DEMATERIALIZATION OF SECURITIES
DEMATERIALIZATION OF SECURITIES2014
Chapter 1Introduction-Investment The concept of investment has
different meaning. Investment is the employment of funds with the
aim of getting return on it. It is the commitment of funds which
have been saved from the current consumption with the hope that
some benefits will receive in future. Thus, it is a reward for
waiting for money. Savings of the people are invested in assets
depending on their risk and return. Investment is also parting with
ones money to be used by another person, for productivity activity.
It means giving a loan or contributes to the equity i.e. ownership
capital of a company. Thus, investment means conversion of money
into a monetary assets or a claim on future money for some return
on it. This return is for saving, i.e. parting with saving or
liquidity and also for taking risk involving the uncertainty about
the actual return, timing of waiting and cost of getting back of
funds and risk of variability of returns. William F. Sharpe defined
the term of investment as the sacrifice of current dollar for
future dollars. This two involves two different attributes. One is
the sacrifice that takes place in the present and which is certain,
uncertain. In some cases the element of time predominates, such as
government bonds. In other case risk is the dominant attribute such
as equity shares. However, both time and risk are important.One
makes investment for a return higher than what he can get by
keeping money in a bank. It is a common knowledge in finance that
money is scarce and the investors want to maximize their return,
but the return is higher, if the risk is higher. Thus, risk and
return go together and they have a tradeoff. All investments may be
risky to some degree or other. Therefore, the art of investment is
to see that the return is maximized with the minimum of risk. If
the investor keeps his money in bank, he takes the least risk, as
the money is safe and he also runs the risk that return in real
terms, adjusted for inflation is negative or small and even if
positive, it may not come up to expectations.
Avenues for investments Wide varieties of investment avenues are
now available in India. An investor can himself select the best
avenue after studying the merits and demerits of different avenues.
Even financial advertising, newspaper supplements on financial
matters and investment journals offer guidance to investors in the
selection of suitable investment avenues.Investment avenues are the
outlets of funds. There are variety of investment avenues or
alternatives. Investors are free to select any one of more
alternative avenues depending upon their needs. All categories of
investors are equally interested by them. In India, investment
alternatives are continually increasing along with the new
developments in the financial markets. Investment is now possible
in corporate securities, public provident fund, mutual fund etc.
thus, wide variety of investment avenues are now available to the
investors. However, the investors should be very careful about
their hard earned money. An investor can select the best avenue
after studying the merits and demerits of the following investment
alternatives:
1. Shares 2. Debentures and government bonds 3. Bank deposits4.
LIC insurance schemes1. Shares:Share means a share in the share
capital of company. A company is a business organization. It is
registered as per companies Act, 1956. Every company has share
capital. The share capital of accompany is divided into number of
equal parts and each part is known as a share. A public limited
company has a complete three stage. The first is registration. The
second is raising capital and the third is commencement of
business. A public limited company issues shares to the public for
raising capital. The first public issue is known as initial public
offerings (IPO). The shares can be issue at par premium or
discount. Each share has a face value of Rs.1, 2, 5 or 10. In order
to issue shares a prospectus is got approved from securities and
exchange board of India (SEBI). These shares are listed with the
stock exchange so that the shareholders can sale these shares in
the markets. The company has to make an application to the stock
exchange for listing of shares. There are two types of shares,
equity shares and preference shares. Preference shares are those
shares which has first preference for payment of dividend and
refund of capital in case of winding up. Equity shares are those
shares which are not preference shares. Preference shares are not
popular in India. Very few companies have issued preference shares.
The preference shares may be cumulative participating and
convertible. The shares are also called as stock. Nowadays, shares
are issued in Demat form. It means shares are credited to a
separate account of applicant opened with depository participant.
This is also called paperless security because shares are issued
through book building process. Book building is a method of public
issue of shares by a company in which the price is determined by
the investors subject to a price band or range of prices given by
the company. Investment of shares is more risky because the share
prices go on changing day by day. Today, the market is more
volatile means more fluctuating. The shares prices may go up or go
down. If the stock market falls the share prices will go down and
the investor will loose money in the investment. However, the
return on investment in shares is higher. The returns on investment
in shares is in the form of regular dividend, capital appreciation,
bonus and rights. There is also liquidity in this kind of
investment. The shares can be sold in stock market and money can be
collected within 3 to 4 days. Investment in shares is not a tax
saving investment. 2. Debentures and Government bonds:-A debenture
is a document issued by a company as an evidence of a debt. It is a
certificate issued by a company under its seal, acknowledging a
debt due by it to its holders. The term debenture includes
debenture stock, bonds and any other securities issued by a
company. The companies Act provide that a company can raise loans
from the public by issue of debentures. The debenture holder gets
interest on the debenture which is fixed at the time of issue. The
debenture are also issued to the public just like issue of share.
