions by opening the accounts at Hyderabad of
investors, members of the Exchange and other Exchanges. The trades of all the
Exchanges having On-line trading which get into National depository can also be settled
at Hyderabad by this exchange itself. In short all the trades of all the investors and
members of any Exchange at Hyderabad in dematerialised securities can be settled by the
Exchange itself as a participant of NSDL and CDSL. The exchange has about 15,000
B.O. accounts.
2. Floating of a subsidiary company for the membership of major stock exchanges
of the country:
The Exchange had floated a Subsidiary Company in the name and style of M/s HSE
Securities Limited for obtaining the Membership of NSE and BSE. The Subsidiary had
obtained membership of both NSE and BSE. About 113 Sub-brokers may register with
HSES, of which about 75 sub-brokers are active. Turnover details are furnished here
under.
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13. BSE
NSE CASH NSE F&O
YEAR CASH
Rs.In Lakhs Rs.IN Lakhs
Rs.IN Lakhs
2001-02 338236.81 -- --
2002-03 426143.50 16657.08 --
2003-04 617808.46 312203.56 17558.59
2004-05 484189.11 354370.71 39519.96
3. Facility To Trade At Nse, Derivatives Trading, Net Trading Etc.
The Exchange has incorporated a subsidiary "HSE securities Limited” with a paid
up capital of Rs. 2.50 crores initially to take NSE Membership, so that the members of
the exchange will have access to the NSE's Trading Screen as Sub-brokers, Derivatives
Trading and Net Trading etc. The Members of this Exchange will also have equal
opportunity of participating in such trading like any other NSE member.
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14. CHAPTER- III
DESIGN OF STUDY
Objectives of the study:
 To know the mechanism in Demateralisation of shares
 To study the activities in Primary market and the Secondary market in the context
of Demateralisation.
 To study the activities of Depository Participants(DP)
 To study the process of Settlement Procedure
 To know the advantages of the Demateralisation of shares
 To know the services provided by the Depository Participant.(DP)
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15. METHODOLOGY OF STUDY
The data collection methods include both the primary and secondary collection
methods.
 Primary sources:
This method includes the data collection from the personal discussion with the
authorized members of the THE HYDERABAD STOCK EXCHANGE.
 Secondary sources:
The secondary collection methods includes the lecture of the superintend of the
department of market operation etc. and also the data collected for the news, magazines
of THE HYDERABAD STOCK EXCHANGE and different books, issues of this
study.
Limitations of the study
The study confines to the past 2-3 years and present system of the dematerialization
process adopted by THE HYDERABAD STOCK EXCHANGE and is confined to the
coverage of all the related areas like the study of Depository Participants.
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16. CHAPTER- IV
INTRODUCTION
India capital market has witnessing rapid growth in recent past; the key indicators on
capital market have proven this point. However, this growth volume of paper that has
flooded the market checking out existing system, as the market grows there is a need for
better system to ensure that such restrictions to growth are removed. The foreign
investors seeking to invest in India are also apprehensive about their liability of the post
trade settlement mechanism used in India.
The biggest deterrent or bottleneck in India capital market is largely manual and paper
based settlement system in Indian stock exchange have been under constant review.
The main deficiencies have been identified in two broad areas
 The clearing and settlement system in stock exchange where by delivery of
shares by seller and payment by the purchaser is made and
 Procedure for transfer of shares in the name of the purchaser current procedure
result in excessive paper work, delays in cleaning and settlement, work
duplication, bad delivery, on transference in costs and prices at which customer's
orders are executed have promoted setting up of depositors
Definition:
Dematerialisation of shares: Conversion of securities from physical (paper) form
to electronic form and credited in the investor's (Beneficial Owners) account with his
depository participant. (DP)
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17. Basics of Dematerialisation:
Demat is a process by which physical shares of investors are converted into an equivalent
number of securities in electronic form and are credited in the investors account with his
depository participant (DP).
Demat trading is now compulsory for all investors. Beginning of first week of January
1999, investor can trade in specific scripts in the demat form. They can provide and
receive delivery only in a dematerialized form and share certificates will not be changed
for these scrip’s.
A depository is an organization where securities of shareholder and held in the electronic
form at the request shareholder through depository participants, the system comparable to
that in a bank. If an investor wants services offered by a depository, he would have to
open an account with it through a DDP – similar to opening an account with any other
branches of the bank in order to avail of its services. Dematerialization is a process by
which physical certificates of an investor or taken back by the co. / register and actually
destroyed and equivalent numbers of securities are credited in the depository account of
that investor. A depository participant is investor’s agent in this system he maintains
investor’s securities account and intimates the status of holdings from time to time to the
investors.
Process of Dematerialization
In order to dematerialise his certificates, an investor will have to first open an account
with a depository participant. And then request for the dematerialization of these
certificates by filling up ‘DEMATERIALIZATION REQUEST FORM’ which will be
available with any DP. The ISIN name and number should be mentioned. This is to
ensure that the security mentioned in the demat request form is it has the one client
intended to dematerialised.
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18. Steps:
 An investor has to submit the request form along with the share certificate, which
is to be dematerialised to depository participant.
 The depository participant gives the denial order to NSDL through the system.
 The depository participants submit the share certificates DRF, DRN to the issuer/
RTA.
 NSDL sends the denial request to the issuer/RTA.
 The issuer/RTA sends conformation/rejection statement after checking the
validity.
 NSDL in turn sends the status intimation to the DP.
 The issuer/RTA sends the objection memo to DP.
 DP gives the statement of holding to the client.
This takes about 15 days from the date of request. Electronic holdings can be converted
back into certificated, if so desires, in a similar fashion as that for demat.
These companies are compulsory traded in dematerialised form from January 4th 1999.
1. BANK OF INDIA
2. BPCL
3. BSES
4. HDFC
5. IDBI
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19. 6. ICICI
7. L & T
8. SBI
9. VSNL
10. WIPRO
11. INFOSYS
From February 15th 1999
1. ACC
2. M&M
3. HPCL
4. ABB
5. NET
6. SAIL
7. Madras refineries
8. Tata Tea
9. Asian Paints
10. Castro India
11. Cochin refineries
12. Ranbaxy
13. Gujrat Ambuja cement
14. Hero Honda
15. DR.Reddys lab.
16. Bajaj Auto
17. Birla Global Fin.
18. TVS Suzuki
19. Thermax
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20. From April 15th 1999
1. BHEL
2. HLL
3. IFCL
4. IPCN
5. ITC
6. MTNL
7. P&G
8. Arvind mills
9. Cipla
10. Colgate
11. Eih ltd.
12. GE shipping
13. Glasco India
14. Grasim India
15. HDFC BANK
16. Hindal co.,
17. Indian hotels
18. Indian rayon
19. Nestle
20. Oriental bank
21. Reliance capital
22. Reliance petrol
23. Reliance India
24. Smith line consumers
25. Tata chemicals
26. Tata power
27. Telco
28. Tisco
29. Novartis
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21. Pre – requisities for dematerialisation:
1. Client to have an account with DP.
2. Securities should be one from the eligible list of demat securities issued by the
depository.
3. Securities must be in the name of the account holder and owned by him.
4. Separate demat requisition form (DRF) is required of each ISIN (issuer).
5. Separate DRN is required for lock in and lock free securities.
6. All the joint holders should sign DRF form.
Operational Procedure for Dematerialisation:
The entire process of dematerialization of shares begins with the opening of an account
with a depository participant by an investor. He requests the depository participant by an
investor. He requests the depository participant for dematerialization of shares certificates
by submitting the same along with a demat request form to the depository participant.
The certificates are forwarded to the company/register and share transfer agent who
processes them and who gives an equivalent credit in the investor’s beneficiary account.
21

