Depositories in india

48

Financial Market:Operations and Services UNIT 9 DEPOSITORIES

Objectives

After going through this unit, you will be able to:

l explain the concept of depositories;

l discuss the importance of depository;

l elucidate the functioning of depositories; and

l describe the mechanism of dematerialisation appreciate involvement oftechnology in depository.

Structure

9.1 Introduction

9.2 Depository System

9.3 Functioning of a Depository

9.4 Switching over to Depository

9.5 Is Depository System Beneficial?

9.6 Selling and Buying of Dematerialised Share

9.7 Depository System in India

9.8 Technology and Depository

9.9 Legal Set up for Depositories in India

9.10 Summary

9.11 Key Words

9.12 Self Assessment Questions

9.13 Further Readings

9.1 INTRODUCTION

A significant development of the 20th century particularly in its later part is expansionof financial market world over which mostly was driven by globalization, technology,innovations and increasing trade volume. India has not been an exception withprobably largest number of listed companies with a very large investor population andever increasing volumes of trades. However, this continuous growth in activitiesincreased problems associated with stock trading. Most of these problems arose dueto the intrinsic nature of paper based trading and settlement, like theft or loss of sharecertificates. This system required handling of huge volumes of paper leading toincreased costs and inefficiencies. The process beginning from buying shares throughthe stock exchanges till getting the certificates duly endorsed in the buyer’s namewas indeed quite complex and time-consuming and was riddled with a variety ofproblems. Growing number of investors participating in the capital market hasincreased the possibility of being hit by a bad delivery, The cost and time spent by thebrokers for rectification of these bad deliveries tends to be higher with thegeographical spread of the clients. The increase in trade volumes lead to exponentialrise in the back office operations thus limiting the growth potential of the brokingmembers. The inconvenience faced by investors (in areas that are far flung and awayfrom the main metros) in settlement of trade also limits the opportunity for suchinvestors, especially in participating in auction trading. The physical form of holding

Content Digitized by eGyanKosh, IGNOU

49

Depositoriesand trading in securities also acted as a bottleneck for broking community in capitalmarket operations. Risk exposure of the investor also increased due to this trading inpaper. Some of these associated risks were: delay in transfer of shares, possibility offorgery on various documents leading to bad deliveries, legal disputes etc., possibilityof theft of share certificates, prevalence of fake certificates in the market, mutilationor loss of share certificates in transit. Thus, the system of security transactions wasnot as investor-friendly as it ought to be. In this scenario dematerialized trading underdepository system is certainly a welcome move. This popular financial serviceemerged in Germany first time.

9.2 DEPOSITORY SYSTEM

Depository system essentially aims at eliminating the voluminous and cumbersomepaper work involved in the scrip-based system and offers scope for ‘paperless’trading through state-of-the-art technology. It is an institution which maintains anelectronic record of ownership or securities. The storage and handling of certificatesis hence immediately eliminated which generates a reduction in costs like back officecost for handling, transporting and storing certificates.

Depositary participant is an institution akin to bank for securities. When an investorhands over securities to a depository participant, investor’s account is credited. Theinvestor’s depository system account will show their holdings. His account is updatedfor his transactions of sale and purchase but without physical movement of scrips ortransfer deeds. In depository system, share certificates belonging to the investors aredematerialised (demats). Dematerialisation or “Demat” is a process wherebyinvestors’ securities like shares, debentures etc, are converted into electronic dataand stored in computers by a Depository. Securities registered in investor’s name aresurrendered to depository participant (DP) and these are sent to the respectivecompanies who will cancel them after “Dematerialization” and credit investor’sdepository account with the DP. The securities on Dematerialization appear asbalances in one’s depository account. These balances are transferable like physicalshares. If at a later date, investors wish to have these “demat” securities convertedback into paper certificates, the Depository does this and their names are entered inthe records of depository as beneficial owners. The beneficial ownership will bewith investor but legal ownership will be with the depository. Consequently,benefits like interest, dividend, rights: bonus and voting rights will be with investors.Since depository is to get securities transferred in its name, the depository name willbe registered in the ownership register maintained by the company. Thus, instead ofname of several owners, the name of depository figures in the register of company.Since transfer will be affected only in depository, register of company need not beupdated on every transactions of sale or purchase of company’s share. It alleviatesthe hardships currently faced by the investors and it also offers option for convertingthe shares from electronic to physical or paper form through a process ofrematerialisation (remat). Depository system is, indeed, time tested and longprevalent in many advance countries and has been playing a significant role in stockmarkets around the world.

Constituents of Depository System

The depository system comprises of:

i) Depository

ii) Depository Participants (DPs)

iii) Companies/Registrars

iv) Investors

Out of these first two need discussion since last two components are general.


50

Financial Market:Operations and Services

i) Depository

Depository functions like a securities bank, where the dematerialized physicalsecurities are traded and held in custody. This facilitates faster risk free and low costsettlement. Depository is much like a bank and performs many activities that aresimilar to a bank depository:

a) enables surrender and withdrawal of securities to and from the depositorythrough the process of ‘demat’ and ‘remat’,

b) maintains investors’ holdings in electronic form,

c) effects settlement of securities traded in depository mode on the stockexchanges,

d) carries out settlement of trades not done on the stock exchanges (off markettrades).

In India a depository has to be promoted as a corporate body under Companies Act,1956. It is also to be Registered as a depository with SEBI. It starts operations afterobtaining a certificate of commencement of business from SEBI. It has to developautomatic data processing systems to protect against unauthorised access. Anetwork to link up with depository participants, issuers and issuer’s agent has to becreated.

Depository, operating in India, shall have a net worth of rupees one hundred croreand instruments for which depository mode is open need not be a security as definedin the Securities Contract (Regulations) Act 1956. The depository, holding securities,shall maintain ownership records in the name of each participant. Despite the factthat legal ownership is with depository, it does not have any voting right against thesecurities held by it. Rights are intact with investors. There are two depositories inIndia at present i.e. NSDL and CDSL.

ii) Depository Participants (DP)

A DP is investors’ representative in the depository system and as per the SEBIguidelines, financial institutions/banks/custodians/stock brokers etc. can become DPsprovided they meet the necessary requirements prescribed by SEBI. DP is also anagent of depository which functions as a link between the depository and thebeneficial owner of the securities. DP has to get itself registered as such under theSEBI Act. The relationship between the depository and the DP will be of a principaland agent and their relation will be governed by the bye-laws of the depository andthe agreement between them. Application for registration as DP is to be submitted toa depository with which it wants to be associated. The registration granted is valid forfive years and can be renewed. As depository holding the securities shall maintainownership records in the name of each DP, DP in return as an agent of depository,shall maintain ownership records of every beneficial owner (investor) in book entryform.