However, there is a need for credit rating before issue of
debentures or bonds. Bonds are issued by the private sector
companies. Therefore, bonds may be tax saving but debentures are
not tax saving investment.The companies owned capital as well as
borrowed capital in their capital structure as compared to equity
shares because debenture holders have no say in the management of
the company and interest on debentures allowed as a business
expense for the purposes. The debentures are considered as secured
loan. There is no much risk in the investment in debentures as
compared to shares. The return on the debentures is also reasonable
and stable. The debentures are also listed with the stock exchanges
and can be traded in the stock market. However, the prices of
debentures are not much volatile.The debenture, being a loan, is
redeemable at a certain period of maturity, otherwise it can be
irredeemable. The debentures can be convertible non-convertible. If
a debenture is convertible into shares at maturity, it is called
convertible. The convertible debentures may be partly convertible.
Convertible debentures became popular in the last decade. The
method of raising long term funds through debentures is not much
popular in India. A very few company have issued debentures and
very few companies debentures or bonds are traded in the stock
market. The debentures were also not popular till recent years.
3. Bank deposits:-Investment of surplus money in bank deposits
is a quite popular among the investors collects working capital for
their business through deposits called bank deposits. The deposits
are given by the customers for specific period and the bank pays
interest on them. In India, all types of bank accept deposits by
offering interest. The deposits can be accepted from individuals,
institutions and even business enterprises. The business and
profitability of banks spend on deposit collection. For depositing
money in the bank, an investor/ depositor has to open an account in
bank. Different types of deposit accounts are: (1) current account
(2) savings bank account (3) fixed deposit account, and (4)
recurring deposit account. This indicates the use of bank deposit
as an avenue of investment by Indian investors. NRIs and NREs can
keep money in nationalized and other banks as savings or fixed
deposits. In case of NRI and NRE account, the bank interest is not
taxable. Some banks offer one percent higher interest rate on
NRI/NRE accounts.4. Life insurance policies:-Life insurance
business was nationalized in India since long (1956) and in sun by
the life insurance corporation of India. In addition, we have also
Postal life Insurance Scheme run by the postal department LIC is
responsible for the expansion of the insurance business in India.
In addition, it plays an important role in collecting the savings
of the people. It gives protection and acts as a method of
compulsory savings. LIC is one of the avenues for investment of
money out of regular income. It also gives protection to the family
members of the policyholder. Life insurance business is no more
monopoly of LIC. Private sector is also allowed to participate in
the insurance business.Advantages of Investment in Life Insurance
Schemes:1. Protection of family members through financial support
in the case of death of policyholder.2. Investment in life
insurance schemes serves as a provision for old age. 3. It acts as
a method of compulsory savings over a long period out of regular
income. 4. Investment in life insurance provides loan facility from
banks. 5. LIC now gives bonus to policyholders on yearly basis this
adds to maturity value of policy.6. Investment in life insurance
schemes gives tax benefit. This tax benefit is available even when
the policy is taken on the name of investors wifes son or
daughter.7. Investment in life insurance gives mental peace to
investors in this age when our life exposed to various risks,
uncertainties and dangers.LIC issues different life policies such
as whole life policies such as whole life policy, endowment policy,
money back policy, etc.
Chapter 2 SecuritiesThe company or other entity issuing the
security is called theissuer. A country's regulatory structure
determines what qualifies as a security. For example, private
investment pools may have some features of securities, but they may
not be registered or regulated as such if they meet various
restrictions.Securities may be represented by a certificate or,
more typically, "non-certificated", that is in electronic or "book
entry" only form. Certificates may bebearer, meaning they entitle
the holder to rights under the security merely by holding the
security, orregistered, meaning they entitle the holder to rights
only if he or she appears on a security register maintained by the
issuer or an intermediary. They include shares of
corporatestockormutual funds,bondsissued by corporations or
governmental agencies,stock optionsor other options, limited
partnership units, and various other formal investment instruments
that are negotiable and fungible.TYPES OF SECURITIES1. SharesA
share is an equity security. Its owner owns one part of the capital
of the company which has issued the shares in question. The shares
enable the shareholder the right to take part in the
decision-making in the company. If the latter operates with profit,
the owners of shares may receive dividends. The amount of the
dividend is decided upon by the shareholders at a General Meeting
of the Shareholders.2. BondsA bond is a debt security. When
purchasing a bond, you have no right to participate in the
company's decision making but are entitled to the reimbursement of
the principal and the interest. There are several ways of repayment
as the companies may decide that the principal be paid in regular
annual installments or on the maturity of bonds. The interest may
be refunded in a fixed amount or may be variable (inflation rate or
foreign currency). The issuers pay the interest once every year or
once every half-year (on the coupon maturity date).3. Open-end
fundsAn open-end fund stands for a diversified portfolio of
securities and similar investments, chosen and professionally
managed by a fund management company. Since the fund does not have
fixed capital but is rather 'open ended', it grows together with
new investors joining and thus funding it. Open-end funds can
invest in domestic and international securities, in either shares,
bonds or other investment vehicles. Depending on the portfolio, the
