DEPOSITORY & CUSTODIAL SERVICES

Sumangala Talur

DEPOSITORY SERVICES The year is 1995. A small time shopkeeper in

Vidharabha makes a small profit in his business. He decides to invest his profits to buy shares in a major public limited company. To obtain his share certificates he has to travel all the way to Mumbai. But as luck would have it, his share certificates are lost on the way back to his village in Vidharabha. With the loss of share certificates, the investor thus loses all the money that he had invested in the shares of the company.

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The shares are no longer issued in the physical form. This process of conversion of physical share certificates into paperless scripts is Known as dematerialisation. All these benefits are introduced by the depositories system brought through by the Depositories Act, 1996.

DEPOSITORY SYSTEM IN INDIA

• The depository system in India was introduced through the Depositories Ordinance of 1996.

• The Depositories Act, 1996 defines a ‘depository’ as a company formed and registered under the Companies Act, 1956 and which is granted a certificate of registration under the Securities and

• Exchange Board of India (SEBI) Act, 1992, s. 12, sub-s. 1A5.

• Thus, depository is the person or a company to whom securities are entrusted for safekeeping handling dealings in them on behalf of the owner of the securities.

• A depository may also be compared to a bank. A depository holds securities (like shares, debentures, bonds, Government Securities, units etc) of investors in electronic form.

• Besides holding securities, a depository also provides services related to transactions in securities

.There are two methods in the

depository system:• immobilisation; and• dematerialisation.• Under immobilisation, the securities

are held by the depositary in a physical form in its own vaults, but the transfer of securities takes place through book entries.

DEMATERIALISATION• Under dematerialisation the securities in a

physical form are destroyed (that is dematerialised) and corresponding balances are electronically credited to the books entries.

• Dematerialisation essentially aims at eliminating voluminous & cumbersome paper work involved in the script-based system

• and offers scope for ‘paperless’ trading through state of-the-art technology. India has adopted the latter method.

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• Thus, the Companies Act, 1956, s. 68B introduced from 13 December 2000 stipulates that every public company, making initial public offer of any security for a sum of 10 crore or more, will issue the same only in dematerialised form.

.• As per SEBI (Disclosure, Investors Protection) Guidelines 2000, no company will make public or rights issue or an offer for sale unless:

(1) The company enters into an agreement with a depository for dematerialisation of securities already issued or proposed to be issued to the public or existing shareholders;

(2) The company gives an option to subscribers/shareholders/investors to receive the security certificates in physical form or hold the securities in dematerialised from with the depository.

BENEFITS OF DEPOSITORY SYSTEM• Elimination of bad deliveries.• Elimination of all risks associated with

physical scrips• Immediate transfer of securities.• Faster settlement cycle.• Faster disbursement of rights, bonus• Paperless system• Elimination of problems associated with

paper scrips – address change, name change, transfer and transmission etc.

• Ease in portfolio management.

DEMAT :PLAYERS & PROCESS• A depository - is the chief player in the

system and is basically organised as a company.

• Every depository is obliged to maintain constant continuous electronic means of communication with all its participants, issuer, clearing houses and clearing corporations.

• In India, two depositories NSDL & CDSL.• NSDL is an organisation promoted by UTI

and National Stock Exchange of India Ltd with its headquarters in Mumbai.

DEMAT :PLAYERS & PROCESS• CDSL is the second depository in the

country, after NSDL, promoted by the Bombay Stock Exchange (BSE), Bank of India, Bank of Baroda, HDFC Bank, State bank of India offering services similar to NSDL.

• Services offered by depositories– acts as a custodian as well as legally

transfer beneficial ownership, – reduces settlement risk by minimising

the paper work involved in trading, and settling and transferring securities

FRAMEWORK OF DEPOSITORIES IN INDIA

• The securities and exchange board of India Act – 1992

• The Depsitories Act 1996• The SEBI (DP) regulations, 1996• Bye laws of Depository• Business rules of Depository• The Companies Act 1956.

Depository Participant• A participant is assigned the role to act as

the agent of the depository under the enactment & may not act unless registered with the SEBI

• the Depositories Act, 1996 defines a participant as a person registered as such under SEBI Act, 1992

• The depository participant serves a link between the investor & the company through the depository in dematerialisation of shares and other electronic transactions.

• Issuer - The issuer is the company which issues the security.

• If a company makes a right issue of a value exceeding Rs. 50 lakhs or a public issue, it will enter into an agreement with a depository for dematerialising its shares or other securities.

• Beneficial Owner -is the person who is known as the member of a company holding shares and share certificates in the physical mode.

• In case of demat ‘beneficial owner’ as a person whose name is recorded with a depository.