22. Steps involved:
1.Investor surrenders certificates for dematerialization to depository participant.
2.Depository participant intimated NSDL of the request through the system.
3.Depository participant submits the certificates to the register.
4.Register confirms the dematerialization request for NSDL.
5.After dematerialization, certificate, register updates accounts and informs NSDL of the
completion of demat.
6.NSDL updates its accounts and informs the DP.
7.DP updates its account and informs investor.
ADVANTAGES OF DEMAT:
Transacting the depository way has several advantages over the traditional system of
share certificates:
Trading in demat segment completely eliminates the risk of bad deliveries which in turn
all cost and wastage of time associated with follow up for rectification. This reduction; in
risk associated with bad delivery has lead to reduction in clearing member age to the
extent of 0.5% can be saved in stamp duty.
In case of transfer of electronic shares, 0.5% can be saved in stamp duty.
Cost of delay/courier/neutralization/the need for further follow up with the clearing
member for shares returned for company/s objection, which happens only in case of
physical securities scan, be avoided.
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23. The investor can also avoid the expense of applying for duplicate certificates in case of
loss/mutilation of certificates.
The investor can also receive your bonuses and rights into your depository account as a
direct credit, thus eliminating risk of loss in transit.
One can also expect a lower interest charge for loans taken against demat shares as
compared to the interest for loan against physical shares. This could result in a saving of
about 0.25% to 1.5%.
RBI has increased the limit of loans against dematerialized securities as collateral to
Rs.20lakh per borrower as against Rs.10lakh per borrower in case of loans against
physical securities.
RBI also reduced the minimum margin to 25% for loans against dematerialized securities
as against 50% for loans against physical securities.
1. Facilitation of cash corporate actions such as dividends:
NSDL provides details of beneficial owners as on a given day (the record date) to the
issuer company/registrar so as to enable the company’s registrar and transfer agents
forward the cash benefits to the investor directly.
2. Lending and borrowing of securities:
A client (lender/borrower) having a beneficiary account with the DP can lend or borrow
securities in electronic form through an approved intermediary, who has opened a special
intermediary account with a DP. The creation of lend/borrow instruction will be initiated
by lender/borrower respectively through his DP. The intermediary will instruct its DP to
confirm the instruction. Recall/repay/lend/borrow order can be initiated by the
lender/borrower or by the intermediary and is to be confirmed by the counter party.
3. Off market trades:
Off market trades are those, which are not cleared through CC/CH accordingly, this are
not routed through the CM pool account.
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24. The buyer & seller negotiate the trade with each other. The seller the instruction slip to;
this DP instructing him to debit his account by giving the details of buyer & the buyer
gives his DP to credit his account by giving the details of selling client but the instruction
slip must have execution date.
4. Trading, clearing & settlement of demateralised securities:
Trading of demat securities is currently available at National Stock Exchange (NSE), The
Mumbai Stock Exchange (BSE) and Calcutta Stock Exchange (CSE).
At NSE, Demat securities are traded into separate segments called “AE segment” & “BE
segment” which are in addition to the segment for trading in securities in the physical
form called “LQ segment”.
Incase of AE segment, demat securities are traded only in market lot where as in BE
segment these can be traded in multiples of one share.
At BSE&CSE, dematerialized securities are traded in a separate segment called demat
segment & Physical securities are traded in unified segment.
For trading in physical securities, the sub-brokers collect the trade orders from there
clients and place these orders with the main brokers for execution in the market. The
main broker enters the details of each trade against each sub-brokers in a separate keptfor
each sub-broker. After execution of the trade, the main broker issues the contractor note
in the name of sub-broker who in true issues separate purchase/sale note to his clients.
There are only few cases in which the main broker issues the contract note in the name of
the clients directly.
Trading in demat securities is very similar to trading in physical securities except that
physical segment follows account period settlements & demat segments follow rolling
settlement. In rolling settlement, all trades executed on the particular day will be settled
on next Monday. Trades in demat segment are to be settled separately with securities held
in demat form which can’t be substituted with physical securities. In case electronic
rolling settlement, short deliveries, if any, are auctioned on the 6th working day.
24

25. 5. Opening, Clearing Accounts For Settlement of Trades:
All the trades executed at time exchanges are settled by the Clearing Member (CM), as in
the case of securities in the physical form to settle trades in demat segment each CM
should open one clearing account with any of the DP.
The procedures for owning clearing accounts are:
Approach a DP.
Fill an account opening form.
Sign on agreement with the DP.
DP forwards application to NSDL.
DP opens account & a/c is provided along with CM-BP-ID to the member.
The clearing account consists of 3 parts:
Pool a/c
Delivery a/c
Receipt a/c
Pool account:
It has tow roles to play in clearing of securities.
Before pay in the selling client of the CM transfers securities from his client account to
the CM pool account.
The CM transfers the securities from his pool account of the butting client.
Delivery account:
The CM transfers the securities in, from the pool account to the delivery account before
pay in at that time of pay-in NSDL flushes out the securities in the delivery account and
transfer the same to the CC/CH.
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26. Receipt account:
On payout day, the CCYCH transfers securities to the pool a/c through the receipt
account. CM had to ensure that before book closure or record date of any co. the
securities move from CM pool a/c to a beneficiary AIC as holding in pool a/c for longer
period is not allowed.
Settlement:
In the depository system, any trade that is cleared and settled through the clearing
corporation (CCICH) is called market trade.
Procedure for pay-in of securities:
Give receipt instruction to the DP for transfer securities from client account to the pool a/
c of give a standing instruction for the same.
Delivery to CCICH, instruction for the transfer of securities from pool a/c to delivery a/c
for pay-in.
Procedure For Payout Of Securities
Transfer of securities from CCICH to pool a/c through receipt in account on payout.
Delivery instruction to transfer from pool a/c to client a/c on payout.
26

27. Clearing flow chart to effect and settlement of market:
SEND RECEIPT INSTURCTION FOR
TRANSFERFROM CLIENT A/C TO POOL A/C
GIVE DELIVERY INSTRUCTION TO YOUR DP ANYTIME BEFORE
FOR TRANSFER FROM POOL A/C TO CC
ANY TIME BEFORE
ON PAY OUT YOU WILL RECEIVE SECURITIES
OR AFTER
FROM CC TO YOUR POOL A/C
GIVE DELIVERY INSTRUCTION FOR TR. OF
SECURITIES FROM POOL A/C TO CLIENTS A/C
6. Inter-Depository Transfers
Transfer of securities from one account in one depository to an account in other
depository is termed as an inter-depository transfer. This facility is quite, similar to the
account transefers within NSDL. It can be done only for securities that are available for
dematerialization on both the depositories.
The account in NSDL can be either a clearing account or a beneficiary account. For
debating the clearing account or the beneficial account with NSDL, the form for “inter-
depository delivery instructions” is required to be submitted by the clearing
member/beneficial owner to its DP.
For creating the clearing account or the beneficial account, the standing instructions
given for automatically crediting the account is applicable. In case the standing
27

28. instructions are not given, then the form for inter-depository Receipt instruction” is
required to be submitted by the clearing member/beneficial owner to its DP.
As both the depositories are connected to each other, they matched to effect inter-
depository transfers are presently exchanged twice on each working day. Both the
depositories inform the issuer/registrar & Transfer Agent about the transfer and it amends
its records accordingly. Government securities cannot be transfered from one depository
to another using this facility.
Comparative structure
Compulsory demat trading applies to only stockexchanges linked to NSDL since only
then can offer trading and settlement in shares. The fundamental difference between
settlement of trading in physical shares and in demat shares, is the shares and the time
taken to acquire it. When physical shares were bought from a broker, the payments had to
be made first then on the settlement day the broker gives the share certificates attached
with transfer deeds. At this juncture the shares don’t legally belong to the buyer even
though he had paid towards the share for transfer deeds.the share certificates are sent to
R&T agent/issuer by registered post or courier. It normally takes any where between one
to three months and sometimes more than six months where after long wait there is a
good chance that the shares come back rejected, not transferred due to the reasons such as
seller’s signature difference. If they are fake or forged, the broker has to lodge a police
compliant and follow up the issue. The buyer is entitled to receive another lot of shares
from the broker in 21 days, the system stands abused.
In dealing with demat shares one doesn’t need to worry about the legal title at the time of
buying since the depositories carries out account transfers electronically. The buyer also
gets the good title in his name on the same day the exchange effects the settlement. On
most exchanges 1-2 days. In demat if the signature, on the “Delivery Instruction
Slip”(DIS) that is to be submitted at time of sale, varies from the DP’S records then the
Dp will inform promptly about the mismatch to the buyer. The instruction will not
28