fund's risk and returns vary accordingly.3.1. Trading in open-end
fundsOpen-end funds do normally not trade on exchanges, and there
are indeed fewExchanges worldwide where open-end fund shares can be
bought; but there areExceptions. Usually, open-end funds are bought
through fund management companies. Investors can invest into the
fund via a postal or a standing order, being charged with an entry
fee upon each new purchase and with an exit fee when they decide to
sell their fund units. The other option, however, is to buy through
a brokerage firm; trading in open-end fund shares on an exchange
involves no entry or exit fees for investors, as they are only
bound by broker's fees.4. Index open-end fundsWith an index
open-end fund, fund management companies allot investors assets to
a basket of securities making up a chosen index that thus tracks
the yield of the mentioned index. While the big investors may
invest directly into a fund, minor investors can only trade in fund
shares on stock exchanges. Due to the possibility of arbitrage, the
market price of index open-end fund shares does usually not stray
from its NAV for more than 1%. 4.1. Trading in index open-end fund
shares on primary market Before purchasing index open-end fund
units, a declaration of accession must be signed. After that,
assets are transferred to a special fund account, open at a
custodian bank. Upon each purchase and sale, the fund charges
appropriate entry and exit fees (max 3% from purchase/sale). Fund
investors are also charged a management fee (0.5% of the average
annual fund NAV) and the costs of custodian services (0.1% of the
average annual fund NAV). Each purchase or sale within the fund on
the primary market results in a changed number of index open-end
fund shares, which in turn affects the changes in the size of
fund's assets. Index open-end fund shares are purchased and sold at
NAV, as calculated by the management company.4.2. Trading in index
open-end fund shares on secondary marketMinor investors can buy
index open-end fund shares on the exchange at the price that forms
on the market, without entry or exit fees, being charged solely
brokerage fees. Exchange trading of index open-end fund shares does
not affect the size of capital; while the owners of index open-end
fund shares change, the funds assets remain unaffected.5. Close-end
funds (ID)ID is a close-end investment fund investing its capital
into securities by other issuers. Investment Company is managed by
a management company (DZU) which decides which securities to
include in the fund's portfolio. The DZU is paid a management fee
by the investment company; it usually amounts to 1-2% per year in
Slovenia. The value of shares of the close-end funds is closely
correlated to the value of the company's.
Chapter3 Bank Abankis afinancial intermediarythat
acceptsdepositsand channels those deposits into lendingactivities,
either directly by loaning or indirectly throughcapital markets. A
bank links together customers that have capital deficits and
customers with capital surpluses.Due to their importance in
thefinancial systemand influence on nationaleconomies, banks are
highly regulatedin most countries. Most nations have
institutionalized a system known as fractional reserve banking, in
which banks hold only a smallreserveof the funds deposited and lend
out the rest for profit. They are generally subject tominimum
capital requirementsbased on an international set of capital
standards, known as theBasel Accords. Banking in its modern sense
evolved in the 14th century in the rich cities ofItaly but in many
ways was a continuation of ideas and concepts
ofcreditandlendingthat had its roots in theancient world. In
thehistory of banking, a number ofbanking dynastieshave played a
central role over many centuries. Theoldest existing bankisMonte
dei Paschi di Siena(the oldest surviving bank in the world and
Italy's third largest bank. Founded in 1472).HistoryThe origins of
modern banking can be traced to medieval and earlyRenaissance
Italy, to the rich cities in the north
likeFlorence,Lucca,Siena,VeniceandGenoa. TheBardiandPeruzzifamilies
dominated banking in 14th century Florence, establishing branches
in many other parts ofEurope.One of the most famous Italian banks
was theMedici Bank, set up byGiovanni di Bicci de' Mediciin 1397.
The earliest known state deposit bank,Banco di San Giorgio(Bank of
St. George), was founded in 1407 atGenoa,Italy. Modern banking
practice, includingfractional reserve bankingand the issue of
banknotes, emerged in the 17th and 18th centuries. Merchants
started to store their gold with thegoldsmithsofLondon, who
possessed private vaults, and charged a fee for that service. In
exchange for each deposit of precious metal, the goldsmiths
issuedreceiptscertifying the quantity and purity of the metal they
held as a bailee; these receipts could not be assigned; only the
original depositor could collect the stored goods.Gradually the
goldsmiths began to lend the money out on behalf of thedepositor,
which led to the development of modern banking practices;promissory
notes(which evolved into banknotes) were issued for money deposited
as a loan to the goldsmith. The goldsmith paid interest on these
deposits. Since the promissory notes were payable on demand, and
the advances (loans) to the goldsmith's customers were repayable
over a longer time period, this was an early form offractional
reserve banking. The promissory notes developed into an assignable
instrument which could circulate as a safe and convenient form of
money backed by the goldsmith's promise to pay, allowing goldsmiths
to advance loans with little risk ofdefault.Thus, the goldsmiths of
London became the forerunners of banking by creating new money
based on credit.TheBank of Englandwas the first to begin the
permanent issue ofbanknotes, in 1695.TheRoyal Bank of
Scotlandestablished the first overdraft facility in 1728.By the
beginning of the 19th century abankers' clearing housewas
established in London to allow multiple banks to clear
transactions. TheRothschild'spioneered international finance on a
large scale, financing the purchase of theSuez Canalfor the British
government.Theoldest bank still in existenceisMonte dei Paschi di
Siena, headquartered inSiena,Italy, which has been operating
continuously since 1472.It is followed byBerenberg Bankof Hamburg
(1590)andSveriges Riks bankof Sweden (1668).Origin of the wordThe
wordbankwas borrowed inMiddle EnglishfromMiddle Frenchbanque, from
OldItalianbanca, fromOld High Germanbanc, bank"bench, counter".
