1. The traditional system of script based dealing in shares involves enormous paper work. The process begins with buying share certificates in paper form and ends with getting the certificates endorsed in the buyer's name. It also involves problems like bad deliveries, forgery and fake certificates & trade certificates, tearing / mutilation due to bad handling, loss of certificates, etc. 2. The Depository System aims at facilitating script less trading and settlement of securities in dematerialised form. It eliminates the problems associated with physical securities and enables faster settlement / transfer and reduction in transaction costs like brokerage, postage, etc. There is no stamp duty to be paid by the buyer.
Tradition system is time consuming Risk of theft, fake transfers etc. Costlier settlement NEED FOR DEPOSITARY SYSTEM The Depositories Act, 1996, defines a depository to mean "a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub-section (IA) of section 12 of the Securities and Exchange Board of India Act, 1992. A depository is an organization, which assists in the allotment and transfer of securities and securities lending. The principal function of a depository is to dematerialize securities and enable their transactions in book-entry form The shares here are held in the form of electronic accounts i.e dematerialized form and the depository system revolves around the concept of paper-less or scrip-less trading.
DEPOSITORY SYSTEM IN INDIA A depository system is governed by the following acts: 1. Securities & Exchange Board of India Act 1992 2. The SEBI(Depositories and Participants) Regulations, 1996 3. Bye laws of depository 4. Business rules of depository 5. The Companies Act 1956 LEGAL FRAMEWORK FOR A DEPOSITORY Presently there are two Depositories working in India: National Securities Depository Limited (NSDL)
Central Depository Services (India) Limited (CDSL)
DEPOSITORIES IN INDIA 1. Depository : A Depository is an organization where the Securities of a shareholder are held in the Electronic form at the request of the shareholder through a `Depository Participant. There are two depository in India. These are a) National Securities Depository Limited (NSDL) b) Central Depository Service [India] Limited [CDSL]
CONSTITUENTS OF THE DEPOSITORY SYSTEM NSDL is a first depositary to be set up in India. NSDL is depository promoted by National Stock Exchange of India Limited, IDBI,UTI,SBI and other financial institutions. NSDL is the first depository to be set up in India. It was registered by SEBI on June 7,1996. NSDL has minimum net worth of Rs 100 crores. DP has to pay an admission fee of Rs 25000 to NSDL, & deposit Rs 10 Lakh as a security with NSDL. In addition to main services of electronic custody & trade settlement services, NSDL provides special services like pledge, automatic delivery of securities to clearing corporations, etc. NSDL has over 288 DPs across the country (as per 2012)
NSDL PROMOTERS OF NSDL 1. Industrial Development Bank of India Limited 2. Unit Trust of India 3. National Stock Exchange of India Limited SHAREHOLDERS OF NSDL State Bank of India Oriental Bank of Commerce Citibank Standard Chartered Bank HDFC Bank Limited The Hongkong and Shanghai Banking Corporation Limited Deutsche Bank Dena Bank Canara Bank Union Bank of India CDSL is a depository promoted by the Stock Exchange, Mumbai jointly with SBI, Bank Of India , HDFC Bank and other financial institutions. CDSL commenced its operations in July 15 th 1999. CDSL was set up with the objective of providing convenient, dependable & secure depository services at affordable cost to all the market participants CSDL has over 563 DPs across the country (as per 2012) CDSL DEPOSITARY SERVICES LTD. PROMOTERS OF CDSL Bombay Stock Exchange Limited Bank of India, Bank of Baroda, State Bank of India and HDFC Bank
SHAREHOLDERS OF CDSL Standard Chartered Bank Centurion Bank of Punjab Ltd Canara Bank Union Bank of India Bank of Maharashtra Jammu and Kashmir Bank Limited The Calcutta Stock Exchange Association Limited Others
1. Multi-Depository System 2. Dematerialization as against immobilization 3. Depository services through depository participants 4. Fungibility 5. Registered Owner/ Beneficial Owner 6. Free Transferability of shares KEY FEATURES OF THE DEPOSITORY SYSTEM IN INDIA 1. Multi-Depository System: The depository model adopted in India provides for a competitive multi-depository system. There can be various entities providing depository services. 2. Dematerialisation as against immobilization: The model adopted in India provides only for dematerialisation of securities. This is a significant step in the direction of achieving a completely paper-free securities market Dematerialisation of securities occurs when securities, issued in physical form, are destroyed and an equivalent number of securities are credited into thee beneficiary owners account. Many of the developed countries have opted either for immobilization (e.g., Japan) of securities.Immobilisation of securities is done by storing or lodging the physical security certificates with an organization that acts as a custodian - a securities depository. All subsequent transactions in such immobilized securities take place through book entries. 3. Depository services through depository participants: The depositories can provide their services to investors through their agents called depository participants. These agents are appointed subject to the conditions prescribed under Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 and other applicable conditions.