29. proceed before the mismatch is rectified. Trading in demat shares doesn’t increase the
number of entities the buyer has to deal as in physical shares.
7. Rematerialisation of shares
Rematerialization is the term used for converting electronic holding back
into physical certified. The D.P will forward the investor's request to NSDL after
verifying that the investors have the necessary balance. NSDL in turn will intimate the
register that will print the certified who will print the certified and dispatch the sale to
investors. In this process NSDL does not directly handle certificates.
STEPS INVOLED IN REMATERIALIZATION:
1.Beneficial owner requests for rematerialization
2.DP intimate NSDL of the request through system
3.NSDL confirms rematerialization request to the registers
4.Registers up date accounts and downloaded details to D.P
5.Register dispatches certificates to investor.
The investor has the potion of rematerialization his total holding or part of it. In addition
to this he has the option to get the certificates in market lot or jumbo lot. In view of the
beneficially owner can rematerialize their securities even if it is an odd lot.
29

30. Drawbacks of Dematerialisation
Most of the investors are apprehensive and cautious about Depository system. Inspite of
having several benefits it has some drawbacks.
 Most of the DP’S do not have the necessary infrastructure to handle the high
workload of tranctions.
 Banks do not provide over draft facilities for physical shares, for scrips it has
been brought under demat shares.
 Small investors really trade the scrips and the custody fee if very probhiting the
investors thus feel demat form uneconomical.
 Volume of paper works, even though small, but it is very complicated.
 Asof now liquidity is one of the major problems faced and also the investors are
apprehensive of the accountability.
 If the personnel are inefficient in the system there may arise insurmountable
problems
 The accounts of small investors remain in category of dormant accounts, which
they feel are likely to be misused by DP’S.
30

31. CHAPTER V
FUNCTIONS OF DEPOSITORY PARTICIPANTS
In the NSDL systems the depository services investors through market intermediaries
called as depository participants (DP) who as per SEBI regulations could be
organizations involved in the business of providing financial services like bank, brokers,
custodians and financial institutions. This system of using the existing distribution
channel helps the depository to reach a wide cross section of investor spread across a
large geographical area at minimum cost.
The admissions of DP’s involve a detailed evaluation by NSDL of their capability to
meet with the strict service standards of NSDL and a further evaluation and approval by
SEBI.
Realizing the potential in this market, all the custodial in India and a number of banks,
Financial institutions and major brokers have already joined as DP’s and they are
providing service in a number of cities. Many more organizations are in various ages of
establishing connectivity into
1. Initial capital cost.
2. Annual revenue cost
Initial capital cost: To be incurred by a DP can be sub-divided into
a) Infrastructure cost:
 Office space required for conducting depository operations. The space should be
enough to allow for server, one router and two nodes and provide easy movement
to at least one operator. Additional space required will vary amongst participants
and will depend on the volume of trades. Most categories of participants being
large institutions already having a network of offices/branches, the space cost
will be notional.
31

32.  Hardware, software and telecommunications cost is more or less mandatory.
They are required to use DPM application software.
b) Security deposit and initial fee:
The following security deposits and fee should be paid by demand draft or a banker’s
cheque. Participants payable are
Application fee to SEBI Rs.5000, registration fee to SEBI Rs.100000 Entry fee to
Rs.25000
Security deposit (refundable) to NSDL Rs.1000000 Total is 1130000.
Thus the total cash outlay to be incurred by a participant is Rs.24.25 lakhs (approx)
Annual revenue cost: The annual revenue cost can be subdivided into
a) Fee and deposits payable to SEBI
Annual fee: Each DP must pay an annual fee Rs.1000 to SEBI as per the details given in
the second schedule of the SEBI regulations.
b) Fee payable to NSDL:
Annual fee: Each participant must pay fee on yearly basis from October 1 to September
30 and is payable before October 31 of the following year.
Transction fee: Each DP must pay the following transaction related fee.
1) Nature of transction fee markets trade 0.05% of the market values for net receipt to
clearing member.
32

33. 2) In respect of debt instruments and government securities, no settlement fee is charged
till March 31 1999.
 Custodial fee: A custody fee at the rate of 0.02 %( 2 basis points per annum on the
average value of securities held by the participant in the dematerialized form is
charged and collected quarterly on the basis of average during the quarter. In the
case of debt instruments and govt.securities held by the participants in demat form
is charged.
 Fee for dematerialisation and rematerialisation NSDL does not charge any fee for
dematerialization requests. However, in case of rematerialisation, a fee of Rs.10
per certificate or 0.10% of the value of securities, which ever is higher will be
charged.
Opening a Demat account:
Opening a demat account is as simple as opening a bank account. You can open a demat
account with any DP convenient to you.
To open an account:
Fill up the account opening form, which is available with the DP.
Sign the DP-client agreement, which defines the rights and duties of the DP and the
person willing to open the account.
Receive client account number
This client id along with DP id gives a unique identification in the depository system.
33

34. There is no restriction on the number of demat accounts any one can open. However, if
any physical shares are in joint names, then they should open the demat account in the
same order of names before submitting their share certificates for dematerialisation.
To dematerialise share certificate:
Fill up a dematerialization request form, which is available, the DP
Submit share certificates along with the form (be sure to write “surrendered for demat”
on the face of the certificate before submitting)
Receive credit for the dematerialized shares in 15 days
Eligibility for DP’s:
As per SEBI (depositories and participants) regulations, 1996.the following categories is
eligible to become DP’s
 Public financial institutions as defined in section 4A of the Companies Act, 1956.
 Bank included in the second schedule of the RBI Act,1934.
 RBI approved foreign banks in India.
 State financial corporations established under section 3 of SFC Act, 1951.
 Institutions engaged in providing financial services, promoted by any of the
institutions mentioned above either jointly or severally.
 Custodian of securities who has been granted certificate of registration u/s of
SEBI Act, 1992
 Clearing corporation or clearing house of stock exchanges.
 Stock brokers who has been granted certificate of registration u/s 12(1) of the
SEBI Act, provided that:
a) They have a minimum net worth of Rs. 50 lakhs.
34

35. b) The aggregate value of the portfolio of securities held in demateralised
form in a depository through each stock broker should not be more than 25
times his net worth.
 Non-banking finance company provided that:
a) They have a minimum net worth of Rs. 50 lakhs, if they wish to act as
DP only on behalf of themselves and not on behalf of any other person.
b) They have a minimum net worth of Rs. 50 crore in addition to the net
worth specified by any other authority, if they wish to act as DP on behalf
of any other person.
The regulations empower NSDL to set its own selection criteria in the bye-laws. Thus,
the applications must also comply with the following admission criteria stated in the bye-
laws.
 The applicant should have a minimum net worth of Rs.1 crore.
 The applicant should not have been convicted in the five years immediately
preceding the filling of the application in any manner involving misappropriation
of funds and securities, theft, embezzlement of funds, fraudulent conversion of
forgery.
 The applicant should not have been expelled, barred or suspended by SEBI, self –
regulatory organization or any stock exchange.
Legality for DPs
The Depositories Act, SEBI (depositories and participants) regulations, byelaws and
business rules of NSDL, form the regulatory framework for the functioning of NSDL.
As per the legal framework, the investor has the option to hold the securities
either in physical or dematerialized securities and shift the market from physical to
dematerialized form.
35