A DP is the first point of contact with the investor and serves as a link between theinvestor and the company through depository in dematerialisation of shares and otherelectronic transactions. A company is not allowed to entertain a demat request frominvestors directly and investors have to necessarily initiate the process through a DP.

Activity 1

a) List four major reasons for emergence of depositories:

......................................................................................................................

......................................................................................................................

......................................................................................................................


51

Depositories......................................................................................................................

......................................................................................................................

b) What is depository service? (answer in five lines).

......................................................................................................................

......................................................................................................................

......................................................................................................................

......................................................................................................................

......................................................................................................................

c) List five DPs operating in India or your locality.

......................................................................................................................

......................................................................................................................

......................................................................................................................

......................................................................................................................

......................................................................................................................

9.3 FUNCTIONING OF A DEPOSITORY

As mentioned earlier that, depository system operates through depository account.Let us see what it is.

Depository Account

An investor desiring to demat his holdings has to open a depository account where inall details of investors’ transactions is recorded. Opening such account is as simple asopening a bank account. Investor can open a depository account with any DPconvenient to him.

There is no restriction on the number of depository accounts a person can open.However, if existing physical shares are in joint names, one has to open a jointaccount submitting share certificates for demat. A sole holder of the sharecertificates cannot add more names as joint holders at the time of dematerialising hisshare certificates.

A client can choose to open more than one account with the same DP. In addition tothis, he has a choice of opening accounts with more than one DP. However a brokercan open just one Clearing Member (CM) account per card/stock exchange forclearing purpose, but he can still open multiple beneficiary accounts. Beneficiary isthe personal account wherein brokers can keep their personal holdings.

A clearing member cannot hold his personal holdings in his clearing member account.A broker may deal in the depository system as a clearing member only through aspecial account, known as the Clearing Member account. This account can be usedonly for clearing purposes and not for holding his own securities in it. As this is atransitory account, the securities held in this account are not eligible for corporateactions. Therefore. the broker will have to open a separate beneficiary owneraccount to hold his investments.

There is no compulsion for the client to open his account with the same DP as that ofhis broker. Even if he has an account with another DP, he can carry out normalbusiness with his broker. There is no loss in operational efficiency. But it is possiblethat opening account with his broker’s DP may work out to his advantage, as some


52


DPs may offer special charge structure if the broker and his clients are dealingthrough him. To open an account one has to:

l Fill up the account opening form, which is available with the DP.

l Sign the DP-client agreement, which defines the rights and duties of the DP andthe person wishing to open the account.

l Receive client account number (client ID).

This client ID along with his DP ID gives investor a unique identification in thedepository system. In depository account, transactions are through demat and remat.Let us discuss these two along with other two relevant concepts.

i) Dematerialisation (Demat)

‘Demat’ is a process by which investors’ share certificates are taken back bycompany through DP, verified and if found in order, demat is confirmed by thecompany and then an equivalent number of shares are credited by the DP toinvestors account as electronic holding. Chart 9.1 explains demat in clear terms. Theentire process of dematerialisation, as required by SEBI, has to be completed within aperiod of 15 days. Dematerialisation is also known as immobilisation of securities.Dematerialisation can be done only on the request made by the investor throughparticipant in a Dematerialisation Request Form (DRF). Thus, ‘Dematerialisation’ is aprocess where by physical existence of security certificates is made extinct andconverted into electronic holdings.

Chart 9.1 : Switching from Scrip-based System to Depository System(Dematerialization Process)

NSDL DEPOSITORYPARTICIPANT

REGISTRAR INVESTOR

1) Investor surrenders certificates for dematerialization to DP.

2) DP intimates depository of the request through the system.

3) DP submits the certificates to the registrar.

4) Registrar confirms the dematerialization request from depository.

5) After dematerializing, registrar updates accounts and informs depository of - thecompletion of dematerialization.

6) Depository updates its accounts and informs the DP.

7) DP updates its accounts and informs investor.

ii) Rematerialisation (Remat)

Rematerialisation is a process (Chart 9.2) of converting electronic holdings of investorback into share certificates in paper form. The process of rematerialisation is alsocarried out through DP and the process has to be completed within a period of30 days. Thus, once security is dematerialised it is not necessary that investor is tocontinue in depository mode for all times to come. He can switch over to rematwhereby he gets back physical possession of security scrips. The client of DP has tosubmit a request for remat. This request is forwarded for necessary action todepository. The depository confirms the rematerialisation request to the Registrar and

›s

›s

›s

›s

›s

›s

›s›s4 5

2

6

31 7›

s›s


53

DepositoriesTransfer Agents. The Registrar updates the accounts and print the desired certificate.The depository is informed by Registrar and certificate is sent to the investor. Thedepository updates its records and communicates to DP to incorporate necessarychanges in the account of the client.

Chart 9.2 : Switching from Depository System to Scrip-based System(Rematerialisation Process)

NSDL DEPOSITORYPARTICIPANT

REGISTRAR INVESTOR

1) Beneficial owner requests for rematerialisation.

2) DP intimates of the Depository request through the system.

3) Depository confirm Rematerialisation request to the registrar. Registrar updatesaccounts and prints certificates.

4) Depository updates accounts and downloads details to DP.

5) Registrar dispatches certificates to investor.

iii) Fungibility

In the depository system, since the physical form of security loses its relevance, thesecurities are to be ‘fungible’. Prior to amendment in 1996, the Companies Act 1956required every specific physical scrip of security as shares or debentures to havedistinctive number for each security when issued or transferred. Securities have beenmade fungible by deleting section 83 of the Companies Act, 1956. Now thecertificates will not carry a distinct number and will form a part of a ‘fungible mass’.Dematerialized shares do not have any distinctive or certificate numbers. Theseshares are fungible - which means that 100 shares of a security are the same as anyother 100 shares of that security. All the certificate of the same security will becomeinterchangeable in the sense that the owner of the security will lose the right to obtainthe exact certificate. The situation of certificate is now that of currency note and thenumber of currency note has no association with ownership of currency note.

Each security held in dematerialized form is given an identity and it is in form of adistinctive ISIN (International Securities Identification Number). ISIN is a 12character long identification mark.

iv) Delivery vs. Payment

It is just not sufficient to have a depository for securities. The concept of Deliveryversus Payment (DVP) also needs to be looked into. DVP involves exchange ofsecurities for funds to take place simultaneously between the parties to a trade. Whilethe depository system would be able to handle the accounting of securities by bookentry, the funds part would have to be handled by the banking system. Therefore thetwo systems have to be integrated in order to have DVP.