Benches were used as desks or exchange counters during the
RenaissancebyFlorentinebankers, who used to make their transactions
atop desks covered by green tablecloths.
Function
These functions of banks are explained in following paragraphs
of this article. A. Primary Functions of Banks :-The primary
functions of a bank are also known as banking functions. They are
the main functions of a bank.These primary functions of banks are
explained below.1. Accepting Deposits:-The bank collects deposits
from the public. These deposits can be of different types, such
as:-a. Saving Depositsb. Fixed Depositsc. Current Depositsd.
Recurring Depositsa. Saving Deposits:- This type of deposits
encourages saving habit among the public. The rate of interest is
low. At present it is about 5% p.a. Withdrawals of deposits are
allowed subject to certain restrictions. This account is suitable
to salary and wage earners. This account can be opened in single
name or in joint names. b. Fixed Deposits: - Lump sum amount is
deposited at one time for a specific period. Higher rate of
interest is paid, which varies with the period of deposit.
Withdrawals are not allowed before the expiry of the period. Those
who have surplus funds go for fixed deposit.c. Current Deposits: -
This type of account is operated by businessmen. Withdrawals are
freely allowed. No interest is paid. In fact, there are service
charges. The account holders can get the benefit of overdraft
facility.d. Recurring Deposits:- This type of account is operated
by salaried persons and petty traders. A certain sum of money is
periodically deposited into the bank. Withdrawals are permitted
only after the expiry of certain period. A higher rate of interest
is paid.2. Granting of Loans and AdvancesThe bank advances loans to
the business community and other members of the public. The rate
charged is higher than what it pays on deposits. The difference in
the interest rates (lending rate and the deposit rate) is its
profit.The types of bank loans and advances are :-a. Overdraftb.
Cash Creditsc. Loansd. Discounting of Bill of Exchangea.
Overdraft:- This type of advances are given to current account
holders. No separate account is maintained. All entries are made in
the current account. A certain amount is sanctioned as overdraft
which can be withdrawn within a certain period of time say three
months or so. Interest is charged on actual amount withdrawn. An
overdraft facility is granted against a collateral security. It is
sanctioned to businessman and firms.b. Cash Credits:- The client is
allowed cash credit upto a specific limit fixed in advance. It can
be given to current account holders as well as to others who do not
have an account with bank. Separate cash credit account is
maintained. Interest is charged on the amount withdrawn in excess
of limit. The cash credit is given against the security of tangible
assets and / or guarantees. The advance is given for a longer
period and a larger amount of loan is sanctioned than that of
overdraft.c. Loans:- It is normally for short term say a period of
one year or medium term say a period of five years. Now-a-days,
banks do lend money for long term. Repayment of money can be in the
form of installments spread over a period of time or in a lumpsum
amount. Interest is charged on the actual amount sanctioned,
whether withdrawn or not. The rate of interest may be slightly
lower than what is charged on overdrafts and cash credits. Loans
are normally secured against tangible assets of the company.d.
Discounting of Bill of Exchange:- The bank can advance money by
discounting or by purchasing bills of exchange both domestic and
foreign bills. The bank pays the bill amount to the drawer or the
beneficiary of the bill by deducting usual discount charges. On
maturity, the bill is presented to the drawee or acceptor of the
bill and the amount is collected.B. Secondary Functions of Banks :-
The bank performs a number of secondary functions, also called as
non-banking functions.These important secondary functions of banks
are explained below.1. Agency Functions:- The bank acts as an agent
of its customers. The bank performs a number of agency functions
which includes :-a. Transfer of Fundsb. Collection of Chequesc.
Periodic Paymentsd. Portfolio Managemente. Periodic Collectionsf.
Other Agency Functionsa. Transfer of Funds:- The bank transfer
funds from one branch to another or from one place to another.b.
Collection of Cheques:- The bank collects the money of the cheques
through clearing section of its customers. The bank also collects
money of the bills of exchange.c. Periodic Payments:-On standing
instructions of the client, the bank makes periodic payments in
respect of electricity bills, rent, etc.d. Portfolio Management:-
The banks also undertakes to purchase and sell the shares and
debentures on behalf of the clients and accordingly debits or
credits the account. This facility is called portfolio
management.e. Periodic Collections:- The bank collects salary,
pension, dividend and such other periodic collections on behalf of
the client.f. Other Agency Functions:-They act as trustees,
executors, advisers and administrators on behalf of its clients.
They act as representatives of clients to deal with other banks and
institutions.2. General Utility FunctionsThe bank also performs
general utility functions, such as :-a. Issue of Drafts, Letter of
Credits, etc.b. Locker Facilityc. Underwriting of Sharesd. Dealing
in Foreign Exchangee. Project Reportsf. Social Welfare Programmesa.
Issue of Drafts and Letter of Credits: - Banks issue drafts for
transferring money from one place to another. It also issues letter
of credit, especially in case of, import trade. It also issues
travellers' cheques.b. Locker Facility: - The bank provides a
locker facility for the safe custody of valuable documents, gold
ornaments and other valuables.c. Underwriting of Shares:-The bank
underwrites shares and debentures through its merchant banking
division.d. Dealing in Foreign Exchange:-The commercial banks are
allowed by RBI to deal in foreign exchange.e. Project Reports: -
The bank may also undertake to prepare project reports on behalf of
its clients.f. Social Welfare Programmes: - It undertakes social
welfare programmes, such as adult literacy programmes, public
welfare campaigns, etc.