4. Fungibility - In the depository system, the securities dematerialized are not identified by distinctive numbers or certificate numbers as in the physical environment. Thus all securities in the same class are identical and interchangeable. For example, all equity shares in the class of fully paid up shares are interchangeable. 5. Registered Owner/ Beneficial Owner - In the depository system, the ownership of securities dematerialized is bifurcated between Registered Owner and Beneficial Owner. For the securities dematerialized, NSDL is the Registered Owner in the books of the issuer; but ownership rights and liabilities rest with Beneficial Owner. All the rights, duties and liabilities underlying the security are on the beneficial owner of the security. 6. Free Transferability of shares: Transfer of shares held in dematerialized form takes place freely through electronic book-entry system.
FUNCTIONS OF DEPOSITORY Dematerialization & rematerialization of securities Maintaining investors holding in electronic form Effects settlement of securities traded on stock exchange Transfer of securities Pledging of dematerialized securities Electronic credit of securities allotted in public issues, rights issue
BENEFITS OF DEPOSITORY 1. A safe and convenient way to hold securities; 2. Immediate transfer of securities; 3. No stamp duty on transfer of securities; 4. Elimination of risks associated with physical certificates such as bad delivery , fake securities, delays, thefts etc.; 5. Reduction in paperwork involved in transfer of securities; 6. Reduction in transaction cost; 7. No odd lot problem, even one share can be sold; 8. Nomination facility; 9. Periodic status reports 10. Convenient consolidation of accounts
1. Records of securities dematerialized and rematerialized. 2. The names of the transferor, transferee, and the dates of transfer of securities. 3. A register and an index of beneficial owners. 4. Details of the holdings of the securities of beneficial owners as at the end of each day. 5. Records of instructions received from, and sent to issuers, issuers' agents and beneficial owners. 6. Records of approval, notice, entry and cancellation of pledge or hypothecation. 7. Details of securities declared to be eligible for dematerialization in the depository. 8. Such other records as may be specified by SEBI for carrying on the activities as a depository.
RECORDS TO BE MAINTAINED BY DEPOSITORY Bank Depositary 1. Holds Funds in accounts Holds Securities in accounts 2. Transfer funds between accounts Transfer securities between accounts 3.Transfers without handling cash Transfers without handling physical securities 4.Safekeeping of money Safekeeping of securities 5.Either of the holder can sign instructions All the joint holders to sign instructions
6. Nomination is kept confidential Signature & Photograph of nominee to be provided DEPOSITARY BANK DIFFERENCE 2. Depository Participant (DP) is described as 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. List of DPs are: ICICI Bank, HDFC bank ,Canara Bank, SBI, IDBI, CitiBank etc., Financial Institutions, stockbrokers, a clearing corporation or a clearing house of a stock exchange , a non-banking finance company, a registrar to an issue or share transfer agent
A DP is just like a Branch of a Bank.
