Depositories Act, 1967

8/8/2019 Depositories Act, 1967

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1996



The advent of online automated trading in India broughtwith it several associated benefits such as transparency intrading and equal opportunity for market players all overthe country but the problems related to settlement of tradessuch as high instances of bad deliveries and long settlement

cycles continued. In order to provide a safe and efficient system of trading

and settlement, Depositories Act ,1996 was enacted.

SEBI notified Regulations in order to provide regulatoryframework for the depositories.

Depositories gave a new dimension and scope forconducting transactions in capital market-primary as well assecondary, in a more efficient and effective manner, in apaperless form on an electronic book entry basis.



A system whereby the transfer of securities takes placenot through not transfer deeds and physical delivery ofscrips, but by means of book entry on the ledgers of theDepository without the physical movement of scrips.

This system is also referred to as ¶Scripless Trading System·.

There are two depositories functioning in India:

(i ) National Securities Limited(N S DL ) is registered

under the Companies act and withSEB

I, with a paid-up capital of Rs.105crores. It commenced operations innovember,1996.

(ii) Central Depositor y Services(India ) Limited(CDS ) which commenced operations during february,1999.



In the depository system, securities are held indepositor y accounts, which is more or lesssimilar to holding funds in bank accounts.

Transfer of ownership of securities is donethrough simple account transfers.

This method does away with all the risks and hassles normally associated with paperwork.

Consequently, the cost of transacting in adepository environment is considerably lower as compared to transacting in certificates



In the depository system, the apex body is theDepository.

A depository can be compared with a bank .

Depository services through depositoryparticipants.

Fungibility

Registered Owner/ Beneficial Owner (twotypes of owners).



There are basically four participant:

The Depository

The Depository Participant

The Issuing Company

The Investor



Basically, a Depository is an organisation whereshare certificates of a shareholder are held inelectronic form at the request of the shareholderthrough the medium of his agent known as

depository particiapant. ´Depository means a company formed and

registered under the Companies Act, 1956 andwhich has been granted a certificate of registrationunder Section 12(1A) of the Securities and

exchange Board of India Act, 1992µ According to The Depositories Act, 1996

´Depository is an organisation where securities ofa shareholder are held in the form of electronicaccounts, in the same way as bank holds moneyµ.



According to SEBI(Depositories and participants)Regulations, only a public financial institution,scheduled bank, foreign bank, recognized stock

exchange, a body corporate engaged in providingfinancial services in which not less than seventy fivepercent of the equity is held by a public financial, bank,foreign bank or recognised stock exchange jointly, oran institution engaged in providing financial services,can apply to SEBI to become a depository. If SEBI is

satisfied, it will register the sponsor as a depositoryand grant it the certification of registration.

Under the provisions of the depositories Act, thesedepositories provide various services to investors andother participants in the capital market, such as,

clearing members, stock exchanges, investmentinstitutions, banks and issuing corporates. Theseinclude basic facilities like account opening,dematerialisation, Rematerialisation, settlement oftrades and advanced facilities like pledging,distribution of non-cash corporate actions, distribution

of securities to allottees in case of public issue, etc.



Issuer or Company: The company which is listed with thedepository and whose shares are available for trading underdemat mode.

Issuer·s Registrar: Registrar provides electronic

connectivity between the depository and the issuercompany. The dematerialisation of shares is done byregistrar on behalf of the company and it keeps theelectronic data of beneficiary owners.

Depository Participant: They act as service providers tothe investors by acting as a custodian of electronic accounts

of the clients and taking care of trading and settlementthereof. They act as a interface between investor anddepository.Banks, financial institutions, custodians, NBFCs and Brokers,etc. can act as depository participants.



Clearing Member: Persons admitted as members by aclearing corporation which has been admitted as a user bythe depository. These members have to open a clearing

member account with the depository participant.

Stock Brokers: Members who trade at sock exchange.These are the registered members of the exchange, who havebeen authorised to trade on trading floor on behalf of theinvestors.

Clearing corporation: This body coordinates between theexchanges for executed trades, clearing members andcustodians for bringing in the necessary funds and securitiesfor settlement.

