CHAPTER 1 The Capital market: The capital market consists of primary and secondary markets. The primary market in which public issue of securities is made through a prospectus is a retail market and there is no physical location. Offer for subscription to securities is made to investing community. The secondary market or stock exchange is a market for trading and settlement of securities that have already been issued. The investors holding securities sell securities through registered brokers/sub-brokers of the stock exchange. Since 1995, trading in securities is screen-based and Internet-based trading has also made an appearance in India. The secondary market consists of 22 stock exchanges. The secondary market provides a trading place for the securities already issued, to be bought and sold. It also provides liquidity to theinitial buyers in the primary market to re-offer the securities to any interested buyer at any price, if mutually accepted. Capital Issues (Control) Act, 1947 the Second World War in 1943 when the objective of the Government was to pre-empt resources to support the War effort. Companies were required to take the Government's approval for tapping household savings. Securities Contracts (Regulation) Act, 1956 This gives the Central Government regulatory jurisdiction over (a) stock exchanges, through a process of recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with conditions prescribed by Central Government. Securities and Exchange Board of IndiaThe secondary market overcame the geographical barriers by moving to screen-based trading. Indian companies were allowed access to international capital market through issue of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). Improved disclosures by listed companies: SEBI has recently started a system for Electronic Data Information Filing and Retrieval System (EDIFAR) to facilitate electronic filing of public domain information by companies. Introduction of derivatives: To assist market participants to manage risks better through hedging, speculation and arbitrage, SC(R)A was amended in 1995 to lift the ban
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CHAPTER 1
The Capital market: The capital market consists of primary and secondary markets.
The primary market in which public issue of securities is made through a prospectus is
a retail market and there is no physical location. Offer for subscription to securities is
made to investing community. The secondary market or stock exchange is a market for
trading and settlement of securities that have already been issued. The investors holding
securities sell securities through registered brokers/sub-brokers of the stock exchange.
Since 1995, trading in securities is screen-based and Internet-based trading has also
made an appearance in India.
The secondary market consists of 22 stock exchanges. The secondary market provides a
trading place for the securities already issued, to be bought and sold. It also provides
liquidity to theinitial buyers in the primary market to re-offer the securities to any
interested buyer at any price, if mutually accepted.
Capital Issues (Control) Act, 1947
the Second World War in 1943 when the objective of the Government was to pre-empt
resources to support the War effort. Companies were required to take the Government's
approval for tapping household savings.
Securities Contracts (Regulation) Act, 1956
This gives the Central Government regulatory jurisdiction over
(a) stock exchanges, through a process of recognition and continued supervision,
(b) contracts in securities, and
(c) listing of securities on stock exchanges. As a condition of recognition, a stock
exchange complies with conditions prescribed by Central Government.
Securities and Exchange Board of IndiaThe secondary market overcame the
geographical barriers by moving to screen-based trading.
Indian companies were allowed access to international capital market through issue of
American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
Improved disclosures by listed companies:
SEBI has recently started a system for Electronic Data Information Filing and Retrieval
System (EDIFAR) to facilitate electronic filing of public domain information by
companies.
Introduction of derivatives: To assist market participants to manage risks better
through hedging, speculation and arbitrage, SC(R)A was amended in 1995 to lift the ban
on options in securities. However, trading in derivatives did not take off, as there was no
suitable legal and regulatory framework to govern these trades.
National Stock Exchange
NSE introduced screen-based trading system (SBTS) where a member can punch into
the computer the quantities of shares and the prices at which he wants to transact.
The NSE started nation-wide SBTS, which have provided a completely transparent
trading mechanism. Regional exchanges lost a lot of business to NSE, forcing them to
introduce SBTS. Today, India can boast that almost 100% trading takes place through
electronic order matching.
Gala is a practice of extracting highest price of the day for "buy" transaction irrespective
of the actual price at which the purchase was actually done and give lowest price of the
day for "sell"
Merchant Bankers
According to SEBI, all issues should be managed by at least one authorised merchant
banker functioning as the sole manager or lead manager. The lead manager should not
agree to manage any issue unless his responsibilities relating to the issue, mainly
disclosures, allotment and refund, are clearly defined. A statement specifying such
responsibilities has to be furnished to SEBI. The responsibilities of lead manager,
underwriting obligations, capital adequacy, due diligence certification, etc., are laid
down in detail by SEBI.