36. In the first such initiative, SEBI announced a regulation that required institutional
investors to compulsorily deliver only in dematerialized form, with respect to a select list
of securities, (which is being expanded in a phased manner).
In addition to the SEBI announced that from January 4, 1999, all categories of
investors can deliver only in demat form with respect to a select list of securities (which
is being expanded in a phased manner).
As an addition all measure to enhance the liquidity of the demat segment, SEBI
declared that, with effect from 6th April 1998, demat share could he delivered against
delivery obligations in the physical segments of the stock exchanges that facilitate trading
in demat securities. However, physical securities cannot be delivered against delivery
obligations to the demat segments of the stock exchanges. Thus demat shares are more
liquid than the physical shares.
36

37. Dps Services
NSDL provides the following services through its network of DPs.
Dematerialization
Dematerialization is a process by which a client can get physical certificates converted in
to electronic balances maintained in its account with the DP.
Settlement of Off Market Trades
Trades, which are settled through the CC/CH of an exchange, are classified as "Market
Trades".
Settlement of Off Market Trades
Trades, which are not settled through the CCCH of an exchange, are classified as "Off
Market Trades".
Pledging / Hypothecation of Dematerialised Securities
NSDL provides beneficial owners with the facility to pledge / hypothecate
securities held in electronic form. Receipt of allotment in the electronic form in public
offerings of companies.
Incase an investor prefers the electronic mode; he has to mention his account
number and name of his participant so that the allotted securities are credited into his
account. Receipt of non-cash corporate benefits such as bonus, rights in electronic form.
If the investor chooses to receive bonus, rights in the electronic form, he can get a direct
credit DP his account, thereby avoiding the risk of loss of certificates in transit.
37

38. Modus of holding and dealing in shares and securities in depository system:
The depository Act, 1996 enables holding, trading and transfer of securities
through book entries. As on date, the transfer of securities takes place in the following
manner:
•The seller and buyer of securities place order with the brokers for sale / purchase of
securities at a particular price.
•The brokers in the screen based trading system (e.g. the Bombay stock exchange- online
trading) enter the sale and purchase bids. As and when bids match, the transaction takes
place.
•Before the pay-in day the seller of the securities is required to lodge the certificates in
respect of securities sold by him along with a transfer deed duly signed by him as
transferor, with his broker and the buyer is required to pay the relevant amount in respect
of securities purchased by him to his broker.
•The brokers have to lodge the relevant securities / amounts with the clearinghouse / bank
of the stock exchange for the purpose of clearing. After the clearing, on the pay-out day,
the selling broker will get the relevant securities, which they would in turn deliver to their
respective clients.
•The company receiving such transfer requests would check the transfer forms and share
certificates and thereafter transfer the securities and return the certificates to the
transferee duly endorsed.
38

39. The Difficulties Faced by Transferees in the Aforesaid System Include
The securities are normally not transferred and delivered in time by the
companies. As per the listing agreement with the stock exchanges, the certificates in
respect of securities sent to the company for transfer ought to be transferred and
dispatched within 30 days of receipt by the company.
The securities purchased can be stolen property, in which event the transferee
could be subjected to police esquires.
•The transferee may lose the bank transfer forms along with the certificates, in which
case it very difficult for him to get a duplicates certificate issued in the favor of the
original transferor and transferred in his favor. He would, in such case required to lodge a
FIR, procure an injunction order form the court and execute a host of other documents.
•The transfer could be rejected on various technical grounds like mismatch of signatures,
transfer form being mutilated, transfer from not being duly executed, stamp duty not
being adequately affixed etc.
•The transfers which are for technical reasons are to be returned by the transferee to his
broker from whom he had purchased the securities, within a stipulated time, in which
even the relevant buying broker would replace the securities along with the transfer
forms. This process could lake as along as two months. In case, the rejected transfer
deeds are not returned to the buying broker in the stipulated time, the replacement of
securities could take substantial time, which would extend up to any year.
•During the course of securities being replaced by the buying broker in respect of rejected
transfer deeds, the company may declare some benefits to its registers shareholders like
dividend, bonus shares, rights shares etc., and the transferee may either lose such benefits
or would have to take substantial pains and to get the benefits from the actual
owner/buying broker.
39

40. The following are the steps that explain the flow of securities to effect settlement of
market trade.
Step 1: Seller gives the delivery instruction to DPI to debit his account and transfer
securities to "Clearing Member 1 Pool a/c" with DPI. (Clearing Member 1 gives
corresponding receipt instruction to DPI to accept in his clearing account securities
transferred by seller through DP 1 if he has not already given standing receipt instruction
for all credits into his clearing a/c.)
Step 2: Securities are transferred from "Selling Client a/c" to "Clearing Member 1 Pool
a/c " with DPI.
Step 3: Clearing Member gives delivery to CC instruction to debit his “Clearing
Member Pool a / c” and credit his “Clearing Member delivery a / c”. The transferee will
take place on the "execution date" mentioned in the instruction. Delivery instruction
should be given as per final or net delivery obligation. Delivery to CC instruction can be
reversible or irreversible. Reversible instructions can be cancelled at the discretion of the
CM.
Step 4: Securities lie in the “Clearing Member Delivery a / c” till settlement day. On
settlement day (5th working day from trade day), securities lying in “Clearing Member
Delivery a / c” are automatically flushed to the CC/CH. No debit instruction is needed for
this transfer. The deadline time for paying of securities for CC/CH may vary from
exchange to another.
Note: If excess securities are transferred to "Delivery a / c", the old
Instruction can be cancelled and replaced buy a new one before NSDL.
40

41. Deadline, provided the instruction was marked as reversible. If excess delivery is made to
CC/CH, the excess will automatically get credited to "Clearing Member Pool a/c" on pay-
out.
Step 5: On settlement day 95th working day from trade day), securities are transferred
from CC/CH to "Clearing Member 2 Receipt a / c" with DP2. No credit instruction is
needed because this transfer is automatic.
Step 6: Securities are transferred from "Clearing Member /Receipt a / c" to "Clearing
Member 2 Pool a / c" receipt amount of clearing member is purely a transit accounts for
maintaining audit trial.
Step 7: Clearing Member 2 gives a delivery instruction to DP2 debit his "Clearing
Member 2 Pool a / c" and credit "Buying Client a / c" with DP2 (Buyer gives
corresponding receipt instruction to DP2 to accept that in his account securities
transferred from "Clearing Member to Pool a / c" through DP2 unless he has not given a
standard instruction to receive credits to his account.).
Note: Funds are not handled by NSDL. Clearing Member 2 obtains one cheque from
buyer and gives it to the CC/CH. Only after the clearing banks clear the cheque, the
CC/CH allows credit of securities to Clearing Member 2 and thereafter, communicates
the match to NSDL.
Step 8: securities are transferred to "Buying Client a / c" from "Clearing Member2 Pool
a / c" with DP2.
Note: Until delivery instruction is given by the clearing Member the securities will
remain in his "Pool a / c". However, if they are not transferred to a "Beneficial Owner a /
c"' the securities will not be eligible to any corporate benefits like bonus, dividends etc.
Procedure in case of Market Transfers for institutional trades:
Institutional trades can be settled the same a manner in which other trades is settled in the
market. However as per the market practices these are settled in the two modes explained
below.
41