Investors: Main beneficiaries for the services provided bythe depository. They are the receiving and giving end andare called as beneficiary owners.

Bank: Account number for bank is recorded to directlycredit the monetary benefits in the account.



A process by which the physical sharecertificates of an investor are taken back by thecompany and an equivalent number of

securities are credited in his account inelectronic form at the request .

It is to be noted that an investor can hold sharesin physical form but for the purpose of tradingin stock exchanges shares should be inelectronic form.





Client submits Rematerialisation RequestForm(RRF) to DP.

DP intimates Depository.

Depository intimates the Registrar/Issuer

DP sends RRF to the Registrar/Issuer

Registrar/Issuer prints certificates and sends to

Investor Registrar/Issuer confirms remat to depository

Investor·s account with DP debited.



The Depositories Act, 1996 shall be deemed tohave come into force on 20th Sept., 1995( becausethe Government of India promulgated thedepositories ordinance in September, 1995)

It extends to entire India and contains 31 sectionsdivided into 6 chapters and a schedule having 6 parts.

This Act was amended by the Securities

Laws(Amendment) Act,2004 with effect from 12th

October, 2004, as a result of which sections 19A to19J were added, most of which deal with theimposition of penalties/punishments.



Chapter I contains some definitions. Chapter II lays down the requirements to be received by a

depository from SEBI. Chapter III deals with the rights and obligations of depositories,

participants, issuers and beneficial owners. Chapter IV deals with the power of SEBI to call for information

and enquiry. Chapter V contains penalties for various offences, and Chapter VI contains miscellaneous provisions. Part I of the schedule contains amendments to the Indian Stamp

Act,1899. Part II contains amendments to the Companies Act, 1956. Part III contains amendments to the Securities

Contracts(Regulation)Act, 1956. Part IV contains amendment to the Income Tax Act, 1961. Part V contains amendment to the Benami

Transactions(Prohibition) to the Income Tax Act,1961. Part V contains amendment s to Securities and Exchange Board Of

India, Act, 1992.



The depositories legislation as per the Statement of Objectsand Reasons appended to the Depositories Act, 1996 aims at providing for:

A legal basis for establishment of depositories to conductthe task of maintenance of ownership records of

securities and effect changes in ownership recordsthrough book entry; Dematerialisation of securities in the depositories mode

as well as giving option to an investor to choose betweenholding securities in physical mode and holdingsecurities in a dematerialised form in a depository;

Making the securities fungible; Making the shares, debentures and any interest thereon

of a public limited company freely transferable; and Exempting all transfers of shares within a depository

from stamp duty.



The Depositories Act, 1996 make a provision for the setting up ofmultiple depositories in India. Every depository will be requiredto be registered with SEBI and receive a certificate ofcommencement of business from it.

In the depository system, the investors have option to join thesystem or not. Those who join the system will have to beregistered with one or more participants who will be agents forthe depositories.

The securities held in the electronic form in the depository will befungible. They will cease to have any distinctive folio or certificatenumbers.All the shares would be identical and can be exchangedfor one another.

No stamp duty is charged on share transferred in the depositoryfrom the investors. Pledge is allowed in depository by surrendering one·s securities. The investor has been given the option to hold securities in

physical or dematerialised form.



The depositories would only be registered owners. Theinvestors would continue to be beneficial owners. Theinvestor·s names in the register of the companies

concerned will be replaced by the name of thedepository, but the economic benefits would continueto remain in the name of the investor. All rights,benefits and liabilities will be with the shareholdersonly.

Ownership changes in the depository system will be

automatically on the basis of delivery versus payment.There will be regular, mandatory flow of informationabout the details of ownership in the depository·srecord to the company concerned.

The depository will interface with the investors

through market intermediaries called depositoryparticipants. The depository has been entrusted with the

responsibility of indemnifying beneficial owners fforany loss caused due to negligence of the depositoryand its participants.



Section 1 of the Depositories

Act 1996 provides that this

Act came intoforce from the 20th September 1995 and extends to the whole of India.

Section 2 of the Depositories Act,1996 contains definitions. Section 2(1)(e)gives the definition of depository.