It is too simplistic to think that DVP would be possible without having an efficientelectronic funds transfer systems because in India, the payment systems are still notupgraded. A quantum jump is required in the level and mode of interaction among thevarious banking institutions.

›s

›s

›s›s3

2

4

51

›s


54

Financial Market:Operations and Services 9.4 SWITCHING OVER TO DEPOSITORY

After discussing in brief the system, ingredients and participants of depository systemwe will discuss the stages involved in the process of switching over to depositorysystem from scrip based system.

i) Appointing DP

Any investor who intends to transact through depository system has to engage onedepository participant (DP). He can approach a DP of his choice and open anaccount with him just like one opens an account with a bank. Investor gets anidentification number called Client ID ( just as one gets ones bank account number)which serves as a reference point for all his transactions with D.P.

Every investor before getting his holding dematerialised has to enter into anagreement with the depository through a participant. This step is necessary whetherinvestor already has securities or securities are yet to be issued in a fresh issue. Theinvestor contracts only with that depository which accepts his securities in ‘depository mode’ since it is not necessary that all eligible securities must be indepository mode and with all the depositories. The decision on whether or not to holdsecurities within the depository mode and if in depository mode, with which depositoryor participants, would be entirely with the investor.

ii) Request for ‘Demat’

After any agreement is entered for getting securities dematerialised and his accountis opened, the investor makes an application to depository participants in form called‘Dematerialisation Request Form’ (DRF) to be provided by the DP and hands overhis share certificates duly cancelled by writing’ surrendered for dematerialisation’ tothem for demat. The DP will accept certificates registered only in investor’s name.

The request for dematerialisation with the depository participants is sent to thedepository through depository network with which DP is connected.

Simultaneously DP submits the securities certificates to the issuer company or itsRegistrar of transfer.

iii) Approach the Company or Registrar of Transfer

The depository will electronically intimate the issuer or its ‘Registrar and transferagent’ of the dematerialisation request. The issuer or the ‘Registrar and transferagent’ has to verify the validity of the security certificates as well as the fact that theDRF has been made by the person recorded as a member in its Register ofMembers. If the issuer or its Registrar is satisfied, it dematerialises the scrip andupdates its record.

iv) Confirmation of Demat

The Registrar to transfer or the concerned company when satisfied with the case ofdemat has to inform the depository of the completion of dematerialisation authorisingan electronic credit for that security in favour of the investor.

v) Crediting the Client’s Account

DP credits investor’s account with the number of shares so dematerialised andthereafter investor hold the securities in electronic form. If there is rejection of dematrequest then such credit is not given. After crediting the account, the client is send thenecessary information in form of a statement like we get bank statement after banktransactions.


55

DepositoriesOption of Rematerialisation

Investor also has the option of converting his electronic holding into share certificatesby requesting DP for a remat in a Rematerialisation Request Form (RRF) andthrough a similar process, company will issue new certificates to investor for theshares so rematerialised.

Activity 2

a) Can you identify similarities between depository account and bank account?

......................................................................................................................

......................................................................................................................

......................................................................................................................

b) What is dematerialisation?

......................................................................................................................

......................................................................................................................

......................................................................................................................

c) What do you understand by Fungibility of securities?

......................................................................................................................

......................................................................................................................

......................................................................................................................

d) Briefly explain DRF, Client 10, RRF.

......................................................................................................................

......................................................................................................................

......................................................................................................................

e) Collect formats from any DP for the following and study their contents:

i) Opening depository account

ii) DRF

iii) RRF

9.5 IS DEPOSITORY SYSTEM BENEFICIAL?

The emergence of depository system is a sign of prosperity of financial marketsystem specially capital market. Depository makes the market more systematic anddisciplined. On many fronts depository system is appreciated. Depositories pass onthe benefits and rights to the transferee quickly since the whole system is efficientand automated. Time lost in communication too is very low. Fraudulent encashment ofdividend warrants and loss of bonus or rights can be avoided. Since depository is tohave a scrip-less capital market, exchange of physical scrips is not desired. Thus, therisk of loss, mutilation: theft and forgery of security certificates is nil. Financial lossowing to loss of physical scrip will no longer haunt the investors. A depository systemprovides benefits to all the constituents of the capital markets viz. the country,investors, intermediaries and the issuers. Official expectations from dematerialisationof securities was expressed by SEBI in following words in its Annual Report1996-97.


56


“It is expected that as the network of depository participants and the proportion ofsecurities dematerialized in the depository increases, the benefits of reduced risk andlower transaction costs will extend to the vast majority of the market participation andlead to improved investor protection and services”.

Benefits of Demat

Transacting the depository way has several advantages over the traditional system oftransacting using share certificates. Some of the benefits are:

l Trading in demat segment completely eliminates the risk of bad deliveries, whichin turn eliminates all cost and wastage of time associated with follow up forrectification. This reduction in risk associated with bad delivery has lead toreduction in brokerage to the extent of 0.5% by quite a few brokerage firms.

l In case of transfer of electronic shares, one saves 0.5% in stamp duty. Cost ofcourier/notarization/the need for further follow-up with broker for sharesreturned for company objection is also saved.

l In case the certificates are lost in transit or when the share certificates becomemutilated or misplaced, to obtain duplicate certificates, one may have to spend atleast Rs.500 for indemnity bond, newspaper advertisement etc, which can becompletely eliminated in the demat form.

l One can also receive bonuses and rights into depository account as a directcredit, thus eliminating risk of loss in transit.

l One can also expect a lower interest charge for loans taken against dematshares as compared to the interest for loan against physical shares. This couldresult in a saving of about 0.25% to 1.5%. Some banks have already announcedthis.

l RBI has increased the limit of loans against dematerialized securities ascollateral to Rs.2 mn per borrower as against Rs.1 mn per borrower in case ofloans against physical securities.

l RBI has also reduced the minimum margin to 25% for loans againstdematerialized securities as against 50% for loans against physical securities. .

The perceptions about safe keeping, risk taking, liquidity and credibility of the markethas undergone a sea change with the full scale operation of depository system andelectronic funds payment coupled with the automated trading systems.

9.6 SELLING AND BUYING OF DEMATERIALISEDSHARES

Trading in dematerialized securities is quite similar to trading in physical securities.The major difference is that at the time of settlement, instead of delivery receipt ofsecurities in the physical form, it is done through account transfer. An investor cannottrade in dematerialized securities through his DP. Trading at the stock exchanges canbe done only through a registered trading member (broker) of the stock exchangeirrespective of whether the securities are held in physical or dematerialized form.