Chapter4 Bank accountsBank deposits serve different purposes for
different people. Some people cannot save regularly; they deposit
money in the bank only when they have extra income. The purpose of
deposit then is to keep money safe for future needs. Some may want
to deposit money in a bank for as long as possible to earn interest
or to accumulate savings with interest so as to buy a flat, or to
meet hospital expenses in old age, etc. Some, mostly businessmen,
deposit all their income from sales in a bank account and pay all
business expenses out of the deposits. Keeping in view these
differences, banks offer the facility of opening different types of
deposit accounts by people to suit their purpose and convenience.A.
Demand depositsThe sum of money that is given to a bank but can be
withdrawn as per the requirement of the depositor. Amounts that are
lying in the savings and current accounts are known as demand
deposits because they can be used at any point of time.
1. Savings Bank Account: If a person has limited income and
wants to save money for future needs, the Saving Bank Account is
most suited for his purpose. This type of account can be opened
with a minimum initial deposit that varies from bank to bank. Money
can be deposited any time in this account. Withdrawals can be made
either by signing a withdrawal form or by issuing a cheque or by
using ATM card. Normally banks put some restriction on the number
of withdrawal from this account. Interest is allowed on the balance
of deposit in the account. The rate of interest on savings bank
account varies from bank to bank and also changes from time to
time. A minimum balance has to be maintained in the account as
prescribed by the bank.
2. Current Deposit Account: Big businessmen, companies and
institutions such as schools, colleges, and hospitals have to make
payment through their bank accounts. Since there are restrictions
on number of withdrawals from savings bank account, that type of
account is not suitable for them. They need to have an account from
which withdrawal can be made any number of times. Banks open
current account for them. Like savings bank account, this account
also requires certain minimum amount of deposit while opening the
account. On this deposit bank does not pay any interest on the
balances. Rather the accountholder pays certain amount each year as
operational charge. For the convenience of the accountholders banks
also allow withdrawal of amounts in excess of the balance of
deposit. This facility is known as overdraft facility. It is
allowed to some specific customers and up to a certain limit
subject to previous agreement with the bank concerned.
B. Time depositAtime deposit is a money deposit at abanking
institutionthat cannot be withdrawn for a certain "term" or period
of time. When the term is over it can be withdrawn or it can be
held for another term. Generally speaking, the longer the term the
better the yield on the money. In its strict sense, certificate
deposit is different from that of time deposit in terms of its
negotiability: CDs are negotiable and can be rediscounted when the
holder needs some liquidity, while time deposits must be kept until
maturity.
1. Fixed Deposit Account (also known as Term Deposit Account):-
Many a time people want to save money for long period. If money is
deposited in savings bank account, banks allow a lower rate of
interest. Therefore, money is deposited in a fixed deposit account
to earn a interest at a higher rate. Bank Deposit Account : This
type of deposit account allows deposit to be made of an amount for
a specified period. This period of deposit may range from 15 days
to three years or more during which no withdrawal is allowed.
However, on request, the depositor can encash the amount before its
maturity. In that case banks give lower interest than what was
agreed upon. The interest on fixed deposit account can be withdrawn
at certain intervals of time. At the end of the period, the deposit
may be withdrawn or renewed for a further period. Banks also grant
loan on the security of fixed deposit receipt.
2. Recurring Deposit Account: This type of account is suitable
for those who can save regularly and expect to earn a fair return
on the deposits over a period of time. While opening the account a
person has to agree to deposit a fixed amount once in a month for a
certain period. The total deposit along with the interest therein
is payable on maturity. However, the depositor can also be allowed
to close the account before its maturity and get back the money
along with the interest till that period. The account can be opened
by a person individually, or jointly with another, or by the
guardian in the name of a minor. The rate of interest allowed on
the deposits is higher than that on a savings bank deposit but
lower than the rate allowed on a fixed deposit for the same period.
C. Miscellaneous depositsThe miscellaneous deposits are the
deposits which is not used by regular customers:*DEMATERIALIZATION
(D-MAT) It is a transfer of physical form of share in to electronic
form. just like savings account for storing shares. It is
compulsory for investors for day-to-day trading. It provide
facility to open a demat account in joint name.in this closure of
account is possible but addition and deletion of name is not
possible.
Chapter 5DematOne of the methods for preventing all the problems
that occur with physical securities is through dematerialization.