3. ISSUERS AND R&T AGENTS: R&T(registrar & Transfer) Agents form an important link between the investors and issuers in the securities market. A company, whose securities are issued and traded in the market, is known as the Issuer. The R&T Agent is appointed by the Issuer to act on its behalf to service the investors in respect of all corporate actions like sending out notices and other communications to the investors as well as dispatch of dividends and other non-cash benefits. R&T Agents perform an equally important role in the depository system as well. 4. CLEARING CORPORATION\CLEARING HOUSE (CC\CH): This term applies to an entity responsible for clearing and settlement of trades done by clearing members on a recognized stock exchange. A Clearing Corporation / Clearing House of a stock exchange is admitted to the depository system for clearing and settlement of securities traded on their respective stock exchanges. For electronic settlement of securities in demat form, the concerned CC/CH of the stock exchange needs to have electronic connectivity with the depository NSDL. 5. Investor : The Investor or the Shareholder who is holding shares in the Company as beneficial owner.
Issuer Exchange (CH/CC) NSDL DP DP Broker Broker Investor Investor Electronic Link Electronic Link
Electronic Link
ELECTRONIC LINKAGE 1. Dematerialisation (usually known as demat) is converting physical certificates to electronic form 2. Rematerialisation, known as remat, is reverse of demat, i.e. getting physical certificates from the electronic securities 3. Transfer of securities, change of beneficial ownership 4. Settlement of trades done on exchange connected to the Depository
SERVICES PROVIDED BY DEPOSITORY
WHAT IS DEMATERIALIZATION? Dematerialization is the process by which physical certificates of securities of an investor are converted to an equivalent number of securities in electronic form and credited into the investors account with his/her DP.
It is to be noted that an investor can hold shares in physical form but for the purpose of trading in stock exchanges shares should be in electronic form. PROCESS OF DEMATERIALISATION An investor intending to dematerialise its securities needs to have an account with a DP.
The client (registered owner) will submit a request to the DP in the Dematerialisation Request Form for dematerialisation, along with the certificates of securities to be dematerialised. Before submission, the client has to deface the certificates by writing "SURRENDERED FOR DEMATERIALISATION". The DP will verify that the form is duly filled in and the number of certificates, number of securities and the security type (equity, debenture etc.) are as given in the DRF. If the form and security count is in order, the DP will issue an acknowledgement slip duly signed and stamped, to the client. After intimating NSDL electronically, the DP sends the securities to the concerned Issuer/ R&T agent. NSDL in turn informs the Issuer/ R&T agent electronically, using NSDL Depository system, about the request for dematerialisation. If the Issuer/ R&T agent finds the certificates in order, it registers NSDL as the holder of the securities (the investor will be the beneficial owner) and communicates to NSDL the confirmation of request electronically. On receiving such confirmation, NSDL credits the securities in the depository account of the investor with the DP. This procedure takes 15to 30 days. DEMATERIALIZATION PROCESS BO DP Depository (NSDL/CDSL) Issuer/ RTA 1. DRF with certificates 2.Electronic request 3. DRF with certificates 4. Forwards Demat request 5.Confirms E-request. 6. Credits In BOs A/c 7. Statement of holding REMATERIALISATION Rematerialisation is the process by which a client can get his electronic holdings converted into physical certificates. A client can rematerialise his dematerialised holdings at any point of time. The rematerialisation process is completed within 30 days. The securities sent for rematerialisation cannot be traded.
PROCEDURE OF REMATERIALISATION The client has to submit the rematerialisation request to the DP with whom he has an account. The DP enters the request in its system which blocks the client's holdings to that extent automatically. The DP releases the request to NSDL and sends the request form to the Issuer/ R&T agent. The Issuer/ R&T agent then prints the certificates, dispatches the same to the client and simultaneously electronically confirms the acceptance of the request to NSDL. Thereafter, the clients blocked balance are debited.
REMATERIALIZATION PROCESS BO DP Depository (NSDL/CDSL)
Issuer/ RTA 1. RRF in duplicate 4.Confirms E-request. 3. RRF with other Doc.s, if any. 2. Enters details in system 5.Debits in BOs A/c 6.Dispatch -es certificate