PROCESS OF DEMATERIALISATION• Step1 -Shareholder/Investor approaches

to a DP of his choice and opens an account just like an account with a bank & gets Client ID created

• Step 2 -Upon receipt of DRF along with the original share certificates, the DP sends an electronic request to company through NSDL for conformation of demat and simultaneously surrenders the shareholdings.

• Step 5 -NSDL further confirms the demat to the shareholder’s DP.

• Step 6 - DP credits the shareholders’ account with the number of shares so dematerialised and thereafter the shareholder holds the securities in electronic form.

Other features of Demat Account• Once a shareholder opens an account with the

depository participant, he may buy or sell shares in electronic form without any paper work & the need for stamp duty of 0.5 per cent is also done away with.

• A shareholder may open accounts with any number of DPs of his choice just as opening bank account with a number of banks.

• Shareholder may trade in depository mode through any broker registered with National Stock Exchange.

• there is no minimum balance required in a demat account

Basic Services Offered by NSDL• Under the provisions of the Depositories Act,

NSDL provides various services to investors and other participants in the capital market like,

• clearing members, stock exchanges, banks and issuers of securities. These include basic facilities like account maintenance, dematerialisation, rematerialisation, settlement of trades through market transfers, off market transfers & inter-depository transfers, distribution of non-cash corporate actions and nomination/ transmission

• The depository system links the issuers, depository participants (DPs), NSDL and clearing corporation/ clearing house of stock exchanges, & facilitates holding of securities in dematerialised form and effects transfers by means of account transfers. This system which facilitates script less trading offers various direct and indirect services to the market participants.

• Market Transfers • Trading in dematerialised securities is quite similar

to trading in physical securities. The major difference is that at the time of settlement, instead of delivery/receipt of securities in the physical form, the same is affected through account transfers.

• Features: Delivery of securities to or from a clearing member are called "Market Trades" in the depository system. A simple way of determining whether a trade is market trade is that, either source or target in a transfer instrument is a CM account; such a transfer is a "Market Trade"

Procedure in Case of Market Transfer for Retail Investors:

Steps in market transfer

• Step-1: - Seller gives delivery instruction to DP1 to debit his account and transfer securities to "Clearing Member1 Pool A/c" with DP1. [Clearing Member1 gives corresponding receipt instruction to DP1 to accept in his clearing account securities transferred by seller through DP1 if he has not already given standing receipt instruction for all credits into his clearing account.]

Step-2: - Securities are transferred from "Selling Client A/c" to "Clearing Member1 Pool A/c" with DP1.

Step-6: - Securities are transferred from "Clearing Member2 Receipt A/c" to "Clearing Member 2 Pool A/c". Receipt account of clearing members is purely a transit account for maintaining audit trail.

Step-7: - Clearing Member2 gives a delivery instruction to DP2 to debit his "Clearing Member 2 Pool A/c" and credit "Buying Client A/c" with DP2. [Buyer gives corresponding receipt instruction to DP2 to accept in his account securities transferred from "Clearing Member2 Pool A/c" through DP2 unless he has not given a standing instruction to receive credits to his account.]

Steps in market transfer

• Step-3: - Clearing Member1 gives delivery to CC instruction to DP1 to debit his "Clearing Member1 Pool A/c" and credit his "Clearing Member1 Delivery A/c". The transfer will take place on the "execution date" mentioned in the instruction. Delivery to CC instruction to be given as per final/ net delivery obligation.

• Step-4: - Securities lie in the "Clearing Member1 Delivery A/c" till settlement day. At the time of pay-in, securities lying in "Clearing Member1 Delivery A/c" are automatically flushed to the Clearing Corporation/ Clearing House. No debit instruction is needed for this transfer. The deadline time for pay-in of securities to the Clearing Corporation/ Clearing House may vary from one exchange to another. Step-5: - At the time of pay-out securities are transferred from the Clearing Corporation/ Clearing House to "Clearing Member2 Receipt A/c" with DP2. No credit instruction is needed because this transfer is automatic.

• Step-6: - Securities are transferred from "Clearing Member2 Receipt A/c" to "Clearing Member 2 Pool A/c". Receipt account of clearing members is purely a transit account for maintaining audit trail.

•Step-7: - Clearing Member2 gives a DI to DP2 to debit his "Clearing Member 2 Pool A/c" and credit "Buying Client A/c" with DP2. [Buyer gives corresponding receipt instruction to DP2 to accept in his account securities transferred from "Clearing

• What is T+3 rolling settlement cycle and when delivery is to be given to a broker ?

• Ans. In case of T+3 rolling settlements , the trades taking place on each trading day are required to be settled on the third day following the date of trade. For example trades of Monday will be settled on Thursday morning. In this example, if you have sold securities, you need to make sure that the securities reach the account of clearing member of the stock exchange latest by Wednesday.

