2. Depository Act
The Depository Act was enacted by the Indian Parliament to provide a legal
framework for the establishment of depositories. The term “Depository” is a
registered organization which helps an investor to buy or sell securities such as
shares, debentures and bonds in an electronic form. Securities and Exchnage
Board of India is liable for the registration, regulation and inspection of the
depository. In this article, we look at the Depository Act in detail.
3. History of Depositories act
• The first depository was set up way back in 1947 in Germany.
• In India it is a relatively new concept introduced in 1996 with the enactment
of Depositories Act 1996
• Their operations are carried out in accordance with regulations made by SEBI
,bye-laws and rules of Depositories Act and SEBI (Depositories and
Participants) Regulations 1996
4. Before introduction of Depository system, the problems faced by investors and
corporates in handling large volume of paper were as follows:
• Bad deliveries
• Fake certificates
• Loss of certificates in transit
• Mutilation of certificates
• Delays in transfer
• Long settlement cycles
• Mismatch of signatures
• Delay refund and remission of dividend etc
Problems facing by investors before
introduction of depositories act
5. Advantages of Depository system
• Share certificates, on dematerialization, are cancelled and the same will not be sent
back to the investor. The shares, represented by dematerialized share certificates
are fungible and, therefore, certificate numbers and distinctive numbers are
cancelled and become non-operative.
• It enables processing of share trading and transfers electronically without involving
share certificates and transfer deeds, thus eliminating the paperwork involved in
scrip-based trading and share transfer system.
• Transfer of dematerialized securities is immediate and unlike in the case of physical
transfer where the change of ownership has to be informed to the company in order
to be registered as such, in case of transfer in dematerialized form, beneficial
ownership will be transferred as soon as the Shares are transferred from one
account to another.
6. • The investor is also relieved of problems like bad delivery, fake certificates,
shares under litigation, signature difference of transferor and the like.
• There is no need to fill a transfer form for transfer of shares and affix share
transfer stamps.
• There is saving in time and cost on account of elimination of posting of
certificates.
• The threat of loss of certificates or fraudulent interception of certificates in
transit that causes anxiety to the investors, are eliminated.
7. Disadvantages of Depository system
• Lack of control: Trading in securities may become uncontrolled in case of
dematerialized securities.
• Need for greater supervision: It is incumbent upon the capital market regulator to
keep a close watch on the trading in dematerialized securities and see to it that
trading does not act as a detriment to investors. The role of key market players in
case of dematerialized securities, such as stock brokers, needs to be supervised as
they have the capability of manipulating the market.
• Complexity of the system: Multiple regulatory frameworks have to be confirmed to,
including the Depositories Act, Regulations and the various Bye Laws of various
depositories. Additionally, agreements are entered at various levels in the process of
dematerialization. These may cause anxiety to the investor desirous of implisity in
terms of transactions in dematerialized securities.
8. • Current regulations prohibit multiple bids or applications by a single person.
But investors open multiple demat accounts and make multiple applications
to subscribe to IPOs in the hope of getting allotment of shares.
• Some listed companies had obtained duplicate shares after the originals were
pledged with banks and then sold the duplicates in the secondary market to
make a profit.
• Promoters of some companies dematerialized shares in excess of the
company's issued capital.
• Certain investors pledged shares with banks and got the same shares reissued
as duplicates.
• There is an undue delay in the settlement of complaints by investors against
depository participants. This is because there is no single body that is in
charge of ensuring full compliance by these companies.
9. How it works
• A depository system carries out its activities through various associates that
include depository participants (DP), issuing companies and their share
transfer agents, clearing corporation of Stock Exchanges etc. The depository is
electronically linked to each of these business partners via satellite links or
through leased lines.
• The Depository is electronically linked to DPs, clearing houses of Stock
Exchanges, corporate and share transfer agents that are registered under the
depository to avail its services etc through VSAT. This integrated system
including the electronic links as stated above and the software at NSDL and
each business partners end is called the National Electronic Settlement and
Transfer System(NEST)
10. Depositories in India
Presently there are two Depositories working in India:
• National Securities Depository Limite (NSDL)
It was registered by the SEBI on june 7 1996 as India's first Depository to
facilitate trading and settlement of securities in the demat form. It is promoted
by IDBI, UTI, NSE
• Central Depository Services (India) Limited. (CSDL)
It commenced its operations during feb 1999 and was promoted by Stock
Exchange Mumbai in association with Bank of Baroda, Bank of India, SBI and
HDFC Bank.
11. Role of NSDL and CDSL
• NSDL (National security Depository Ltd) and CDSL (Central Depository service
Ltd) play an important role in the Indian stock market today.
• They are promoted mainly by NSE and BSE respectively, provide depository.
service for electronic trading of securities both equity and debt.
• These two depositories maintain details of shares and debt instruments in
electronic format after dematerialization.
• The basic activities of these two organization may be compared to that of
banks Just as banks maintains cash deposits and provide all services relating
to the electronic settlement of trading in shares and debt instrument.
12. • Change of ownership of shares and debenture following buying and selling of
these instrument in stock exchanges are reflected in the electronic database
maintained by these two depositories.
• The depositories also provide many services Appropriate electronic crediting
of securities to investors demat accounts after a public issue, right issue,
bonus issue or stock splits are also done through them. They also facilitate the
purchase and sale of units of mutual fund.
13. Who is Depository Participant?
• A Depository Participant (DP) is an agent of the depository.
• They are the intermediaries between the depository and the investors.
• The relationship between the DPs and the depository is governed by an
agreement made between the two under the Depositories Act.
• In a strictly legal sense, a DP is an entity who is registered as such with SEBI
under the provisions of the SEBI Act.
• As per the provisions of this Act, a DP can offer depository related services
only after obtaining a certificate of registration from SEBI.
14. Conditions to be a Depository participant
In terms of the Depositories Act, 1996, SEBI Depositories& Participants)
Regulations, 1996, only the following entities are eligible to become a
Depository Participant:
Public Financial Institution
Banks including Foreign Banks
State Financial Corporation
15. Services of Depositories System
• Opening of depository system
• Dematerialisation
• Rematerialisation
• Settlement of trades in dematerialised securities
• Account transfer
• Transfer, transmission and transposition
• Pledge and hypothecation
• Redemption or repurchase
• Stock lending and borrowing
• Corporate action
• Account freezing
• Nomination
• Demat of debt instruments Dealing in govt securities
16. Certificate of Commencement of Business
All depository needs to be registered with the SEBI or Securities and Exchange
Board of India to receive a Certificate of Commencement of Business on
fulfilment of such conditions as specified below:
• The depository should maintain adequate systems and safeguards to prevent
manipulation of records and transactions.
• The depository should conduct an annual inspection of these procedures and
forward a copy of the inspection report to SEBI.
17. Surrender of Certificate of Security
• To avail the services of a depository, the person should surrender the
certificate of security to the issuer( the person making an issue of securities)
as specified by the regulations:
• On receipt of a certificate of security, the issuer would cancel the certificate of
security and register the name of the depository as a registered owner with
respect of the security received and inform the same to the depository.
• On receipt of information, the depository would enter the name of the person
as the beneficial owner of the securities.