Any investor who buys securities from any of the stock exchanges wheredematerialized securities are available, may receive his delivery in the dematerializedform as dematerialized shares can be delivered in the physical segment at the optionof the seller. When investor wants to purchase shares in electronic form, he has toinstruct his broker to purchase the dematerialized shares from the stock exchanges.Once the order is executed, he has to instruct his DP (vide a simple format which isavailable with the DP) to receive securities from his broker’s clearing account.


57

DepositoriesSelling dematerialized shares in stock exchanges is similar to the procedure for sellingphysical shares. Under depository system instead of delivering physical shares to thebroker, one instructs one’s DP to debit his account with the number of shares soldand credit his broker’s clearing account. For this, a delivery instruction has to begiven to DP in a standardized format, which will be available with DP.

Other Services

a) Pledging Dematerialized Shares: Dematerialized shares could be pledged; infact, this is more advantageous as compared to pledging share certificates. Afterloan is repaid one can request for a closure of pledge by instructing one’s DPthrough a standard format. The pledgee on receiving the repayment as well asthe request for closure of pledge will instruct his DP accordingly. Even thelocked-in securities can be pledged. The pledgor continues to remain thebeneficiary holder of those securities even after the securities are pledged.

b) Initial Public Offerings: Credits for public offers can be directly received intodemat account. In the public issue application form of depository eligiblecompanies, there will be a provision to indicate the manner in which securitiesshould be allotted to the applicant. One is to mention one’s client accountnumber and the name and identification number of DP. All allotment due toinvestor will be credited into required account.

c) Receipt of Cash/non-cash Benefits: When any corporate event such asrights or bonus or dividend is announced for a particular security, depository willgive the details of all the clients having electronic holdings in that security as ofthe record date to the registrar. The registrar will then calculate the corporatebenefits due to all the shareholders. The disbursement of cash benefits such asdividend/ interest will be done directly by the registrar. In case of non-cashbenefits, depository will directly credit the securities entitlements in thedepository accounts of all those clients who have opted for electronic allotmentbased on the information provided by the registrar.

d) Stock Lending and Borrowing: Through the depository account securities inthe demat form can be easily lent/ borrowed. Securities can be lent or borrowedin electronic form through an approved intermediary, who has opened a special‘intermediary’ account with a DP. Instructions are to be given to DP through astandard format (which is available with DP) to deposit securities with theintermediary. Similarly to borrow securities from the intermediary, one has toinstruct DP through a standard format (which is available with your DP).

e) Transmission of Securities: Transmission of securities due to death, lunacy,bankruptcy, insolvency or by any other lawful means other than transfer is alsopossible in the depository system. In the case of transmission, the claimant willhave to fill in a transmission request form, (which is available with the DP)supported by valid documents.

f) Freezing Account with DP: If at any time as a security measure one wishesthat no transaction should be effected in one’s account, one may advise one’sDP accordingly. DP will ensure that account of such investor is totally frozenuntil further instructions from him.

Tax Aspect

In case of dematerialized holdings cost of acquisition and period of holding forcalculation of capital gains tax is determined on the basis of First In First Out (FIFO)method. This is as per the amendment to the Income Tax Act. The proof of the costof acquisition will remain to be the contract note.


58

Financial Market:Operations and Services 9.7 DEPOSITORY SYSTEM IN INDIA

In April 1996 the Governing Board of SEBI approved the draft of SEBI(Depositories and Participants) Regulations 1996. The Securities andExchange Board of India notified these regulations on May 16, 1996.The government of India in 1996 introduced in Lok Sabha the DepositoryBill to usher in scrip less trading and avoid “bad delivery, theft and forgery inshare transfer and settlement” .

National Securities Depositories Ltd. (NSDL) promoted by Industrial DevelopmentBank of India, Unit Trust of India and National Stock Exchange emerged as the firstdepository to be registered in India. There was a great debate on central-versus-multiple depository system. Ultimately multiple depository system became a choice.Considering the sheer size of the network that would have to be established, a singleorganisation may not be able to handle it. To have competition, multiple depository is amust. Subsequently, another depository emerged on Indian scene i.e. CentralDepository Services Limited (CDSL). It received a certificate of commencement ofbusiness from SEBI on February 8, 1999. CDSL was set up with the objective ofproviding convenient, dependable and secure depository services at affordable cost toall market participants. All leading stock exchanges like the National Stock Exchange,Calcutta Stock Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad,etc have established connectivity with CDSL.

29th November, 1996 was a red letter day for Indian capital market as in rnore than100 year history of stock exchanges in India, for the first time National StockExchange witnessed trade in dematerialised scrips of an Indian Company i.e.‘Reliance Industries’. The very first lot of transaction was, as expected, at premiumin comparison to prevailing price for physical delivery due to inherent qualities ofquick settlement. clean deliveries and exemptions from stamp duty. To make thesystem operational on large scale, Government of India promulgated an ordinance toamend the Depository Act to enable the shares of statutory bodies such as IDBI.SBI, UTI and other public sector banks and the units of mutual funds to transactthrough depositories.

The changes in last few years in mechanism of capital market has made market moreefficient. About 99% of settlements are through depositories. Besides overcoming theproblems of bad deliveries, paper deliveries etc. this system has cut down the timetaken in settlement. Indian market now has attained T+3 settlement effectively andefficiently through NSDL and CDSL Some of the important statistics aboutdepositories in India at present (May 2004) is as under:

Features NSDL CDSL

DPs (no.) 216 220

Investors (Iakhs) 53.53 6.71

Demat (qty- Crores) 8672 1428

Demat (Value Rs- Cr) 912812 103338

No. of Co.s (equity) 5311 4837

(Source: NSDL and CDSL )


59

DepositoriesWorking of National Securities Depositroy Limited (NSDL)

NSDL is the first depository in India till now registered with SEBI in June 1996.It has been promoted jointly by lDBI, UTI and NSE. NSDL operates through anetwork of DPs who interact with investors. However, as required by theDepositories Act, NSDL is responsible to every individual investor holding an accountwith the depository. It operates on a two-tier structure, wherein it maintains theaccounts of the DPs, who in turn maintain the clients’ accounts. The online softwareprovided by NSDL to the DPs give an access to each account maintained bydepository participants so that their functioning can be monitored and controlled.NSDL also maintains online connectively with the registrars and transfer agents (R&T) of the securities and perform a daily reconciliation of all the account balances toensure that the number of securities issued and dematerialised in the depositorytallies. NSDL operates through DPs to perform the relevant functions which are asunder:

a) Getting withdrawal and surrender of securities from and to the depository.

b) Maintain investor holding in electronic form.

c) Effect settlement of securities traded on the exchanges.

d) Carry out settlement of trades not done on the stock exchanges, i.e. off markettrades.