India has adopted the demat route in which the book entry is made
electronically against securities that are cancelled. The share
certificates are shredded and a corresponding credit entry of the
number of securities is made in the account opened with the
depository participant (DP).The securities held by an
dematerialization from are fungible. They do not bear any
distinguishable features like distinctive number, folio number or
certificate number. once the shares are dematerialized, they lost
their identification features in terms of shares certificate
distinctive number and folio numbers. Title to the securities owned
is in the terms of number of share securities and not in terms of
distinctive number, certificate numbers etc. Each security is
identified in the depository system by ISIN and shorten name. for
example, a person owning 200 shares in XYZ Ltd. In physical form
will record his ownership as below:Company Name: XYZ Ltd.No. of
Shares: 200Distinctive Nos: 932654701 or 932654900Certificate No:
XYZ001263Folio No: X658542In NSDL depository system, the record of
ownership will be shown as: INE001A0103 XYZ by demat 200
International Securities Identification Number (ISIN) Each of the
securities dematerialized in the NSDL? CDSL depository bears a
distinctive ISIN- an identification number. International
securities identification number (ISIN) is a unique identification
number for each security issued in any of the international
standards organization (ISO) member countries in accordance with
the ISIN standard (ISO6166). ISO6166 was developed for the use in
an international (cross- border) as well as domestic traders. ISIN
is a 12-character long identification mark. It has three components
a pre-fix. A basic number and a check digit. The pre-fix is a
two-letter country code as stated under ISO 3166ISIN (ISIN for
India). The basic number companies nine alphanumeric characters.
The check digit at the end of the ISIN is computed according to the
modulus 10 Double-Add-Double. It establishes that the ISIN is a
valid. Securities issued by the same company, issued at different
times or carrying different sights, terms and conditions are
considered different securities for the purpose of allocating ISIN
and are allotted distinct ISINs. In India, SEBI assigns ISIN to
various publically traded securities. Different ISINs are allocated
to the physical and dematerialized securities of the same issue. To
illustrate, ISIN INE 475c 01 012 has the following break up: IN
-India, E company, Last digit check digit, First four digits 475c
company serial number, 01 equity(it can be mutual funds units or
debts), 01 issue no, 2 check digit.The third digit (E in the above
example) may be E, F, A, B, or 9. Each one carries the following
meaning:- E- company, F- mutual fund unit, A- central government
securities security, B- state with rights which are different from
equity shares bearing INE number.Whenever dealing with ISIN number.
It is important to pay special attention to the third digit.
Securities that can be dematerializedThe depository system in India
is governed by the rules made by the market regulator SEBI.
According to the SEBI (depositories and participants) Regulations,
1996, the following securities are eligible for holding in
dematerialized form.1. Shares, scrips, stocks, bonds debentures,
debenture stock or other marketable securities of similar nature of
any incorporated company or body corporate including underlying
share of ADRs and GDRs.2. Units of mutual funds, right under
collective investment schemes and venture capital funds, commercial
paper, certificate of deposit, securitized debt, money market
investment and unlisted securities.
Perquisites for dematerialization request1. The registered
holder of the securities should make the request.2. Securities to
be dematerialized must be recognized by NSDL/ CDSL as eligible in
other words. Only those securities whose ISIN has been activated by
NSDL/ CDSL, can be dematerialized.3. The company / issuer should
have established connectivity with NSDL only after such
connectivity established that the securities of that company /
issuer are recognized to be available for dematerialization.4. The
holder of security should have a beneficiary account in the same
name as it appears on the security certificates to be
dematerialized.5. The request should be made in the prescribed
dematerialization request form.
Transposition aim dematNSDL has amended its bye laws and
business rules to enable investors to transpose names of the joint
holders along with the process of dematerilsation through their
DPs. Prior to this amendment. Investors having shares in joint
names. But indifferent sequence were either required to open
multiple accounts for each sequence or to effect the transposition
directly with the issuer / R&T agent and then dematerialize
their securities through their DPs. In case of transposition come
dematerialization, the client can get the securities dematerialized
in the same account if the names appearing on the certificates
match with the names in which the account has been opened but are
in a different order, by submitting the security certificates along
with the transposition from and the dematerialization request form
(DRF) to the DP.
Chapter 6 Advantages and disadvantages Advantages of
dematerialization The biggest advantage is that when you buy demat
shares, you can rest assured that there is no risk of their being
fake, forged or stolen shares as it sometimes happen with shares
held in the physical form. Moreover, in the case of demat shares
you need not worry about bad deliveries.
In the case of demat shares there is also no stamp duty on
transfer of shares. Neither is there a complicated transfer form to
fill up. As a result, an investor not only saves money but it also
freed from the tedious and repetitive paperwork, which invariably
accompanies the buying, and selling of shares in the physical
form.The stock exchanges have now discarded the earlier concept of
marketable lots, small lots, and old lots. This becomes possible
only because of dematerialization of shares. Now even one share, no
matter how small the denomination or how low the share price, can
be bought or sold easily on the exchange. Demat is a big advantage
for the small investor as it enables him to buy high-priced shares
in small quantities which were earlier after out of his reach
because a marketable lot of high- priced shares would usually
involve a fairly large sum of money. Equally, demat enables the
small investor to sell his odd lots and small lots of shares at
market prices. Earlier, he would have been compelled to sell such
lots at prices well below prevailing market price of the share.
Another big advantage of dematerialization of shares is that of
nomination facility. This facility did not exist earlier in the
case of physical share holdings; the law permits individuals to
file a nomination form only in the case of a depository account.
