Depository system in India
In India the need for setting up a depository was realized after the large scale of irregularities in securities transactions of 1992 exposed the limitations of the prevailing system.DepositoryThe 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 Act 1996
DepositoryThe term Depository means a place where a deposit of money, securities, property etc is deposited for safekeeping under the terms of depository agreement
A depository is an organisation, which assists in the allotment and transfer of securities and securities lending.
The shares here are held in the form of electronic accounts i.e dematerialised form and the depository system revolves around the concept of paper-less or scrip-less trading.
DepositoryIt holds the securities of the investors in the form of electronic book entries avoiding risks associated with paper It is not mandatory and is left to the investor to decide Depositories carry out its operations through various functionaries called business partners Why Depository System in India?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 in refund and remission of dividend etc
NEED FOR DEPOSITORY SYSTEMAn effective and fully developed depository system is essential for maintaining and enhancing the effeciency of a mature capital market
Realised for the growth of primary market,
Which would reduce the time between the allotment of shares and transfer of entitlements arising out of each allotment.FACILITATEDIntroduction of scripless trading
and settlement for improving the efficiency
and eliminating the various problems associated with dealings in physical certificates.Depository SystemOpening of depository system Dematerialisation Rematerialisation Settlement of trades in dematerialised securities Account transfer Transfer ,transmission and transposition
FacilitatesPledge and hypothecation Redemption or repurchase Stock lending and borrowing Corporate action Account freezing Nomination Demat of debt instruments Dealing in govt securities
A DEPOSITORY SYSTEMThe Depository System in our country was initiated by the Stock Holding Corporation of India Limited (SHCIL) in July,1992.
Benefits -the investing public,- the issuers of securities, -the intermediaries and -the nation as a whole. Depositories in IndiaPresently there are two Depositories working in India: National Securities Depository Limited (NSDL) It was registered by the SEBI on june 7 1996 as Indias first Depository to facilitate trading and settlement of securities in the demat form. It is promoted by IDBI, UTI, NSE
CSDLCentral 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
Legislative FrameworkThe Depositories Act was passed by the parliament in the August,1996.
Which lays down the legislative frame work for facilitating the dematerialisation and
book entry transfer of securities in a depository.Depository SystemThe Act provides that a depository, which is required to be a company under the Companies Act,1956,
and Depository Participant i.e. agents of the depository need to be registered with Stock Exchange Board of India (SEBI).Depository SystemThe depository shall carry out the dematerialization of securities and the transfer of beneficial ownership through electronic book entry. The investors, however, have the option to hold securities in physical or dematerialized form, or to rematerialize securities previously held in dematerialized form.Depository SystemSEBI has notified the regulations in May,1996, with regard to norms for registration of depositories and participants, the eligibility criteria for admission of securities to a depository. FIRST DEPOSITORY IN INDIAThe National Securities Depository Limited (NSDL)
Promoted by IDBI, UTI and NSE. It has commenced its operation from November 8,1996.NSDLTo begin with only the capital market segment of NSE has been associated with the NDSL
as NSE has a clearing corporation (NSCCL),
which guarantees performance of trade obligations and has been admitted into the depository.DEPOSITORY SYSTEMThe depository system functions like banking system. A bank holds funds in accounts whereas a depository holds securities in accounts for its clients. A depository transfers securities on the written instruction of client.DEMATERLISATIONA process by which the physical share certificates of an investor are taken back by the company and
an equivalent number of securities are credited to his account in electronic form at the request of the investor.DEMATERIALISATIONOnce the company is admitted into depository system, an ISIN (international securities identifiction number) is allotted by the depository. This no. is unique for each security of the company that is admitted in the depository The entire process takes about 15 days time. However when large no. of certificates are submitted from institutions, it takes upto 30 days for dematAn investor may demat a part of his holdings and hold the balance in physical mode for the same security Demat shares are fungible because they do not have any distinctive or certificate numbers