42. Direct Custodial Settlement (DCS)
In this case, the trading member (broker) at the time of entering, the trade, will
notify through the trading terminal that his trade would be settled by the custodian if the
institution on whose behalf he has effected the trade. For this purpose all the custodians
are the members of the clearing custodian (CC) or clearing house (CH). Once the
custodian confirms this, the CC/CH would download the trade obligation statements to
the clearing custodian. Based on would have no role to play in this.
In a DCS trade, since the custodian of the trading institution acts as a clearing
member to settle the trade, the custodian will open a clearing account with its own DP
outfit. The custodian of the institution also acts as its DP (all custodian providing services
to local and foreign institutional investors have joined NSDL as DPs).
In this case, clearing membera1 and clearing member2 have accounts with their
own DP outfit i.e., DP1 and DP2 respectively (who are also their custodians)
Step 1: DP1 (who is also the custodian and clearing member of the institutional seller)
debits the institutional seller's account and credits his "own Clearing Member Pool a / c".
Step 2: DPI debits "own Clearing Member Pool a / c" and credits "own Clearing
Memberl Delivery a / c".
Step 3: Securities lie in the "own Clearing Member1 Delivery a / c" till settlement day.
On settlement day 9 5th working day from trade day), securities lying in "own Clearing
Member1 Delivery a / c are automatically flushed to the CC/CH. The deadline time for
pay-in of securities to the CC/CH may vary from one exchange to another.
42

43. Step 4: On settlement day (5th working day from trade day) securities are transferred
from the CC/CH to "own Clearing Member 2 Receipt a / c" with DP2 is also the clearing
member and custodian of institutional buyer.
Step 5: Securities are transferred from "own Clearing Member2 receipt a/c to "own
Clearing Member2 Pool a / c". Receipt account of clearing members is purely a transit
account for maintaining audit trail. Thereafter, DP2 debits "own Clearing Member2 pool
a /c" and credits the institutional buyer's account.'
(Note: Founds is not handled by NSDL. Clearing Member2 (who is also the custodian for
institutional buyer) gives cheque directly to CC/CH. only after the cheque is being
cleared by the bank, the CC/CH.I allows credit of securities to clearing member2 and
thereafter, communication of the match to NSDL.)
Delivery Vs Payment (Dvp)
In this case the trading member 9broker) settles the trade with CC/CH as the clearing
member and settles the same with the custodian of the DVP mode. This means for a
•Sale transaction the trading member would effect the payment of funds to the custodian
of the selling institution and take delivery of securities before the pay-in and uses the
same to settle with the CC/CH.
•Buy transaction, the trading member would deliver his own funds to the CC/CH 1 at the
time of pay-in and takes delivery of securities from the CC/CH at the time of pay-out.
These securities are in turn delivered to the custodian of the buying and then are received
from them.
This means, due to the online transfer possible in NSDL environment, the
duration of funding by trading member would be much lower for dematerialized
securities.
In a DVP trade, the trading member (broker) settles the trade with the CC/CH as a
trading member and s settles the same with the custodian of the institution in DVP mode.
The custodian of the institution, in context of NSDL is also the DP as all custodians
providing services to local and foreign institutional
43

44. investors have joined NSDL as DP. In this case, the selling institution and clearing
member 1 (who is also the trading member of the selling institution) have their respective
account with DPI. The buying institution and clearing member (who is also the trading
member of the buying institution) have their respective account with DP2, DPI, DP2 and
the CC/CH have online electronic consecutively with NSDL.
The Following Explains the Flow of Securities to Effect Settlement of a Dvp Trade.
Step 1: Securities are transferred from "selling institution i/e" to "Clearing Member 1
Pool a / c" with DPI, on clearing memberl giving receipt instruction to DPI. If the
clearing memberl has already given standing receipt instruction to receive all credits to
his clearing a/c, he need not give a separate receipt instruction. The custodian of selling
institution gives a corresponding delivery instruction to its own DP outfit to i.e. DPI in
the diagram. Note: Custodian of the selling institution releases securities to "Clearing
Member1 Pool a / c" only after receipt of pay order from clearing member1.
Step 2: Clearing Member1 gives delivery to CC/CH instruction to DPI to debit his "own
Clearing Member1 Pool a/c" and credit his "Clearing Member1 delivery a / c". The
transfer will take place on the "Execution Date" mentioned in the instruction. Delivery
to CC instruction can be reversible or irreversible.
Step 3: Securities lie in the "own Clearing Member Delivery a / c" till settlement day. On
settlement day (5th working day from trade day), securities lying in "Clearing Member1
Delivery a / c" are automatically flushed to the CC/CH. No debit instruction is needed for
this transfer. The deadline time for pay-in of securities to CC/CH may vary from one
exchange to another.
Note: If excess securities are transferred to "Delivery a / c", the old instruction can be
cancelled and replaced by a new one before NSDL, deadline, provided the instruction
was marked as reversible. If excess delivery is made to the CC/CH, excess will
automatically get credited to "Clearing Member Pool a / c" on pay-out.
44

45. Step 4: On settlement day (5 working day from trade day) securities are transferred from
CC/CH to "Clearing Member2 Receipt a / c" with DP2. No credit instruction is needed
because this transfer is automatic.
Step 5: Securities are transferred from "Clearing Member2 Receipt a / c" to "Clearing
Member Pool A / c" Receipt a / c of clearing member is purely a transit account for
maintaining audit trial.
Step 6: Clearing Member 2 gives a delivery instruction to DP2 to debit his "Pool a / c"
and credit "Buying Instruction a / c" with DP2. Custodian of buying institution gives
corresponding receipt instruction to its own DP outfit i.e. DP2 in diagram to accept in
buying institutions account securities transferred from "Clearing Member 2 Pool a / c"
through DP2.
Step 7: Securities are transferred to "Buying Client a / c" from "Clearing Member 2 Pool
a / c" with DP2.
(Note: Funds are not handled by NSDL. Clearing Member2 gives a cheque directly to the
CC/CH. Only after the cheque is cleared by clearing bank, the CC/CH allows credit of
securities to clearing member 2 and thereafter, communicates the match to NSDL)
Precautions:
•For a transfer of securities to be effected from one account to another, details mentioned
in the "delivery" and "receipt" instruction need to be especially careful with respect to the
"Execution date" mentioned in two forms. The transfer would be rejected if there were a
mismatch in this regard even if all other details in the two forms match.
•Investors need to be careful with respect to pay-in deadline. They need to take care of
not only the NSDL deadline but also the deadline put forth by their DP.
45

46. Off Market Transfers:
Trading in dematerialized securities is quite similar to trading in physical securities. The
major difference is that at the time of settlement, instead of delivery / receipt of securities
in the physical form, the same is affected through account transfers.
Features:
Trades, which are not settled through the CC/CH of an exchange, are classified as
"Off Market Trades". Negotiated trades and trade-for-trades, which are not cleared and
settled through the CC/CH, by this definition, are off-market trades. The selling client
will have to give a delivery instruction to his DP to transfer securities from his depository
account to the buying client's depository account.
To receive securities from the selling client's depository account, the buying client
must give a receipt instruction if he has not already given standing receipt instruction to
his DP. The details in the "delivery" and "receipt" instructions must match else the
transfer will not take place. The transfer will take place on the "execution date" indicated
in the instructions. If the buying client has given a standing receipt instruction, this may
be ignored. The payment aspect is handled outside the NSDL environment between the
selling and buying clients. The procedure in this case is similar to an off-market transfer
involving two clients.
However, the procedure involves the three distinct off-; market transfers. Off
market transfer number, delivering party, receiving part.
1. Selling institution depository account negotiating selling broker beneficial account.
2. Negotiating selling broker beneficial a/c negotiating buying broker beneficiary a/c
3. Negotiating buying broker beneficial account buying institution depository account.
Precautions:
For transfer of securities to be effected from one account to another, details
mentioned in the "delivery" and "receipt" instructions need to match. Investors need to be
especially carefully with respect to the "Execution date" mentioned in the two forms. The
transfer would be rejected if there is a mismatch in this regard even if all other details in'
46

47. the two forms match. Incase buyer has already given a standing receipt instruction to DP,
this may be ignored.
47