Mutual Funds
Mutual funds are financial intermediaries, which collect the savings of small investors
and invest them in a diversified portfolio of securities to minimise risk and maximise
returns for their participants. The units of mutual funds, in turn, are also tradable
securities. Their price is determined by their net asset value (NAV) which is declared
periodically.
Depository Participants
SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for the
applicants who are stockbrokers or non-banking finance companies (NBFCs), for
granting a certificate of registration to act as a DP. For R & T Agents a minimum net
worth of Rs. 10 crore is prescribed in addition to a grant of certificate of registration by
SEBI.
NSDL stipulates a minimum net worth of Rs. 300 Lakh to be eligible to become a DP as
against Rs. 50 lakh prescribed by SEBI (D&P) Regulations, except for R & T agents and
NBFCs, as mentioned above.
Ware-house Receipts
NSDL has been approached by multi-commodity exchanges to provide depository facility
for warehouse receipts.
Internet Broking
The trading platform, which was converted from the trading hall to the computer
terminals at the brokers' premises, has now shifted to the homes of investors.
Submission of Instruction through Mobile Phone Login Easily (SIMPLE)
. This facility will be available for password based users (hereinafter referred as Users) of
SPEED-e facility.
. Users will be able to submit Client to Clearing Member Pool Account transfer
instructions on SPEED-e website through their mobile phones.The Indian Capital
Market – An Overview
. Mobile phones of the Users should be enabled with GPRS facility for accessing SPEED-
e website.
CHAPTER 2
Fungibility:
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.
Legal Framework
The operations of the depositories are primarily governed by the Depositories Act,
1996,Securities and Exchange Board of India (Depositories & Participants) Regulations,
1996, Bye-Laws approved by SEBI, and Business Rules framed in accordance with the
Regulations and Bye-Laws.A depository company must have a minimum net worth of
Rs. 100 crore. The sponsor(s) of the depository have to hold at least 51% of the equity
capital of the depository company.
Depository
1. The depository has a net worth of not less than Rs. 100 crore;
2. The Bye-Laws of the depository have been approved by SEBI;
3. The automatic data processing systems of the depository have been protected against
unauthorised access, alteration, destruction, disclosure or dissemination of records and
data;
4. The network, through which continuous electronic means of communication are
established between the depository, participants, issuers and issuers' agents, is secure
against unauthorised entry or access;
Bye-Laws – A depository is required to make Bye-Laws governing its operations. The
Bye-Laws have to be in conformity with the Depositories Act and the regulations made
thereunder, and need to be approved by SEBI before becoming effective.
Services of Depository –
(a) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate.
(b) Units of mutual funds, rights under collective investment schemes and venture
capital funds, commercial paper, certificates of deposit, securitised debt, money market
instruments, government securities, and unlisted securities.
(c) Securities admitted to NSDL depository are notified to all DPs through circulars sent
by email. Investors are informed about these securities through NSDL's Website
ww.nsdl.co.in and NSDL Update - a monthly newsletter of NSDL. Functions of
Depository
Functions of Depository
Dematerialisation: One of the primary functions of depository is to eliminate or minimise
the movement of physical securities in the market. This is achieved through
dematerialisation of securities. Dematerialisation is the process of converting securities
held in physical form into holdings in book entry form.
Pledge and Hypothecation:
The securities held with NSDL may be used as collateral to secure loans and other
credits by the clients. In a manual environment, borrowers are required to deliver
pledged securities in physical form to the lender or its custodian. These securities are
verified for authenticity and often need to be transferred in the name of lender. This has
a time and money cost by way of transfer fees or stamp duty. If the borrower wants to
substitute the pledged securities, these steps have to be repeated. Use of depository
services for pledging/ hypothecating the securities makes the process very simple and
cost effective. The securities pledged/hypothecated are transferred to a segregated or
collateral account through book entries in the records of the depository.
National Securities Depository Limited
The Industrial Development Bank of India (IDBI) - the largest development bank in
India, Unit Trust of India (UTI) - the largest Indian mutual fund and the National Stock
Exchange (NSE) - the largest stock exchange in India, sponsored the setting up of NSDL
and subscribed to the initial capital. NSDL commenced operations on November 8,
1996.
Ownership
NSDL is a public limited company incorporated under the Companies Act, 1956.