In the operations of NSDL besides DPs there is another organisation called asNational Securities Clearing Corporation Ltd. (NSCCL). It is responsible for theclearing and settlement system for its clearing members (CM) and investors to settlethe trades in the depository section. The procedure is as under:

i) The cycle of delivering and receiving securities in this market segmentbroadly remains similar to the existing cycle for physical securities, that is,from Wednesday to Tuesday with the exception that pay-in and payout ofboth securities and funds are affected on the same day, that is Tuesday.

ii) In the physical segment, today, a seller delivers paper securities to his CM whoin turn, pays in such securities in the clearing house in the depository segment,the seller is required to instruct his DP to transfer securities from his accountwith the DP to the CM’s pool account with the DP.

iii) On or before the time specified for the pay- in by NSCCL, the CMinstructs its DP to move the required balance from its pool account to itsdelivery account.

iv) The NSDL then moves the balances from CM’s delivery accounts to NSCCLsettlement account within the depository as per schedule set up for the pay in ofdepository securities.

v) Payout is received from NSCCL into the CM’s account from where the CMinstructs his DP to distribute the securities to the buyers.

NSDL also provides stock lending and borrowing facilities to the investors, subjectto the regulations on lending and borrowing. The investor can also receive hiscorporate benefits through NSDL. The disbursement of cash benefits such asdividend/interest will be done by the registrar whereas the distribution of securitiesentitlements will be done by the depository based on the information provided by theregistrar.

The NSDL fee structure

The NSDL has specified a fee structure for all the players in the system and it is asfollows:


60


i) Depository participants

Some of the important fee heads and charges are as under:

NSDL’s Fee Structure

Fee Type Rate of Fees

Custody fee Rs. 6 per annum per total holding In a Icompany

Transaction fee Rs.10 per transaction (charged to selleronly)

Pledge creation Rs.25 per instruction

Securities borrowing Rs. 25 per instruction

Rematerialisation Rs. 10 per certificate

Dematerialisation No charges

Security deposit Rs. 10 lakh

Registration fee Rs. 1.5 lakh

ii) Issuers and registrars

No fees charged

iii) Investors

The DPs make different charges to render services to investors like for openingaccounts, closing the account, Demat, Remat, custody, market transfers (sale orpurchase). Some DPs also ask for security deposits. These costs at the moment arekeeping small investors away from depository. Further, psycofear of not holding sharecertificate in physical form is also keeping investors away from depository.

Charges Made by a Sample of DPs to Investors:

a) Advance deposit of Rs.1200 (Valid for 2 years) and account maintenancecharges of Rs.600 per annum.

b) Transaction charges 0.04 % (Minimum Rs.20) + NSDLs settlement charges.

c) Transaction charge 0.04 % (Minimum Rs.20)

d) RS.15 per transaction + NSDL settlement charge.

e) Transaction charges RS.60 for value upto Rs.1 lac and 0.02 % for valueexceeding Rs. 1 lac.

f) Account Maintenance on slab basis.

g) Account maintenance is found to vary among DPs from zero to Rs. 450 perannum, the most common range being Rs. 200 – 300.

h) Some DPs demand security deposits.

i) Some DPs have the policy of cross selling among their associative businesses bygiving discount to the favoured customers

iv) Companies

Companies wanting their scrips to be de-materialised need to invest Rs. 20 lakh toRs. 25 lakh in establishing connectivity with the exchange. This is in fact not a fee butthis amount is required for creation of desired infrastructure.


61

DepositoriesNot Very Happy Situation

A point to be noted is that share depository service has unfortunately not evolved inIndia as a voluntary commercial service, to be priced attractively for the users but asa compulsory bureaucratic requirement prescribed by SEBI for trading shares.Making demat compulsory and allowing the depositories to exploit their near-monopolistic position by charging whatever fees they like, is nothing but robbing ofthe small investors. This is pushing the small investors out of the equity market.Demat has never been compulsory in the US. The Working Group, set up by SEBI in1994, on the legal framework of a depository system for India, had envisaged that “itwould be optional for an investor to hold and transfer the securities through or outsidethe depository”, although, in long run, the bulk of the securities may be held in thedepository form. The group also recognised that “in many cases, investors would beresiding at a place where no depository facilities are available and a small investormight find it costly to transfer the shares through depository.”

A survey conducted by SCMRD on household investors and its empirical data on theextent of acceptance of the depository system among ordinary investors reveals thata vast majority of middle class shareowners in India have preferred not to go fordemat and to continue holding paper certificates but this leaves them on the horns ofa dilemma. Also, about 40 per cent of listed companies, mainly the smaller ones, havenot joined the depository system but, as the traditional trading system has been almostdismantled in haste, the shareholders of such companies are also suffering. This hascreated serious difficulties for mid-sized and small companies in tapping the publicmarket for capital. All these aspects are not being given proper consideration bypolicy makers and regulators concerned with the capital market.

The depositories levy certain fees from Depository Participants (DPs), who are itsagencies for providing depository services to investors. The investors have directcontact only with the DPs and no contact at all with depositories. They leave DPscompletely free to decide in what manner and how much they will charge to theinvestors for the depository services. Most DPs charge for account opening, accountmaintenance, custody, transaction settlement, pledge creation and closure, etc. TheDPs have to charge to investors substantially more than what the depositories chargeto DPs in total because DPs have to recover their own operational expense besidesthe fee they pay to the depositories.

In view of the high cost of depository system for custody purposes alone, an investor,who is not a frequent trader, is being quite rational by not going for demat. The wholedepository system in India seems to have been designed mainly keeping in view theneeds of frequent traders and speculators rather than the needs of long-terminvestors who may trade only once in a while. Perhaps: those who designed thedepository system were also motivated by the objective of maximising thedepository’s income rather than serving the actual needs of the clients in the mosteconomical way.

Dematerialisation should be optional (especially for below par value shares) as smallinvestors find the charges very high,. At times, the cost of the shares is less thanthe dematerialisation. Compulsory demat should be abolished and transactions shouldbe allowed for physical sale or purchase in case of small investors.