48. CHAPTER VI
NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL)
The automated trading brought with it several associated benefits such as
transparency in trading and equal opportunity for the market players all over the country,
the problems related to settlement of trades such as high instances of bad delivery and
delay in transfer of ownership have continued. As answer to the myriad settlement
problem NSDL was inaugurated in November 1996, as the first depository in the country.
In depository system, securities are held in securities (depository) accounts, which is
more or less similar to holding funds in bank accounts. Transfer of ownership is done
through simple account transfer. This method does away with the entire risks and
depository environment is considerably lower as compared to transaction in physical
certificates.
Trading in dematerialized securities is quite similar to trading in physical
securities. The major difference is that at the time of settlement, instead of delivery /
receipt of securities in the physical form, the same is effected through account transfer.
Currently dematerialized trading is available at NSE, BSE, and CSE. Consequently there
will be separate price quotes available for each script in both segments. The trades in
each of these segments cannot be netted off with each other.
Exclusive demats segment follows rolling settlement (T+5) cycle and
the unified (erstwhile-physical) segment follows account period settlement cycle. All
investors, other than the institutional investors, can deliver securities either in the
physical or dematerialized form in the market. However, initially this was applicable only
at those exchanges, which have joined the depositor, but SEBI has also specified that this
list is to be expanded in a phased manner. The settlement of trades in the stock exchanges
is undertaken by the clearing corporation (CC)/ clearing House (CH) of the
corresponding stock exchanges. While settlement of dematerialized securities are effected
through NSDL; the funds settlement is effected through the clearing banks. The
physical securities are settled by the clearing members directly with the CC / CH.
48

49. Promoters/Shareholders
NSDL is promoted by Industrial Development Bank of India (IDBI) – the largest
development bank of India, Unit Trust of India (UTI) - the largest mutual fund in India
and National Stock Exchange (NSE) - the largest stock exchange in India. Some of the
prominent banks in the country have taken a stake in NSDL.
Promoters:
Industrial Development Bank of India
Unit Trust of India National Stock Exchange
Other shareholders:
State Bank of India
Global Trust Bank Limited
Citibank NA
Standard Bank Limited
The Honking and Shanghai Banking Corporation Limited
Deutsche Bank Dena Bank
Canara Bank
49

50. MILESTONES OF DEPOSITORY SYSTEM:
Sep-1995 Drafting of the depository ordinance
Dec-1995 NSDL incorporation
May-1996 SEBI Regulations
Aug-1996 Enactment of the Depositories Act
Nov-1996 Inauguration of NSDL; commencement of Dematerialization
Dec-1996 Commencement of trading in dematerialized shares on NSE
Jun-1997 Total value of demat securities at NSDL crosses US $ 1bn
Dec-1997 Commencement of trading in dematerialized shares on BSE
Jan-1998 Compulsory demat trading for institutional investors commences
Mar-1998 Total value of demat securities at NSDL crosses US $ 5bn
Apr-1998 Demat shares treated as good delivery in physical segments of NSE and
Jun-1998 Commencement of trading in dematerialized shares on CSE
Sep-1998 Commencement of trading in dematerialized shares on DSE
Nov-1998 Investor account cross 100,00
Dec-1998 Commencement of dematerialization of Government Securities.
Jan-1999 Compulsory demat trading for retail investors commences
May-1999 NSDL launches the NSDL - Depository operations module
Oct-1999 Investor accounts cross one million mark
Feb-2000 NSDL launches internet based service - SPEED for clearing Members.
May-2000 Investor accounts cross 2.5 million
Jun-2000 Commencement of dematerialization of Debt instruments.
Jun-2000 98% settlement in demat form
Jul-2001 Introduction of T+5 Rolling Settlement & Uniform Settlement Cycle
Apr-2002 Introduction of T+3 Rolling Settlement
Nov-2002 Launch of STEADY - an STP initiative by NSDL
Dec-2002 Investor accounts cross 5 million
Apr-2003 Introduction of T+2 Rolling Settlement
Legal Framework
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51. As a part of its on-going market reforms, the Government of India (SEBI) notified
its September 1995. Based on this ordinance, securities and Exchange Board of India
(SEBI) notified its Depositories and Participants Regulations in May 1996 in order to
provide the regulatory framework for depositories. The enactment of the depositories Act
the following August paved the way for the launch of National Securities Depository Ltd.
(NSDL) in November 1996.
In exercise of the rights conferred by the Depositories Act, NSDL framed its
ByeLaws and Business Rules. The bylaws are approved by SEBI. While the bylaws
define the scope of the functioning of NSDL and its business partners; the Business Rules
outline the operational procedures to be followed by NSDL its business partners.
Depository System - Business Partners
NSDL carries out its activities through various functionaries called business
partners who include Depository Participants (DPs), issuing companies and their
Registrars and Shares Transfer Agents, Clearing Corporations / Clearing House of Stock
Exchanges.
NSDL is electronically linked to each of these business partners via a satellite link
through very Small Aperture Terminals (VASTs) or through leased landlines. The entire
integrated system (included the electronic links and the software at NSDL and each
business partner's end) is called the "NEST" (National Electronic Settlement & Transfer)
system.
Depository Participant (DP): the investor obtains Depository Services through a
depository participant of NSDL. A DP can be a bank, financial institution, a custodian, a
broker, or any entity eligible as per SEBI (Depository
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52. Participants) Regulations, 1996. The SEBI regulations and NSDL bye laws also lay down
the criteria for any of these categories to become a DP.
Just as one opens a bank account in order to avail of the services of. a bank, an
investor opens a depository account with a depository participant in order to avail of
depository facilities. Though NSDL commenced operations with just three DPI,
Depositor's Participants services are now available in most of the major cities and towns
across the country.
Issuing companies / their Registrar & Transfer Agents: Securities issuers who
have entered into an agreement with NSDL are admitted into the NSDL depository. As
per this agreement, issuer agrees to verify the certificates submitted for dematerialization
before they are dematerialized and to maintain electronic connectivity with NSDL.
Electronic connectivity facilitates dematerialisation, rematerialisation, daily
reconciliation and corporate actions.
NSDL is electronically linked to each issuer company or its R&T agent. This
facilitates dematerialization, rematerialisation and corporate actions.
Clearing corporation / House: the clearing corporations / Houses of stock
Exchanges also have to be electronically linked to the depository in order to facilitate the
settlement of the trades done on the stock exchanges for dematerialized shares. At
present, all the major clearing corporations/ houses of stock exchanges are electronically
connected to NSDL.
Joining NSDL as DP
Joining NSDL as Issuer
Joining NSDL as Registrar and Share Transfer Agent
Joining NSDLasCC/CH
52