Business Rules of NSDL
Amendments to NSDL Business Rules require the approval of NSDL Executive
Committee and filing of the same with SEBI at least a day before the effective date for
the amendments.
Fee Structure of NSDL
NSDL charges the DPs and not the investors directly. These charges are fixed. The DPs
in turn, are free to charge their clients, i.e., the investors for their services. Thus, there
is a two-tier fee structure.
Connectivity
The computer system used by DPs, companies, R&T Agents and stock exchanges may
be connected to NSDL central system through V-SAT network or leased line network or
Multi Protocol Label Switching (MPLS) technology.
CHAPTER-3
Depository Participants
A DP is an entity who is registered as such with SEBI under the provisions of the SEBI (
Depositories & Participants) Regulations, 1996. As per the provisions of these
regulations, an entity can offer depository-related services only after obtaining a
certificate of registration from SEBI as a depository participant.
Eligibility Criteria
The eligibility criteria are prescribed by the SEBI (Depository & Participants)
Regulations, 1996 and the Bye-Laws of NSDL.
Net Worth – SEBI (Depositories & Participants) Regulations, 1996 prescribe a minimum
net worth of Rs. 50 lakh for the applicants who are stockbrokers or non-banking finance
companies (NBFCs), for granting a certificate of registration to act as a DP. For R & T
Agents a minimum net worth of Rs. 10 crore is prescribed in addition to a grant of
certificate of registration by SEBI.
If a stockbroker seeks to act as a DP in more than one depository, he should comply
with the specified net worth criterion separately for each such depository. If an NBFC
seeks to act as a DP on behalf of any other person, it needs to have a networth of Rs. 50
crore in addition to the networth specified by any other authority. No minimum net
worth criterion has been prescribed for other categories of DPs. However, depositories
can fix a higher net worth criterion for their DPs.
NSDL stipulates a minimum net worth of Rs. 300 lakh for all categories to be eligible to
become a DP as against Rs. 50 lakh prescribed by SEBI (D&P) Regulations, 1996, except
for R & T Agents and NBFCs, as mentioned above.
The minimum net worth for a DP prescribed under the Bye-Laws of NSDL is Rs. 300
lakh.
Business Restrictions – where the stock broker has a minimum net worth of Rs. 10
crore, the limits on the aggregate value of the portfolio of securities of the beneficial
owners held in dematerialised form in a depository through him, shall not be applicable.
NBFCs, having a net worth of less than Rs. 50 crore, may act as DPs only on their own
behalf. Only NBFCs having a minimum net worth of above Rs. 50 crore, in addition to
the net worth specified by any other authority, may provide depository related services
to other persons also.
Record of Services – The DP should maintain and preserve the records and documents
for a minimum period of five years. They should also make them available for inspection
by the depository whenever required.
1. Forms for Opening, Closing, Freezing and Defreezing of accounts given by the clients.
2. Record of all the dematerialisation and rematerialisation requests received from the
clients.
3. Record of all the delivery/ receipt instructions given by the clients and learing
Members.
4. Copies of correspondence received from clients for updation of client details in DPM.
5. Records of all the actions taken on the exception reports generated by the system.
6. Details of grievances/arbitration proceedings received from the clients, action taken
and status of the same.
7. Record of all forms received in respect of Pledge, Securities Lending and Transmission
of securities.
Clearing Corporation/Clearing House (CC/CH)
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.
The Issuer shall inform NSDL on the next day on which the information is being sent to
the stock exchanges in which the eligible securities are listed, about the dates from
which new shares arising out of conversions, further issues, final call payments, etc.
become
The Issuer shall furnish information to NSDL of any further issues such as rights,
bonus, public offerings with details viz., opening and closing dates, issue size, issue
price, record date, book closure, proportion, along with a copy of the offer document.
The Issuer shall give information to NSDL about book closures, record dates, dates for
the payment of interest or dividend, dates for annual general meetings.
The Issuer and its R&T Agent undertakes that the dematerialisation and
rematerialisation requests are processed within 15 and 30 days respectively.