Even in the case of accounts held in the joint names, the filing of
nomination forms is permitted. In the event of the death of any one
of the joint holders, the shares held in the joint account will be
transferred to the single depository account of the surviving
holder. If the surviving holder does not have a single account,
then he will be required to open one in order to receive the shares
earlier held in the joint depository account. The nominee would get
the shares only in case all the joint holder die. Nomination
facility is, however, not available to companies, Hindu Undivided
Families, partnership firms, societies, trusts, etc.In the case of
dematerialized shares, change in your address no long requires your
having to send separate letters to each individual company whose
shares you hold. All you need to do is to inform your DP of any
change in your address, and the Dp will send the new address to all
the companies in which you hold shares. Your new address is then
entered into the records of the company and the concerned
depository.
In the case of dematerialized shares, bonus and rights shares
are immediately transferred to your account with the DP as soon as
they become due to you without any delay. When the shares are head
in the physical form, the bonus/rights share certificates come
through the post after a considerable delay, which could be as long
as three to four weeks. There is also the danger of their getting
lost in transit, being miss-delivered by the postman, or otherwise
falling into the wrong hands.
Disadvantages of Demat Trading in securities may become
uncontrolled in case of dematerialized securities. 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. For dematerialized
securities, the role of key market players such as stock-brokers
needs to be supervised as they have the capability of manipulating
the market. Multiple regulatory frameworks have to be conformed to,
including the Depositories Act, Regulations and the various
Bye-Laws of various depositories. Agreements are entered at various
levels in the process of dematerialization. These may cause worries
to the investor desirous of simplicity. There is no provision to
close a demat account, which is having illiquid shares. The
investor cannot close the account and he and his successors have to
go on paying the charges to the participant, like annual folio
charges etc. After liquidating the holdings, many Indian investors
don't close their dp account. They are unaware that DPs charge even
on accounts with nil holdings.
CAHPTER 7 Dematerialization process
Client / investor submit the DRF and physical certificates to
DP. DP checks whether the securities are available for demat client
defaces the certificates by stamping surrendered for
dematerlisation DP punches two holes on the name of the company and
draws two parallel line across the face of the certificate. 1. DPs
provides dematerialization request forms (DRF) to their clients.2.
The client completes the DRF in all respects and submits to the DP
along with the security certificates to be dematerialized.3. The DP
checks the DRF for validity, completeness and correctness. The
following points should be checked particularly:-the security
certificates sought to be dematerialized are to DRF.-the attach
security certificates are marked with the word surrendered for
dematerialization. This a precautionary measure to prevent misuse
of share certificates anyone.-the certificates are not mutilated or
defaced in a manner affected in a manner affecting any material
information.-the name of client on DRF and the certificates is
exactly the same as in the clients account in DPM. However, minor
vacations in the name.2. DP enters the demat request in his system
to be sent to NSDL/CDSL. DP dispatches the physical certificates
along with the DRF to the R&T agent.3. NSDL/CDSL records the
details of the electronic request in the system and forwards the
request to the R&T agent.4. R&T agent, on receiving the
physical documents and the electronic request, verifies and checks
them. Once the R&T agent is satisfied, dematerialization of the
concerned securities is electronically confirmed to NSDL/ CDSL.5.
NSDL/CDSL credits the dematerialized securities to the beneficiary
account of the investor and intimates the DP electronically. The DP
issues of transaction to the client.Checklist for investorsWhile
filling up the dematerialization request form, investors need to
check:1. The DRF has to be obtained only from the DP with whom they
have opened an account.2. The DRF has to be filed in duplicate/
triplicate as required by the DP.3. All the information asked in
the form is mandatory and has to be filled.4. Separate forms should
be filled for separate ISIN number of the company.5. Separate forms
should be filled for lock-in and free securities.6. All the holders
should sign the DRF form. Signatures should match with those of the
specimens on the account opening form. However if the signature
with the company R&T agent is different from the signature with
the DP, the client may affix both the signatures.7. The order of
the holders should be same as that in the account opening form.8.
While submitting the shares they should be defaced by mentioning on
it surrendered for dematerialization.9. After submitting the
certificates, an acknowledgement slip duly signed but the DP should
be collected.10. Demat request form for dematerializing government
securities is different and is called DRF-GS.Checklist for DPBefore
accepting the form and share certificate for the dematerialization
the DP should check:1. Client has submitted the securities for
dematerialization along with the dematerialization request form
(DRF).2. No dematerialization request, other than from a registered
holder of securities, has been entitled.3. The certificates
submitted by the client dematerialization belong to the eligible
list of securities admitted by the depository.4. Verify that the
DRF submitted by the client has been filled completely and duly
signed. The DP has to issue to the client an acknowledgement slip
duly signed and stamped.5. Verify the signature of the client on
the form compare it with the specimen available in its records. if
the signature are different, the DP has to ensure proper
identification of the client.6. NSDL issues circulars on caution to
be exercised in respect of share belonging to some companies. such
circulars should be referred to before accepting a demat request.7.
If the form is in order, the request details are entered in its DPM
and the DPM generates a dematerialization request number (DRN).8.