53. Charges
NSDL provides depository services to investors and clearing members through
market intermediaries called Depository Participants (DPs). NSDL does not charge the
investors and clearing members directly but charges its DPs, who are free to have their
own charge structure for their clients. NSDL charges to DPs are standard across DPs.
NSDL charges to its DPs are as follows:
Annual Fees:
Average market value of dematerialized securities held with
Participant Annual Fee (Rs.) up to 200 crores 1,00,000.
Between200 crores and 500 crores 2,50,00.
More that 500 crores 5,00,000
Fees for Account Opening: nil
Transaction Related fees:
Nature of Transaction Fee
Market trade 0.02% of the market value of the securities (other Than debt
instruments and commercial papers) debited to the Accounts(s) of its Client(s).
0.002% of the market value of the securities received from the Clearing
Corporation into the Receipt-in Account of each Clearing Member maintained with the
participant subject to a minimum of Rs.1000/- and a maximum of Rs.20, 000/- per
quarter per CM account. Off- market trade 0.02% of the market value of the securities
(other than debt instruments and commercial papers) Debited to the account(s) of its
Client(s).
Inter-settlement 0.02% of the market value of the securities for transfer from one
settlement to another in CM pool account. No settlement fee will be payable for inter-
settlement transfer of securities effected in the additional CM Accounts maintained for
the purpose of Vyaj Badla or ALBM transactions.
Pool To Pool 0.02% of the market value of the securities to the participant of the
delivering Clearing Member. Pledge On creation or closure of pledge, a fee at the rate of
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54. 0.01% of the value of the securities pledged/ hypothecated shall be charged to the
participant of the pledges. On invocation of pledge, a fee at the rate of 0.02% of the value
of the securities credited to the account(s) of its Client(s) shall he charged to the
participant of the pledge. Lending & Borrowing:
Securities lent by intermediary to borrower 0.02% of market value For credit to
borrowers account for transaction up to 3 months: Additional 0.02% for transactions
beyond 3 months.
Transaction related Fees for Debt Instruments:
Commercial paper: Nil
Other Debt Instruments: 0.01% on the value of debt securities debited and credited
subject to maximum of Rs. 100 for each different security.
No settlement fee shall be charged in the following cases:
a) In the case of transfers necessitated by transmission.
b) in the case of transfers of the account of the Client from one participant to another as a
consequence of the expulsion or suspension of such participant;
c) When the client closes its account with a participant and transfers the entire balance in
its account to its account maintained with another participant.
Custody fees:
Each participant shall pay custody fee at the rate of 0.01% (1 basis points) per
annum on the average value of securities held by the participant in dematerialized form.
This fee wills I is collected quarterly on the basis of average holding during the quarter.
Provided however that, the custody fee payable by a Participant will be subject to an
annual Overall ceiling as given below:
Average market value of dematerialized securities with the participant during the
quarter annual overall ceiling (to be recovered quarterly)
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55. Up to Rs.200crore Rs.25, 000
More than Rs.200crore and upto Rs.2000 crore Rs.1, 25,000
More than Rs.2000crore Rs.4, 00,000
While calculating the custody value paid a one-time custody fee not be included.
In case of debt instruments and Government Securities, each Participant shall pay
custody fee at the rate of 0.005% (0.5 basis point) per annum on the average value of the
securities held by the participant in dematerialized form subject to the overall ceiling as
given above. Fees For Dematerialization and Rematerialization:
NSDL does not charge any fees for Dematerialization requests. However, in case
of Rematerialization, a fee of Rs.107-per certificate or 0.02% of the value of securities,
whichever is higher will be charged.
Related Links
The Indian capital market has witnessed and unprecedented growth in the past few
years, facilitated by modernization of the trading systems. Automation of the trading
infrastructure in 1994 has given us a trading system comparable with the best in the
world. The establishment of a settlement guarantees scheme has removed counterpart risk
in trading.
Though the advent of automated trading brought with it several associated
benefits such as transference in trading and equal opportunity for market players all over
the country, the problems related to settlement of trades such as high instances of bad
deliveries and delay in transfer of ownership have continued. As an answer to the myriad
settlement problems National Securities Depository Ltd. (NSDL) was inaugurated in
November 1996 as the first depository in the country.
In a depository system, securities are held in securities (depository) accounts,
which is more or less similar to holding funds in ban accounts. Transfer of ownership of
securities is done through simple account transfers.
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56. This method does away with all the risks and hassles normally associated
with paperwork. Consequently, the cost of transacting in a depository environment is
considerably lower,as compared to transacting in certificates.
Basic Services
Under the provisions of the Depositories Act, NSDL provides various services to
investors and oilier participants in the capital market like, Clearing members, stock
exchange, banks and issuers of securities. These include basis facilities like account
maintains, dematerialization materialization, settlement, of trades through market
transfers, off market transfers & inter-depository transfers, distribution of non-cash
corporate actions and nomination transmission.
The depository system, which links the issuers, depository participants (DPs),
NSDL and Clearing Corporation / clearing house of stock exchanges, facilitates
holding of securities in dematerialized form and effects transfers by means of
account transfers. This system which facilitates scrip less trading offers various direct
and benefits to the market participants.
Accounts Maintenance
To avail of the various services offered by NSDL an investor / a broker/ an approved,
intermediary (for lending & borrowing) has to open a NSDL Depository' account
Depository accounts are of three types Beneficiary Account. An investor or a broker who
wants to hold shares in Dematerialized (demat) form and undertake scrip less trading
must have a depository account called beneficiary account with a DP of his choice.
Clearing member account Member brokers of those stock exchanges which have
established electronic consecutively with NSDL need to open a clearing member account,
with a DP of his choice, to clear and settle trades in the demat form.
This account is meant only to transfer shares to and receive shares from the clearing
corporation / house and hence, the member broker does not have any ownership
(beneficiary) rights over the shares held in such an account. Further, clearing members of
stock exchanges permitting Vyaj Bandla and ALBM transaction can request for a
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57. "clearing member Vyaj Badia" Account to participate in Vyaj Badia transactions and
"clearing member ALBM" account to participate in ALBM transactions. These additional
CM accounts maintained for the purpose of Vyaj Badia or ALBM transactions will have
to be necessarily opened with the clearinghouse of the concerned stock exchange e.g. a
BSE clearing member's "normal Clearing member account" could be with a DP XYZ, but
his "clearing Member Vyaj Badia" account will have to necessarily be with the clearing
House of the concerned stock exchange.
Intermediary account: Any person desiring to act as approved . intermediary" for
stock lending and borrowing needs to open an intermediary account with any DP of his
choice.
An intermediary account may be opened with the DP only after the intermediary
has obtained registration form the securities & Exchange Board of India and with the
prior approval of NSDL. This account is meant only to deposit the securities received
from the lender and lend intermediary does not have any ownership (beneficiary) rights
over the shares held in such an account.
Various services offered by DPs with respect to these accounts are as follows:
Freezing of Accounts: Account freezing means suspending any further transaction from
the depository account till the account is de-Frozen. A depository account maintained
with a DP can be frozen if the DP receive a written instruction in prescribe form from the
client. A Frozen account can be de-frozen or re-activated if the client submits written
Instruction in prescribed form to the DP.
Nomination:
A client can make a nomination of his account in favor of any person by filling the
nomination form with his DP. Such nomination is considered to be conclusive evidence
of the account holder(s) disposition in respect of all the securities in the account for
which the nomination is made.
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58. Change in Address: the client can change his address by submitting the changes in
writing to the DP. The changes conveyed to the DP would be automatically communicate
to the companies in which he is holding Shares in dematerialized form.
Bank Account Details: Details of bank account of the client, including the 9-digit
code by the bank and branch appearing on the MICR checks issued by the bank have to
given to the DP at time of account opening. Companies use this information for printing
them on Divided/interest warrants etc. to prevent its misuse. In case the client wish to
change this bank account details, ha can do by submitting the Changes in writing to the
DP.
Standing Instruction Facility: DP registers the transfer of securities to or from a
beneficial owner's account only on receipt of instructions from the client. The clients
need to give delivery instruction to transfer securities from their account & receipt
instruction to get credit into their account. However, for ease of operation, a facility of
standing instruction is provided to the client's for receiving securities to the credit of their
accounts without any further instruction from them.
Consolidation of Accounts: some clients could have opened multiple accounts to
dematerialize their shares held in multiple combinations & sequence of names. However,
they may not need so many accounts after they have dematerialized their shares and may
want to bring all their shareholding into one or fewer accounts. Using off-market account
transfer instruction such consolidation can be done.