9.8 TECHNOLOGY AND DEPOSITORY

After gong through this lesson up to now, you can appreciate that to think ofdepositories without technology is impossible. Depositories carry out their activitiesthrough various functionaries as DPs, Issuing corporates and their Registrars andTransfer agents, clearing houses etc. Depositories are electronically linked to each of


62


such partners via a satellite link. The norms laid down by SEBI for Depositories arealso technology oriented. In order to facilitate transfers between investors havingaccounts in the two existing depositories in the country the Securities and ExchangeBoard of India has asked all stock exchanges to link up with the depositories. SEBIhas also directed the companies’ registrar and transfer agents to effect change ofregistered ownership in its books within two hours of receiving a transfer requestfrom the depositories.

Once connected to both the depositories the stock exchanges have also to ensure thatinter-depository transfers take place smoothly. It also involves the two depositoriesconnecting with each other. The NSDL and CDSL have signed an agreement forinter-depository connectivity. All this cannot be possible in absence of technology.Use of internet provides user friendly features besides efficient control on settlementprocess. Both the depositories have successfully harnessed technology to the fulladvantage of the investors and investment culture in India.

In NSDL, Very Small Aperture Terminals (VSATs) is such a link and its entireintegrated system has been named as NEST (National Electronic Settlement &Transfer). To ensure uninterrupted service NSDL has three level back up.

Machine level back up: The IBM mainframe situated at “Trade World” (NSDLoffice in Mumbai) in which the data is processed has adequate redundancy built intoits configuration. There is a standby central processing unit (CPU) to whichprocessing can be switched over to in case of main system CPU failure. The disk hasRAID implementation, which ensures that a single point failure will not lead to loss indata. All network components like router, communication controllers etc, have on-lineredundancy and thus a failure does not result in loss of transaction.

Disaster back up site: In addition, a disaster back up site equipped with a computeridentical to the mainframe computer and computing resources has been set up at aremote location about 175 km away from Mumbai. This site has been tested foroperations from the site.

Back-up in case of power failure: Continuity in power supply to the main systemsis assured by providing for; dual uninterrupted power supply (UPS) for IBM-Mainframe and related components wherein the two UPSs are connected in tandem.In case of failure of primary UPS, the secondary UPS takes over instantaneously andthus, there is no interruption in operation, and back-up diesel generator set.

To ensure safety to investors SEBI desires that where records are kept electronicallyby the participant, it shall ensure that the integrity of the data processing systems ismaintained at all times and take all precautions necessary to ensure that the recordsare not lost, destroyed or tampered with and in the event of loss or destruction, ensurethat sufficient back up of records is available at all times at a different place. If aninvestor looses his statement of holdings, he may inform his DP and obtain a duplicatestatement of holdings. The loss of statement of holding will not affect his actualholdings. Depository account details are confidential. There are strict systems andprocedures established to protect the confidentiality of investor information at thedepository to ensure that these are available to only authorized persons. Even a DPother than your own, cannot have access to your account.

IT and schemes of CDSL

i) easi. electronic access to securities information easi is a convenient, simple tooperate facility, which allows Beneficial Owners (BOs) and Clearing Members(CMs) to access their demat account through an internet enabled PC for obtaininginformation about their holdings and transactions, anywhere. 7 days a week. 24 hoursa day, through CDSL’s website www.cdslindia.com. It allows SO/CM an anytime-


63

Depositoriesanywhere access of the holdings and transactions in his demat account. Thus, a BOcan, not only monitor his account but also does not require approaching his DP eachtime a statement of account is required. The portfolio valuation facility also savesvaluable time for investors in looking up stock quotes daily. The almost real-timeinformation available through easi makes it very convenient for a BO to makeeffective decisions on his portfolio. A BO can avail of this facility only if the DP withwhom he maintains his account is registered for this facility. Registering to easi is avery simple process. One is to log into website site www.cdslindia.com. and proceedas directed.

A BO can use easi for:

a) Viewing, downloading and printing of details of holdings and status oftransactions on almost real time basis, anytime-anywhere.

b) Obtaining the valuation of his holdings in his account as on the previous dayclosing price on BSE.

c) To print/download the statement of account as and when required.

easi also provides a convenient overdue report to CMs which facilitates them tomonitor pay-in of securities. CMs can view the overdue status of pay-in instructionsprovided by clients and can also monitor the client level payout through easi.

ii) easiest (electronic access to securities information and execution of securedtransactions) is another scheme wherein internet facility permits clearing members(CMs)/Beneficial Owners (BOs) to submit debit / credit transaction instructions toeffect off-market, on-market, interdepository and early pay-in transactions. Moreover,all the facilities and benefits of easi are automatically available to a subscriber ofeasiest.

9.9 LEGAL SET UP FOR DEPOSITORIES IN INDIA

Protecting the interest of investors is of paramount importance to SEBI and in thisdirection it regulates the provisions of Depositories Act, 1996. It is the statute whichgives directions to depository business in India. As per the Act a depository should bea corporate body and should get certificate of Commencement of Business fromSEBI. The Act specifies Rights and Obligations of depositories, participants, issuersand beneficial owners. Some of the important provisions are:

– Depository shall enter into an agreement with one or more participants as itsagent.

– All securities held by a depository shall be in a fungible form.

– A depository shall be registered owner of securities for the purposes of effectingtransfers of ownership on behalf of a beneficial owner. Beneficial owners shallbe entitled to all the rights and benefits in respect of his securities held by adepository.

– Beneficial owner with prior information can pledge or hypothecate securitiesheld in depository.

– Depository shall furnish needed information to beneficial owners and Issuers.

– Depository is to indemnify beneficial owners for any loss incurred due tonegligence of participants.

– Depositories have powers to make byelaws for related matters with priorapproval of SEBI.

(also refer to Appendix)


64


To facilitate operations of the said Act SEBI (Depositories and Participants)Regulations 1996 were issued. These regulations, which regulate depository system,run in seven chapters with 69 regulations, two schedules and five form formats.These regulations cover the registration of depositories who are to submit applicationin specified forms along with prescribed information and registration fee. Certificateof registration is granted subject to some conditions (See Regulation No.7). Ongetting certificate of registration, SEBI issues Certificate of Commencement ofBusiness for which a specified form is to be submitted. SEBI considers all matterswhich are relevant to the efficient and orderly functioning of depository (SeeRegulation 13). Participants are also to be granted’ Certificate of Registration (SeeRegulations 16 to 20). These certificates of Registration can be renewed. Theregulations also discuss rights and obligations of depositories, participants andissuers. Regulations also specify mode of communication for the system. Provisionshave also been made to facilitate creation of pledge and hypothecation ofsecurities of investor held in depository mode. SEBI has right to appoint inspectingofficers to undertake inspection of the books of accounts, records, documents andinfrastructure systems and procedure of a depository, participant, a beneficial owner,an issuer or its agent, either of its own or on any complaint. Some of the importantregulations for depositories are given in Appendix.