REMATERIALISATION CONVERSION OF DEMAT HOLDINGS BACK INTO CERTIFICATES If the investors wish to get the securities in physical form ,all he has to do is to request DP for remat Procedure : Investor must fill up a remat request form (RRF) The DP will forward the request to depository after verifying that the shareholder has the necessary balances Depository will in turn intimate the registrar RTA (registrar & transfer agent) will print the certificates and dispatch the same to the investor
How Works An investor will have to first open an account with a Depository Participant And then request for the dematerialisation of his/her/their securities (share certificate) through the DP so that the dematerialised holdings can be credited into that a/c.DEPOSITORY FUNCTIONSACCOUNT OPENING, DEMATERIALISATION, REMATERIALISATION, SETTLEMENT, INITIAL PUBLIC OFFER FOR CORPORATE BENEFITS, PLEDGINGDEPOSITORY PARTICIPANT (DP)is the representative of the investor in the depository system
providing the link between the Company and Investor through the Depository.How to StartBeneficiary a/c is an a/c opened by the investor or a broker with a DP of his choice to hold shares in demat form and undertake scripless trading For opening demat a/c, the following documents are required: Demat opening form duly filled Address proof photograph Once a demat a/c is opened investor must sign an agreement with the DP and the investor will be allotted an account no. called as client identity No minimum balance is required The investor is provided with a transaction statement by his DP at regular intervals based on which the investor will know his security balances
LINKAGE/PLAYERSIssuer Depository Depository Participant (Dp) Securities, Issuers And Registrars Share Transfer Agents Stock Exchanges And Stock Brokers Clearing Corporation/ Clearing House And Clearing Members Banking System Investors
BUYING OF SECURITIESProcedure: Investor purchases securities in any of the SE connected to Depository through a broker Investor pays broker Broker pays clearing corporation On the pay out day broker receives credit for securities He gives instructions to DP to debit clearing a/c and credit clients a/c Investor receives shares into his a/c Investor has to make sure that the broker transfers the securities into his a/c before the book closure Or else the company may hive corporate benefits to the broker
SELLING OF SECURITIESProcedure Investor sells securities in any SE linked to depository through a broker Investor gives instruction to DP to debit his a/c and credit broker a/c Before the pay-in day, investors broker transfers the securities to clearing corporation Broker receives payment from SE Investor receives payment from broker Sale in demat form is similar to sale under physical mode
SETTLEMENTSettlement of trades in dematerialised securities The following stock exchanges have been admitted on the depository to conduct this activity: NSE The BSE ,Calcutta Stock Exchange Delhi SE Ludhiana SE Bangalore SE Over the counter exchange of India Madras SE Inter connected SE Ahmedabad SE
CLEARINGClearing Corporation/ Clearing House and Clearing Members A clearing corporation is a central organisation created to facilitate efficient , fast and economical settlement of transactions at a SE . it being an internal department of a SE is an independent entity The members of Clearing Corporation brokerage firms, banks or other financial institutions who are called as clearing members. Eg:all trades done at NSE & OTCEI are settled through National Securities Clearing Corporation Limited (NSCCL) It acts as a central mechanism for consolidating and settling transactions instead of the member firms settling each trade individually amongst themselves
Benefits of Depository SystemElimination of bad deliveries,
Elimination of risks associated with physical certificates,
Immediate transfer
& Registration of securitiesBenefitsFaster disbursement of non cash benefits rights, bonus etc. Reduction in brokerage, Reduction in handling of paper & periodic reports to investorElimination of problems related to change of address of investor, transmission etc.
To the NationGrowing and more liquid markets Increase in competitiveness in the international market place attracting many investors Improved prospects for privatisation of public sector units by creating a conducive environment Considerable reduction in delay Minimises settlement risk and fraud restoring investors faith in the capital markets
To the investing publicReduction of risks associated with loss, mutilation, theft and forgery of physical scrip Elimination of financial loss from loss of physical scrip Greater liquidity from speedier settlements Reduction in delays in registration Faster receipt of corporate benefits Reduced transaction costs through greater efficiency
To issuers:Up-to-date knowledge of shareholders names and addresses Reduction in printing and distribution costs of new issues Easy transfer of corporate benefits Improved ability to attract international investors without having to incur expenditure of issuance in overseas markets