As per Regulation 6 of SEBI(Depositories and Participants) Regulations1996, SEBI shall consider an application only from the followingcategories of institutions to be registered as a depository:

(a)A public financial institution as defined in Section 4A of theCompaniesAct,1956;(b)A bank include for the time being in Schedule II to the Reserve Bank of

India;(c)A foreign bank operating in India with the approval of reserve Bank ofindia;

(d)A recognized stock exchange within the meaning of Section2(i) of the

Securities Contracts(Regulation) Act,1956;(e)A body corporate engaged in providing financial services where notless than seventy of the equity capital is held by any of the institutionsmentioned in (a), (b), (c), or (d) jointly or severally;(f)An institution engaged in providing financial services establishedoutside India and approved by the central government;(g)Moreover each of the applicants must be a fit and proper person.



As per Section 2(1)(g) Participant means a personregistered under section 12(1A) of the Securities andExchange Board of India Act, 1992. The applicant

should belong to one of the following categories: Apublic financial institution, A bank, A foreign bankoperating in India with the approval of RBI, A statefinancial corporation, an institution engaged inproviding financial services, A custodian ofsecurities, A clearing corporation, A stock broker, a

non banking finance company, and a registrar to anissue or share transfer agent. As per Section 2(1)(a) Beneficial Owner means a

person whose name is recorded as such with adepository.

A

s perS

ection 2(1)(f) Issuer means any person makingan issue of securities. Section 2(1)(j) defines a Register Owner as a

depository whose name is entered as such in theregister of the issuer.



As per Section3 of the Depositories Act,1996, no Depository shallact as a Depository unless it obtains a certificate of commencementof business from SEBI.

As per Regulation 10 of the SEBI(Depositories and Participants)

Regulations, 1996, a Depository which has been granted acertificate for registration must apply to SEBI for thecommencement of business in Form C within one year from thedate of its registration.

The SEBI while considering the grant of certificate of

commencement of business shall take into account all matterswhich are relevant to the efficient and orderly functioning of theDepository such as, whether the Depository has a net worth of notless than Rs.100crores,whether the byelaws of the depository havebeen approved by the SEBI, whether network through which theelectronic means of communications are established between the

Depository, participants, issuers and issuer·s agent is secured



Any company or other institution to be eligible to provide depository services must:

Be formed and registered as a company under the CompaniesAct, 1956.

Be registered with SEBI as a Depository under the SEBI Act,

1992. Has framed byelaws with the previous approval o SEBI. Has one or more participants to render depository services on

its behalf. Has adequate systems and safeguards to prevent

manipulation of records and transactions to the satisfaction ofSEB

I. Complies with Depositories Act, 1996 and SEBI(Depositories

and Participants) Regulations, 1996. Meets eligibility criteria in terms of constitution, network, etc.



Agreement between depository and participant(Sec.4)A Depository shall enter into an agreement, in such

form as may be specified by the bylaws, with one ormore participants as its agent. Services of depository(Sec.5) Any person wishing to

avail of the services of a Depository, must enter into anagreement with it, through a participant, in such form

as may be specified by the bylaws of the depository. Registration of transfer of Securities with

depository(sec.7) if a shareholder effects the transfer,then he will contact the participant which will conveythe information to the Depository which will registerthe security in the name of transferee.



Securities to be in Fungible Form(Sec.9) Securities of acompany joining the Depository System shall bedematerialised i.e. to say that the securities will be no longeridentified by the corresponding share certificate and

distinctive number. The securities will be in fungible formand will not be distinguished by distinctive numbers asstipulated in section 150 of the Companies Act which isapplicable to securities in non-depository mode.

Rights of Depositories and Beneficial Owner (Sec.10) A depository should be deemed to be the registered owner for

the purposes of effecting transfer of ownership of securityon behalf of a beneficial owner. The depository as aregistered owner should not have any voting rights or anyother rights in respect of securities held by it. The beneficialowner is entitled to all the rights and benefits and besubjected to all the liabilities in respect of his securities held

by a depository.

Register of Beneficial Owner(sec11) Every Depository isrequired to maintain a register and an index of beneficialowners in the manner provided in the Companies Act.