Activity 3

a) List five important benefits of demat.

......................................................................................................................

......................................................................................................................

......................................................................................................................

b) Briefly discuss the followings in relation with depositories:

Pledging of securities, Stock lending, Transmission of securities.

......................................................................................................................

......................................................................................................................

......................................................................................................................

c) Name the two depositories in India.

......................................................................................................................

......................................................................................................................

......................................................................................................................

d) Visit the sites of the two depositories and collect latest data.

......................................................................................................................

......................................................................................................................

......................................................................................................................

e) Visit three DPs and compare various fee charged by them from investors.

......................................................................................................................

......................................................................................................................

......................................................................................................................

f) What way technology facilitates depositories to work?

......................................................................................................................

......................................................................................................................

......................................................................................................................


65

Depositoriesg) Which enactment regulates depositories in India?

......................................................................................................................

......................................................................................................................

......................................................................................................................

9.10 SUMMARY

Depository system essentially aims at eliminating the voluminous and cumbersomepaper work involved in the scrip-based system and offers scope for ‘paperless’trading through state-of-the-art technology. It is an institution which maintains anelectronic record of ownership or securities. Depository functions like a securitiesbank, where the dematerialized physical securities are traded and held in custody.This facilitates faster, risk free and low cost settlement. Constituents of DepositorySystem are: Depository, Depository Participants (DPs), Companies/Registrars andInvestors. In depository system, share certificates belonging to the investors aredematerialised (demats). Dematerialisation or “Demat” is a process wherebyinvestors’ securities like shares, debentures etc, are converted into electronic data andstored in computers by a Depository. Securities can again be converted into physicalform and it is called Rematerialisation . In the depository system, since the physicalform of security loses its relevance, the securities are to be ‘fungible’. Each securityheld in dematerialized form is given an identity and it is in form of a distinctive ISIN(International Securities Identification Number). There are two depositories in Indiahaving about 436 DPs. Their fee ‘charges for investors differ and are high for smallinvestors. Both the depositories have successfully harnessed technology to the fulladvantage of the investors and investment culture in India. Depositories in India areregulated by Depository Act 1996 and to facilitate operations of the said Act SEBI(Depositories & Participants) Regulations 1996 were issued. It is a general feelingthat depository service has added to the efficiency of capital market in India.

9.11 KEY WORDS

Demat : Investor securities like shares, debentures, etc. are converted into electronicdata and stored in computers by a depository.

Depository : Functions like a securities bank, where the dematerialized physicalsecurities are traded and held in custody.

Depository Account : An account which the investor opens with a DP wherein allthe details of the investor’s transactions are recorded in demat form.

Dematerialisation (Demat) : Is a process where by physical existence of securitycertificates is made extinct and converted into electronic holdings.

Rematerialisation : Converting the shares from electronic to physical or paperform.

9.12 SELF ASSESSMENT QUESTIONS

1 ) Discuss the need of Depository System in a financial system.

2) Write notes on :

a) Depository Participant

b ) Depository account

c) Fungibility


66


3) Discuss the process of dematerialisation.

4) What type of records are maintained by DPs?

5) Discuss the process of creating pledge of securities held in depositories.

9.12 FURTHER READINGS

Gupta, L.C., Naveen Jain: Indian Securities Depository System, What has GoneWrong? Economic and Political Weekly, May 17, 2003

Kullu Rao, P. : Custodial services need for change, Chartered Secretary, October, 1996.

NSDL : A handout, National Securities Depositories Ltd., Bombay, 1997.

SEBI : SEBI (Custodian of Securities) Regulations, 1996.

SEBI (Depositories and Participants) Regulations, 1996.

Shah, Ravi : Emergence of Securities Depositories in India, The City, Aug-Sep 2002

Stock Lending scheme, 1997.


67

DepositoriesAppendix

The Depositories Act, 1996 gives power to depositories to make bye-lawsbut such bye laws should be consistent with the provisions of this Act and the SEBIRegulations. Such bye-laws shall provide for:

a) the eligibility criteria for admission and removal of securities in the depository;

b) the conditions subject to which the securities shall be dealt with;

c) the eligibility criteria for admission of any person as a participant;

d) the manner and procedure for dematerialisation of securities;

e) the procedure for transactions within the depository;

f) the manner in which securities shall be dealt with or withdrawn from a

depository;

g) the procedure for ensuring safeguards to protect the interests of participants andbeneficial owners;

h) the conditions of admission into and withdrawal from a participant by beneficialowner;

i) the procedure for conveying information to the participants and beneficialowners on dividend declaration, shareholder meetings and other matters ofinterest to the beneficial owners;

j) the manner of distribution of dividends, interest and monetary benefits receivedfrom the company among beneficial owners;

k) the manner of creating pledge or hypothecation in respect of securities held witha depository;

l) inter se rights and obligations among the depository, issuer, participants, andbeneficial owners;

m) the manner and the periodicity of furnishing information to the Board, issuer andother persons;

n) the procedure for resolving disputes involving depository, issuer, company or abeneficial owner;

o) the procedure for proceeding against the participant committing breach of theregulations and provisions for suspension and expulsion of participants from thedepository and cancellation of agreements entered with the depository;

p) the internal control standards including procedure for auditing, and monitoring.reviewing

SEBI (Depositories and Participants) Regulations, 1996

Board (SEBI) grants a certificate of registration to a depository subject to thefollowing conditions, namely:

a) the depository shall pay the registration fee specified within fifteen days of

receipt of intimation from the Board;

b) the depository shall comply with the provisions of the Act, the Depositories

Ordinance, the bye-laws, agreements and these regulations;

c) the depository shall not carryon any activity other than that of a depository

unless the activity is incidental to the activity of the depository;

d) the sponsor shall, at all times, hold at least fifty one per cent of the equity capitalof the depository and the balance of the equity capital of the depository shall beheld by its participants;


68


e) no participant shalf at any time, hold more than five per cent of the equity capitalof the depository;

f) If any information previously submitted by the depository or the sponsor to theBoard is found to be false or misleading in any material particular, or if there isany change in such information, the depository shall forthwith inform the Boardin writing;

g) the depository shall redress the grievances of the participants and the beneficialowners within thirty days of the date of receipt of any complaint from aparticipant or a beneficial owner and keep the Board informed about the numberand the nature of redressals:

h) The depository shall make an application for commencement of business underregulation 14 within one year from the date of grant of certificate of registrationunder this regulation; and

i) The depository shall amend its bye-laws as directed by SEBI.