Role of Issuer/ R&T Agent in Dematerialisation of Securities
The Depository electronically intimates, on a daily basis, all dematerialisation requests
to the respective Issuer or its R&T Agent. The Issuer or its R&T Agent have to verify the
validity of the security certificates as well as the fact that the demat request has been
made by the person recorded as a member in its Register of Members. After such
verification, the Issuer or its R&T Agent intimates
CHAPTER-4
NSDL has supplied the application software for depository operations to its business
partners (viz. Depository Participants, Clearing Corporation and Issuers/Registrar &
Transfer Agents). The software of Depository Participants is called DPM (DP), for
Clearing Corporation, it is called DPM (CC) and for Issuer/Registrar & Transfer Agents,
it is called DPM (SHR). The complete depository software of NSDL is called as NEST
(National Electronic Settlement & Transfer).
Pledge/Hypothecation: This module is used to enter pledge or hypothecation related
instructions -creation, confirmation of creation, closure, closure confirmation and
invocation. Account Freeze Facility: NSDL system provides the facility to freeze the
depository accounts for any debits or for both, debits and credits. In an account which
is "freezed for debits", no debits will be permitted from the account, till the time it is
unfreezed.
Account Freeze Facility: NSDL system provides the facility to freeze the depository
accounts for any debits or for both, debits and credits. In an account which is "freezed
for debits", no debits will be permitted from the account, till the time it is unfreezed.
CHAPTER-5
Explain the information to be given in the application form. Clarification should be given
on the items like standing instructions, introduction, nomination, PAN number,
importance of correct and complete bank account and address details and the care to be
taken in case of joint accounts, HUF accounts, NRI accounts, etc.
• For ease of operation and elimination of redundancies, the facility of standing
instruction has been provided in the account opening form. This facility enables clients
to give standing instructions to DPs, at the time of opening the account itself, for
receiving securities to the credit of their accounts without any further instruction from
them.
• Assure the client about the time by which the account will be opened and the account
number communicated to him.
• Handing over "Delivery Instructions book" with pre-printed serial number of the slips
stamped with Client-ID on the slips. The client should be made aware of the need and
reasons to take care in preserving and using the book.
• Explain various other forms used in the depository system.
• Ensure that a copy of the agreement including schedule of charges is given to the
client. Demat Process
Demat Process
DP should attend to this area with care and caution by ensuring the despatch of DRFs
and certificates to R&T Agents within seven days.
CHAPTER-6
Elimination of bad deliveries - In the depository environment, once the holdings of an
investor are dematerialised, the question of bad delivery does not arise, i.e., their
transfer cannot be rejected due to defect in the quality of the security.
•Elimination of all risks associated with physical certificates -Dealing in physical
securities has associated security risks of theft of stocks, mutilation or loss of
certificates during movements to and from the registrars. These expose the investor to
the cost of obtaining duplicate certificates, advertisements, etc. Such problems do not
arise in the depository environment.
Benefits & Safety
• No stamp duty -There is no stamp duty for transfer of equity instruments and units of
mutual funds in the depository system. In the case of physical shares, stamp duty of
0.5% is payable on transfer of shares.
• Reduction in rate of interest on loans -Some banks provide this benefit against pledge
of dematerialised securities.
Dematerialised securities eliminate hassles/risks like getting securities registered in
their name at the time of book closure if the pledgee defaults in repayment. Also
eliminated is the risk of stocks coming under objections when they are sent to the
company's registrar for registration, if the pledge has to be invoked.
• This requirement is applicable to physical deliveries wherein the number of securities
is less than 500.
Eligible to enter into contracts at their own, the account in the name of minor ; is
required to be operated by their guardian. The guardian may be the natural guardian,
guardian appointed by will or the guardian appointed by an order of the court. The
minor's guardian will be eligible to open, operate and close the account on behalf of the
minor. The guardian(s) would be signing the instruction slips to be given to the
depository participant, on behalf of the minor. A minor however cannot be a joint
account holder. Non cash corporate benefits arising out of bonus/rights allotment of
shares are credited to the account of the minor. Cash corporate benefits will be issued
by the concerned issuer of securities in the name of the minor. the account in the name
of minor is required to be operated by their guardian. The minor's guardian will be
eligible to open, operate and close the account on behalf of the minor. The guardian(s)
would be signing the instruction slips to be given to the depository participant, on behalf
of the minor.
CHAPTER 7
Any change made by DPs in their pricing structure should be notified to the beneficial
owners (investors/clients) at least 30 days in advance.