Pledge or Hypothecation of securities held in aDepository(Sec12) A Beneficial Owner may, with theprevious approval of the depository, create a pledge or

hypothecation in respect of a security owned by himthrough a depository. However, a Beneficial Ownermust give intimation of such pledge or hypothecationto the depository and the depository shall then makeentries in its records which shall be evidence of a

pledge or hypothecation. Furnishing of Information and Records byDepository and Issuer(Sec.13) Every depository shallfurnish to the issuer information about the transfer ofsecurities in the name of beneficial owners at such

intervals and in such manner as may be specified bythe bye-laws. Every issuer shall make available to thedepository copy of the relevant records in respect ofsecurities held by such depository.



Option to opt out in respect of any Seurity (Sec.14) If abeneficial owner seeks to opt out of a depository inrespect of any security, he shall inform the depositoryaccordingly. On receipt of such intimation, the

depository will make necessary changes in its recordsand shall inform the issuer company. Thereupon theissuer company shall, within 30 days of the receipt ofintimation from the depository and on payment of theprescribed fee, issue the certificate of securities to thebeneficial owner and thereafter keep record of themember as per the provisions of the Companies Act,1956.

Depositories to indemnify loss in certain cases(Sec.16)Any loss caused to the beneficial owner due to thenegligence of the depository or the participant, would

be indemnified by the depository to such beneficialowner. Where the loss due to the negligence of theparticipant is indemnified by the depository, thedepository has the right to recover the same from suchparticipant.



Power of SEBI to call for information and enquiry(Sec.18) Ifsecurities and Exchange of India(SEBI) considers it necessary inthe public interest or in the interest of investors, it may, byorder in writing:

(a)call upon any issuer company, depository, participant orbeneficial owner to furnish in writing such information relatingto the securities held in a depository as it may require; or

(b)authorise any person to make an enquiry or inspection inrelation to the affairs of the issuer company, beneficial owner,depository or participant, who shall submit a report of suchenquiry or inspection to it within the specified period.

It shall be the duty of every director, manager, partner,secretary, officer or employee of the depository or issuer orparticipant or beneficial owner to give the inspector allnecessary assistance in connection with the enquiry orinspection.



Power of SEBI to give directions in certaincases(Sec.19) On the basis of information

received or the report submitted by theinspector under Section 18, if it appears to SEBIthat there is good reason so to do, it may issuesuch directions to any depository or participant

or issuer as it may deem fit in the interest ofinvestors or the securities market.



With a view to ensuring better compliance of various provisions of the

Depositories Act and the Rules and Regulations framed thereunder by SEBI,Sections 19A to 19J have been inserted in the DepositoriesAct by the´Securities Laws(Amendment) Act,2004µ with effect from 12-10-2004.

Penalty for failure to furnish information/return, etc. ² Section 19A

Penalty for failure to enter into agreement- Section 19B

Penalty for failure to redress investor·s grievances- Section 19C Penalty for delay in dematerialisation or issue of certificate of securities-

Section 19D Penalty for failure to reconcile records- Section 19E

Penalty for failure to comply with directions issued by Board under section19 of the Act- Section 19F

Sections 19A to 19F provide that the guilty party shall be liable to a penaltyof Rs.1 lakh for each day during which the failure continues or Rs.1 crore,whichever is less, for every failure.

Penalty for contravention where no separate penalty has been provided.Section 19G provides that whoever fails to comply with any provision ofthis Act, the rules or the Regulation or by-laws made or directions issued bySEBI thereunder, for which no separate penalty has been provided, shall beliable to a penalty which may extend to Rs.1 crore.



For the purpose of adjudging under Section 19A to19G, SEBI will appoint an officer not below the rank ofa Division Chief of SEBI to be an Adjudicating Officerfor holding an enquiry for the purpose of imposing anypenalty under the said Sections. While holding an

enquiry, theA

djudicating Officer shall have power tosummon any person acquainted with facts andcircumstances of the case, to give evidence or toproduce any document which may be useful to thesubject matter of enquiry. If, on such enquiry, theAdjudicating Officer is satisfied that the person who

failed to comply with the provisions of any of theSections specified earlier, he may impose such penaltyas he thinks fit in accordance with the provisions ofany of those sections.