The DRN so generated are entered in the space provided for the
purpose in DRF. The details given in DRF should match with the
details of the report generated by DPM and verified by a person
other than the person who had entered the data. 9. The DRF is
forwarded to the issuer or its R&T agent only after
ascertaining that the number of certificates annexed with the DRF
tallies with the number of certificates mentioned on the DRF within
7 days of its receipt. 10. The details of the certificates
submitted for dematerialization with the details filled up are in
consonance with the DRF.11. The client has marked the certificates
submitted for dematerialization with the words surrendered for the
dematerialization.12. The safety and security of the certificates
submitted for dematerialization till the certificates were forward
to the issuer or its R&T agent has to be ensured.13. Punch two
holes on the company name on the security certificates before
forwarding them to the issuer or its R&T agent.14. Ensure that
the client has filled in a separate DRF for securities having
distinct ISINs.15. Ensure that the client for has filled in a
separate DRF for locked in and free securities having the same
ISINs.16. Ensure that the client has submitted a separate DRF for
each of his/their accounts maintained with the DP.17. DRF and
certificates have to be sent to the correct address of the company
where they are accepted. NSDL issues circulars giving information
about the addresses where physical documents will be
accepted.Precautions to be taken while processing DRF1. Ensure
account to have the same sequence of names structure of holders and
name structure as printed on the physical certificate.2. Ensure
ISIN is activated 3. Separate DRF for:-party and fully paid up
shares -locked and free holdings-holding locked in for different
reasons-locked in holding having different release date-different
ISINs of the company4. ISIN to be entered by DP5. All the joint
holders to sign DRF6. Check DRF form with details on
certificate.
Chapter 8 SEBI guidelines SEBI has taken various policy
initiatives to popularize the demat concept. In order to help
investors to dematerialize physical shares received but not yet
registered in their name. SEBI has introduced a scheme called
transfer-cum-demat. As per the guidelines, all companies that are
inclued in the SEBI compulsory list have to offer
transfer-cum-demat facility. Investors who have bought shares of
these companies from the marked can send their shares to the
company for simultaneous action of transfer-cum-demat with effect
from February 12, 2013 this facility is applicable for shares upto
500 only. The relevant details of the guidelines are enumerated
below.1. the issuer or its Register and Transfer (R&T) Agent,
on completion of the process of registration shares submitted for
transfer, has to intimate the investor providing an option to
dematerialize such share. The investor intending to exercise the
option of dematerializing shares has to send the dematerialization
request within 30 days of the date of the option letter, failing
which the issuer or its R&T Agent can dispatch the
certificates. Requests received subsequent to dispatch of the
certificates are rejected.2. Investors exercising the option of
dematerializing the shares have to submit the following documents
to the DP:*dematerialization request form (DRF)*original option
letter received from the issuer or its R&T agent.3. DP shall
affix its seal and signature on the original option letter.4. The
DP has to execute the request for dematerialization in the
Depository DP module (DPM).5. The DP has to dispatch of DRF along
with the original option letter to the issuer or its R&T Agent
and keep a copy of it for records.6. The issuer or its R&T
Agent has to process the dematerialization request for its validity
and verify the signatures on the DRF with those on the transfer
deed.7. If the request is in order, the Issuer or its R&T Agent
defaces the certificates with the word Dematerialized and confirms
the dematerialization request.8. The issuer or its R&T Agent
has to maintain a record of the securities certificates that have
been dematerialized.9. If the request is rejected, the Issuer or
its R&T agent has to dispatch the certificates to the
investors.10. NSDL is required to obtain from the company a
certificate from a Chartered Accountant or a company secretary that
the company has complied with the guidelines.
chapterPrimary data
DATE OF VISIT: 24TH JUNE,2014.
PLACE OF VISIT: GHATKOPAR.
TOPIC OF VISIT: DEMATERIALISATION OF SECURITIES.
OBJECTIVE OF VISIT:1.To understand the concept of
DEMATERIALISATION OF SECURITIES as per their point of view.2.To
know the different benefits of DEMATERIALISATION OF SECURITIES.
OBSERVATION: As per the view of dematerialisation they provide
demat A/C facility and basically concentraate on all of salaried
and businessmean. As per SHCIL, there is no requirement of
registration with stock exchange. Activites of demat is provided by
DP. No calculations are done by SHCIL.There is requirement of
licence for providing demat service as per deposirary Act and SEBI.
For demat account opening, it takes four working days, which is
done by broker by trading account. There is no need to maintain
savings account for demat account opening there is no benefit for
demat account holder other than account holders. The document
required for opening demat account holder while opening an demat
A/C are ID proof i.e. pan card, address proof in the name holder,
cheque copy, Bank passbook 1st page and latest transaction page
with this they try to provide their prompt services to their
premium customers.
Conclusion Indian economies have been globalized and the capital
markets have been linked to the international financial market.
Foreign individuals and institutional investors have encouraged to
participate into it. So, there is a need for raising the Indian
Capital market in to the international standards in terms of
efficiency and transparency. One such measure is the passing out of
the Depository Act during the year 1996. Dematerialization of
securities and under this system is one of the major steps aimed at
improving and modernizing the capital market and enhancing the
levels of investors protection measures which aims at eliminating
the bad deliveries and forgery of shares and expediting the
transfer of shares. 27The drawback of the old system and the pool
proof measures sought to improve efficiency in transfer and
transparency standards prompted to evaluated the functioning of the
dematerialization process and to focus on the developments of the
depository system in the Indian capital market. The study showed
that there is a growth in the shares included in the
dematerialization process both in terms of volume of shares and
value of shares.
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