Fee at the rate of Rs. 8 per folio (ISIN position) in NSDL, subject to a minimum amount
as mentioned below, plus service tax as applicable :
Nominal Value of securities admitted (Rs.) Amount (Rs.)
Upto 5 crore 6,000
Above 5 crore and upto 10 crore 15,000
Above 10 crore and upto 20 crore 30,000
Above 20 crore 50,000
The above fee would be applicable on all securities i.e. equity, debt, units of mutual
funds, pass through certificates, certificates of deposit, commercial papers, preference
shares etc., except Government securities.
The fee will be based on the total ISIN positions (folios) as on March 31, of the previous
financial year.
Provided however that, in case the issued capital or ISIN positions increase during the
financial year due to issue of further shares, by way of public offer, the annual custody
fee would be charged on a pro-rata basis, at the time of such issue.
The fee will be charged every year, on a financial year basis and shall be payable by April
30 of that financial year.
If an issuer fails to pay the fees by the due date, the Depository may charge interest @
12% p.a. on the amount, from the due date of payment till the payment is received by
the depository.
One-Time Custody Fees
An Issuer may pay a one-time custody fee to NSDL at the rate of 0.05% plus service tax
as applicable, on the market capitalisation of the company. The market capitalisation of
a company will be determined on the basis of the average market price for a period of
26 weeks proceeding the date on which the company agrees to make such payment.
Consequent upon such payment,
NSDL shall not levy any custody fee on the Participants or annual custody fee on the
Issuer.
Fee for Distribution of Non-Cash Corporate Benefits (Net of service tax, as
applicable)
A fee at the rate of Rs. 10 per record for debits or credits to accounts as the case may
be, shall be charged to the Issuer, subject to a minimum fee of Rs.1000 per corporate
action.
In case of conversion of shares of non pari-passu to pari-passu, partly-paid to fully-paid
etc., no fee shall be charged.
A fee of Rs.10,000 shall be levied on the Issuer for five issues of Commercial Papers
during the financial year. Provided however that an additional fee of Rs. 10,000 shall be
levied on the Issuer for every additional five issues.
A fee of Rs. 10,000 shall be levied on the Issuer for five such issues made in a financial
year. Provided however an additional fee of Rs.10,000 shall be levied on the Issuer for
every additional five issues.
Fee for details of Beneficiary Owners Position (Benpos) (Net of service tax, as
applicable)
NSDL shall levy a fee of Rs. 5,000/- in case there are upto 10,000 beneficial owners and
Rs. 10,000/- for other cases. However, the weekly downloads and downloads for statutory
purposes are provided free of charge.
Security Deposit
Every Participant shall pay to the Depository Rs.10 lakh by way of interest free refundable
security deposit. However, a Clearing Corporation or a Clearing House of a Stock Exchange
will be exempt from payment of security deposit.
Transaction Related Fees
A settlement fee at the rate of Rs. 5 per debit instruction charged to the Participant of the
Client. in a Client's account shall be the Clearing Corporation into the Receipt-in account of
each Clearing Member (CM) maintained with the Participant subject to a minimum of
Rs.1000 and a maximum of Rs.5,000 per quarter per CM Account shall be charged to the
Participant.
Pledge Fee
A fee at the rate of Rs.25 per instruction for creation of pledge / hypothecation shall be
charged to the Participant of the pledgor/ hypothecator. No fee shall be charged when a
pledge / hypothecation is closed or invoked.
Fee For Dematerialisation & Rematerialisation
However, in case of rematerialisation request, a flat fee of Rs. 10 per certificate shall be
charged to the Participant Provided however that with effect from November 1, 2006, the
Participant shall be charged the following fee for rematerialisation of securities :
a) a fee of Rs.10 for every hundred securities or part thereof; or
b) a flat fee of Rs.10 per certificate, whichever is higher.
With effect from March 1, 2008, no rematerialisation fee shall be charged for Government
securities.
Minimum Fee
In case the total fee billed to the Participant in a financial year is less than the minimum
fee of Rs. 1,00,000 then the Participant shall be charged the difference thereof.
Account Freezing Charge :
The Participant will charge the investors a fee of not more than Rs.125 per freeze
instruction IDeAS facility has been made mandatory for all the DPs of NSDL.
Fees for Warehouse Receipts
The following charges will be levied by NSDL on the DPs towards demat services for