Certificate of Commencement of Business

The Board shall take into account for considering grant of certificate ofcommencement of business, the following points, namely, whether

a) The depository has a net worth of not less than rupees one hundred crore;

b) The bye-laws of the depository have been approved by the Board;

c) The automatic data processing systems of the depository have been protectedagainst unautharised access, alteration, destruction, disclosure or disseminationof records and data:

d) the network through which continuous electronic means of communications areestablished between the depository, participants, issuers and issuer’s agents issecure against unauthorised entry or access;

e) The depository has established standard transmission and encryption formats forelectronic communications of data between the depository, participants, issuersand issuers’ agents;

f) the physical or electronic access to the premises, facilities, automatic dataprocessing systems, data storage sites and facilities including back up sites andfacilities and to the electronic data communication network connecting thedepository, participants, issuers and issuer’s agents is controlled, monitored andrecorded;

g) the depository has a detailed operations manual explaining all aspects of itsfunctioning, including the interface and method of transmission of informationbetween the depository,- issuers, issuers’ agents, participants and beneficialowners;

h) the depository has established adequate procedures and facilities to ensure thatits records are protected against loss or destruction and arrangements havebeen made for maintaining back up facilities at a location different from that ofthe depository;

i) the depository has made adequate arrangements including insurance forindemnifying the beneficial owners for any loss that may be caused to suchbeneficial owners by the wrongful act, negligence or default of the depository orits participants or of any employee of the depository or participant; and

j) The grant of certificate of commencement of business is in the interest ofinvestors in the securities market.


69

DepositoriesThe Board shall, before granting a certificate of commencement of business makes aphysical verification of the infrastructure facilities and systems established by thedepository.

Record of Services by Depository Participant (DP)

i) Types of records

Every participant shall maintain the following records and documents, namely:

a) Records of all the transactions entered into with a depository and with abeneficial owner;

b) Details of securities dematerialised, rematerialised on behalf of beneficialowners with whom it has entered into an agreement;

c) Records of instructions received from beneficial owners and statements ofaccount provided to beneficial owners; and

d) Records of approval, notice, entry and cancellation of pledge or hypothecation,as the case may be.

Every participant shall make available for the inspection of the depository in which itis a participant all records referred above.

Every participant shall allow persons authorised by the depository in which it is aparticipant to enter its premises during normal office hours and inspect its records.

Every participant shall intimate the Board the place wrlere the records anddocuments are maintained.

The participant shall preserve records and documents for a minimum period of fiveyears.

ii) Where records are kept electronically by the participant, it shall ensure that theintegrity of the data processing systems is maintained at all times and take allprecautions necessary to ensure that the records are not lost. Destroyed ortampered with and in the event of loss or destruction, ensure that sufficient backup of records is available at all times at a different place.

iii) If a participant enters into an agreement with more than one depository, it shallmaintain the specified records separately in respect of each depository.

iv) No participant shall assign or delegate its functions as participant to any otherperson, without the prior approval of the depository.

Agreement by Issuer

Every issuer whose securities have been declared as eligible to be held indematerialised form in a depository shall enter into an agreement with the depository.

Records to be Maintained by Depository

Every depository shall maintain the following records and documents, namely:

a) records of securities dematerialised and rematerialised;

b) the names of the transferor, transferee, and the dates of transfer of securities;

c) a register and an index of beneficial owners;

d) records of instructions received from and sent to participants, Issuers, issuers’agents and beneficial owners;

e) records of approval, notice, entry and cancellation or pledge or hypothecation, asthe case may be;

f) details of participants;


70


g) details of securities declared to be eligible for dematerialisation in the depository;and any other record required by SEBI.

Every depository shall intimate the Board the place where the records and documentsare maintained. Depository shall preserve records and documents for minimum periodof five years.

Manner of Creating Pledge or Hypothecation

Investor shall make an application in this regard to the depository through theparticipant who has his account in respect of such security in the manner specified inregulations. On receipt of application of the beneficial owner through the participant,the depository shall make such investigation as it may consider, necessary and if itapproves the creation of the pledge or hypothecation, it shall enter the particulars ofthe intended pledge or hypothecation in its r9cords and where he does so, intimate theparticipant who shall also amend its records accordingly and immediately intimate thebeneficial owner. On receipt of the intimation the beneficial owner may create apledge or hypothecation and where he does so, he shall intimate the depositorythrough the participant of the creation of such pledge or hypothecation. Theparticipant, on receipt of such intimation, shall substitute for the notice of pledge orhypothecation in its records and entry of pledge or hypothecation as the case may beand shall inform the pledgee, beneficial owner and the depository. Then depositoryshall make in its records the changes referred to . The entry of pledge made shall becancelled by the participant when the beneficial owner redeems the pledge orhypothecation and makes a request, with the concurrence of the pledgee, to theparticipant to cancel the entry of pledge or hypothecation, and the participant shallinform the depository accordingly. Then the depository shall make in its records therequired changes.

Other Points

l Every depository shall extend such co-operation to the beneficial owners,issuers, issuers’ agents, custodians of securities, other depositories and clearingorganizations as is necessary for the effective, prompt and accurate clearanceand settlement of securities transactions and conduct of business.

l No depository shall assign or delegate to any other person its functions as adepository, without the prior approval of the Board.

l Every participant shall enter into an agreement with a beneficial owner beforeacting as a participant on his behalf, in a manner specified by the depository inits bye-laws.

l Separate accounts shall be opened by every participant in the name of each ofthe beneficial owners and the securities of each beneficial owner shall besegregated, and shall not be mixed up with the securities of other beneficialowners or with the participant’s own securities.

l A participant shall register the transfer of securities to or from a beneficialowner’s account only on receipt of instructions from the beneficial owner andthereafter confirm the same to the beneficial owner in a manner as specified bythe depository in its bye-laws.

l Every entry in the beneficial owner’s account shall be supported by electronicinstructions or any other mode of instruction received from the beneficial ownerin accordance with the agreement with the beneficial owner.

l Every participant shall maintain continuous electronic means of communicationwith each depository in which it is a participant.

l Every participant shall have adequate mechanism for the purposes of reviewing,monitoring and evaluating the participant’s internal accounting controls andsystems.


Documents

Depositories in india