Section 20(1) provides that irrespective of any penaltyimposed by the Adjudicating Officer under this Act, ifany person contravenes or abets the contravention ofthe provisions of this Act or rules or regulations or by-laws made thereunder, he shall be punishable withimprisonment for a term which may extend to 10 years,or with fine, which may extend to Rs.25 crores, or withboth.

Section 20(2) further provides that if any person fails topay the penalty imposed by the adjudicating officer or

fails to comply with any of his directions or orders, heshall be punishable with imprisonment for a termwhich shall be not less than one month but which mayextend to 10 years, or with fine, which may extend toRs. 25 crores, or with both.



Where an offence under this Act has been committed by acompany, the company itself as well as every other personwho at the time when offence was committed was inchargeof, and was responsible to, the company for the conduct ofits business like the Managing Director or Executive

Director, shall deemed to be guilty of offence and shall beliable to be proceeded against and punished accordingly.Again, if it is proved that the offence was committed withthe consent or connivance of, or is attributable to any neglecton the part of, any director, manger, secretary, or otherofficer of the company, such person would also be deemed

to be guilty of that offence and shall be liable to beproceeded against and punished accordingly. But a personwill not be liable in a case where he proves that the offencewas committed without his knowledge, or that he hadexercised all due diligence to prevent the commission ofsuch offence.



Section 22 provided that no court shall takecognizance of any offence punishable underthis Act or any rules or regulations or bye-laws

made there under except on a complaint madeby the Central Government or StateGovernment or the Securities and ExchangeBoard of India or by any person. No court

inferior to that of a Court of Session shall tryany offence punishable under this Acy.



According to Section 23, before the commencement of theSecurities Laws (Second Amendment)Act, 1999 (i.e., before 16th

December,1999) any person who was aggrieved by an order ofSEBI made under the Depositories Act or the regulations madethereunder had a right of appeal to the Central Governmentwithin such time as may be prescribed.

On and after commencement of the Securities Laws(2nd

Amendment)Act,1999, Section 23A of the Depositories Actprovides that any person aggrieved by an order of the SEBI, madeunder this Act or the regulations made thereunder, or by an ordermade by an Adjudicating Officer under this Act, may appeal tothe Securities Appellate Tribunal within 45 days from the date on

which a copy of the order is received by him, for relief. Section 23F provides that any person aggrieved by any decision or

order of the Securities Appellate Tribunal may file an appeal tothe Supreme Court within 60 days from the date ofcommunication of decision or order to him on any question of factor law arising out of such order.



Section 23A also provides that the appeal filed before the SecuritiesAppellate Tribunal must be dealt with by it as expeditiously as possibleand endeavor should be made by it to dispose of the appeal finally within6 months from the date of receipt of the appeal.

Section 23B provides that the Securities Appellate Tribunal shall have

powers to regulate its own procedures, including the places at which theTribunal shall have its sittings. Section 23C provides that the appellant may either in person or authorise

one or more chartered accountants or company secretaries or costaccountants or legal practitioners or any of its officers to present his or itscase before the Securities Appellate Tribunal.

It may be noted that as per Section 23E, no civil court shall have

jurisdiction to entertain any suit or proceeding in respect of any matterwhich a Securities Appellate Tribunal is empowered by this Act todetermine and no injunction shall be granted by an court in respect of anyaction taken by the Securities Appellate Tribunal in pursuance of thepowers conferred to it under this Act.



Section 25 of the Depositories Act empowers SEBI to makeregulations consistent with the provisions of this Act andthe rules made thereunder, in order to carry out thepurposes of this Act. Thus, in exercise of the powersconferred by Section 30 of the Securities and Exchange

Board of India Act, 1992 alongwith Section 25 of theDepositories Act,1996, the securities and Exchange Board ofIndia has made the SEBI(Depositories & participants)Regulations, 1996, which deal with the registration of adepository and participant, the form and criteria uponwhich the certificate of commencement of business shall be

issued to the depository, the manner in which the certificateof security shall be surrendered, the manner of creating apledge or hypothecation in respect of security owned by abeneficial owner, rights and obligations of depositories,participants and issuers, and the eligibility criteria foradmission of securities in the depository etc.

Documents

Depositories Act, 1967