Closure of Account: A client can close a depository account by giving an
application in the prescribed form. In case there is any balance in the account sought to
be closed, the following steps are necessary.
(a) Re- materialization of all securities standing to the credit of the account at the time of
making the application for closure; or (b) Transferring the balance to the credit of
another account opened by the same account holder(s) either with the same participant
or with a different participant.
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59. Features:
Corporate action is benefit given by a company to its investors. These may be either
monetary benefits like dividend, interest or non-monetary benefits like bonus, rights, etc.
with the same participant or with benefits.
Monetary benefits (dividends etc): NSDL will give the beneficiary ownership details to
the Issuer/R&T Agent. The issuer /R&T Agent will carry out the necessary processing
and the distribution of such benefits will be outside the system.
Non-monetary benefits (right bonus etc): NSDL will give the beneficiary ownership
details to the Issuer / R&T Agent. The Issuer /R&T Agent will details to NSDL. NSDL
will then credit the beneficiary owner's accounts by downloading the data to the DPs.
Procedure In Case of Cash Corporate Actions:
NSDL will inform the DPs about the record date /book closure as Announced by
the Issuer for the corporate action. NSDL will also inform the DPs about the no-delivery
period as announced by the Clearing Corporation / Clearing House and the procedure to
be followed they're of through a circular.
On receipt of information about the book closure / record date, the DP will take care:
To update the changes in tax status, bank details, change of address etc. in the beneficial
owner's accounts well in advance of the book closure/record date. To clear positions in all
the clearing accounts by transferring the relevant securities to relevant beneficiary
accounts well in advance of the book closure/record date.
The balance lying in the Clearing Accounts are reported to Issue/R&T agent as transit
account position. NSDL will provide the details of the beneficial owners and their
holdings as on the EOD of the record date or the BOD on the
business clay prior to commencement of book closure to the Issuer /R&T
agent. The Issuer / R&T agent will distribute dividend, interest and other monetary
benefits directly to the beneficial owners on the basis of list provided by NSDL.
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60. Procedure in case of Non-Cash Corporate Actions:
NSDL will inform the DPs about the record date / book closure as Announced by the
Issuers (or the corporate action. NSDL will also inform the no-delivery period as
announced by the Clearing Corporation / Clearing I house and the procedure to be
followed thereof by issuing a circular.
On receipt of information about the book closure / record date, the DP will take
Care:
To update the changes in tax status, bank details, change of address etc. In the
beneficial owners accounts well in advance of the book closure / record date.
To clear positions in all the clearing accounts by transferring the relevant
securities to relevant beneficiary accounts well in advance of the book closure / record
date. The balances lying in the Clearing Accounts will be reported to Issuer / R&T agent
as transit account position.
NSDL will provide the details of the beneficial owners and their holdings as on
the EOD of the records date or the OD on the business clay prior to commencement of
book closure to the Issuer / R&T agent.
The Issuer R&T agent will provide an option to the shareholders to be allotted
securities either in physical or electronic form. The investors who opt for electronic
securities will indicate the UP Id and the beneficial Owner account number in the form
and send it to the Issuer / R&T Agent.
If investor does not make any, choose of form in which these corporate benefits
are to be received, then the Issuer / R&T agent will issue securities in the form in which
the investor holds original securities. Even the investors
who hold original shares in physical form can opt for corporate benefits in denial form.
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61. The Issuer / R&T agent will provide allotment details and the date on which the
necessary credit entries are to be made in the accounts of the beneficial owners (referred
to as execution date) to NSDL.
NSDL will perform the necessary bookings and the relevant credit entries are
booked in the DPM on the execution date.
The DP will give the statement of holdings and transaction statement to the
beneficial owners, giving the updated positions after the corporate action.
Precautions:
Investor must ensure that securities purchased by form or transferred to his
account form his broker's pool account before the record date or book closure date. This
facilitates receipt of corporate actions directly without any problem.
The investor who holds securities in physical form of requires securities in a
different account or who acquires rights from original holder and opts for noncash
corporate benefits (bonus, rights issue etc) in demat form must correctly indicate benefits
or electronically credited into his accounts. This investor must also ensure that the name
in which the depository account has been opened matches with the name appearing in the
records of the issuer / registrar.
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62. Transmission
One of the lesser-known but widely experienced problems with respect to dealing
in share certificates is transmission of shares. The companies Act distinguish
transmission of shares from transfer of shares. While Transfer of shares relates to a
voluntary act of the shareholder, transmission is brought about by operation of law. The
word "transmission" means that devolution of title to shares otherwise than by transfer,
for example, devolution by death, succession, inheritance, bankruptcy, marriage, etc.
While transfer of shares is brought about by delivery of a proper instrument of transfer
(viz., transfer deed) duly stamped and executed, transmission of shares is done by
forwarding the necessary documents (such as a notarized copy of death certificate) to the
company.
On registration of the transmission of shares, the person entitled to transmission of
shares becomes the shareholder of the company and is entitled to all rights and subject to
all liabilities as such shareholder.
In case the deceased shareholder had holdings in different companies, then in
order to effect transmission of shares for these shares, the relevant documents must be
sent to each of the companies, along with the share certificates. This results in a heavy
reliance on the postal system. Follow-up
May have to be made with each of the companies in order gets the transmission
affected before the book closure, if the survivor(s) wishes to avail of the benefits
occurred through these shares.
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63. Transmission of Securities in the Depository System:
In the depository system, all these problems are mitigated, as the shares are
account balances in the electronic form. The process of transmission through the
depository is not only simple but it is also quicker. This is because the successor to the
title interacts only with entity-his DP.
Transmission of Securities held jointly. In case the deceased was one of the joint
holders, then the surviving holders have to request the DP vide a form called the
transmission form along with a copy of notarized death certificate to transmit the
securities lying in the account of the deceased to the account of the surviving holders. For
this purpose the surviving clients must have a depositor account, which can be with the
same DP or with a different DP.
Transmission of Securities held singly. In case of death of the sole holder, the
legal heir(s) or legal representatives(s) of the deceased must request the DP to transmit
the balance lying in the Client account of the deceased to the account of the legal heir(s)
or legal representative(s).
For this, the legal heir(s) or the legal representative(s) of such securities must
submit an instruction called the transmission form to the DP along with the following
documents.
a. A copy of the death certificate duly notarized.
b. A copy of the succession certificate duly notarized or an order of a court of
components jurisdiction where the deceased has not left a will, or
c. A copy of the Probate of Letter of Administration duly notarized.
However, if the legal heir(s) or the legal representative(s) express inability to
produce either of the documents mentioned under (b) and (c) above, and the market value
of the securities held in each account of the deceased as on the date of application for
transmission does no exceed Rs. one lakh, then the DP will process the transmission
request on the basis of the following documents.
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64. NSDL - A Description of Operations:
India set up its first depository (NSDL) under the Depository Act passed by the
parliament in August 1996. NSDL, owned by IDBI, UTI, NSE and SBI, started
operations on November 8lh 1996. NSDL was set up with an initial capital of INR one
billion (USD 28 million), promoted by Industrial Development Bank of India (IDBI),
Unit Trust of India (UTI) and National Stock Exchange of India (NSEIL). Subsequently,
State Bank of India (SBI) became a shareholder by contributing to the capital to the
extent of INR 50 million.
Started in simple terms, the depository system comprise of Depository
Participants (DPs), through whom the investors and brokers use Depository facilitates,
the companies or their share registrar and transfer Agents (R&T Agents), who agree to
have their shares and securities admitted into the system, and the clearing corporations /
houses of the Stock exchange, who sign up with the depository to facilitate trading and
settlements of demat securities.
To order to clear and settle the trades that have been done for dematerialized
securities, clearing members have to open Clearing Member Accounts with the DPs.
Similarly, investors have to open Depository Accounts with DPs in order to use the
facilitate of the depository system. These investors offer there
Share certificates and scripts to the latter of dematerialization i.e., credit to their
electronically maintained accounts. For transfer or transmission of this share or for
further purchases, the investors operate these accounts almost like any other running
accounts in bank.
NSDL itself functions as a central accounting and record keeping office and
clearing house in respect of these shares and securities through electronic operations. As
all these are electronically linked, speed, accuracy and safety are assured. Risks attendant
to handling physical scripts are eliminated.
64