• Off - Market Transfers • Trading in demat securities is quite similar to

trading in physical securities. The major difference is that at the time of settlement, instead of delivery/receipt of securities in the physical form, the same is affected through account transfers.

• Features: Trades which are not settled through the Clearing Corporation/ Clearing House of an exchange are classified as "Off Market Trades". Delivery of securities to or from sub brokers, delivery for trade-for-trade transactions, by this definition are off-market trades.

Procedure in case of an Off-Market Transfer Involving Two Clients:

Corporate Actions • Features: Corporate actions are benefits given by a company

to its investors. These may be either monetary benefits like dividend, interest or non-monetary benefits like bonus, rights, etc. NSDL facilitates distribution of corporate benefits. Monetary benefits (dividends etc): NSDL will give the beneficiary ownership details to the Issuer/R & T Agent. The Issuer/R & T Agent will carry out the necessary processing and the distribution of such benefits will be outside the system. Non-monetary benefits (rights bonus etc): NSDL will give the beneficiary ownership details to the Issuer/ R & T Agent. The Issuer/R & T Agent will carry out the necessary processing and upload the beneficiary ownership details to NSDL. NSDL will then credit the beneficiary owners' accounts by downloading the data to the DPs.

Public Issues • Features: NSDL depository system provides facility

for allotments of securities directly in to the depository account of the investors in the dematerialised form.

Procedure: • The Issuer provides an option in the application

form to the BOs to opt for securities either in physical or electronic form.

• The BO who opts for electronic securities will indicate the DP Id and the beneficial owner a/c number in the application form and send it to the Issuer/R&T agent.

Public Issue contd• The Issuer/R&T agent will issue securities in

physical form in respect of those BOs who do not indicate any choice.

• The Issuer/R&T agent will provide allotment details and the date on which the necessary credit entries are to be made in the accounts of the beneficial owners (referred to as execution date) to NSDL.

• NSDL will perform the necessary bookings and the relevant credit entries are booked in the DPM on the execution date.

• The Participant will give the statement of holdings and transaction statement to the beneficial owners, giving the updated positions after the shares are credited.

SPEED-e

• NSDL launched SPEED-e in September, 2001. Any Participant of NSDL can subscribe to SPEED-e,

• The common infrastructure of NSDL. SPEED-e enables demat account holders to submit delivery instructions directly on the Internet through SPEED-e website https://speed-e.nsdl.com.

• SPEED-e is available only to those Participants who have subscribed to it and the Users sign an agreement with the Participant.

• A demat account holder will have the option of accessing SPEED-e either as a Password User or as a Smart Card User. A Clearing Member must be a Smart Card User to be able to access SPEED-e.

• Password Users can debit their demat accounts only in favour of specified Pre-Notified Clearing Member accounts (upto three), while Smart Card Users can submit instructions in favour of any number of accounts.

IDeAS• IDeAS (Internet-based Demat Account Statement) is the

facility for viewing balances and transactions in the demat account updated on an online basis with a delay of maximum 30 minutes. This facility is available to the Users of SPEED-e, Clearing Members who have subscribed to IDeAS and to those clients whose Participants are registered for IDeAS. A demat account holder or a Clearing Member will have the option to access IDeAS either as a Password or a Smart Card User.

• For more information on IDeAS logon to : http://www.nsdl.co.in/newnsdl/speed-e.php and select IDeAS.

• STEADY is a facility which enables the brokers to deliver/submit contract notes to custodians/ fund managers electronically by transmitting digitally signed trade information with encryption. It further enables fund managers to enrich the contract note and convert it into instructions for the custodian.

• STEADY will enable electronic communication between brokers, custodians and fund managers in respect of FII and domestic trades. In order to use the STEADY facility, brokers, custodians and fund managers will have to access 'STEADY' with smart card, bearing digital signature certificate issued by licensed Certifying Authority (CA), approved by NSDL.

• Settlement fee:• A settlement fee at the rate of Rs. 5 per debit instruction in a

Client's a/c shall be charged to the Participant of the Client.• A settlement fee at the rate of Re.1.00 per instruction in

respect of securities received from the Clearing Corp. into the Pool a/c of each Clearing Member maintained with the DP subject to a minimum of Rs. 1,000 and a maximum of Rs. 5,000 per quarter per CM A/c shall be charged to the Participant.

• A settlement fee at the rate of Rs.5 per debit instruction for transfer of securities by way of inter-settlement transfers in the CM A/c(s) shall be charged to the Participant.

• A settlement fee at the rate of Rs.5 per debit instruction for transfer of securities from the CM a/c of a CM to the CM a/c of another CM shall be charged to the Participant of the delivering Clearing Member.

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• Pledge feeA fee at the rate of Rs.25 per instruction for creation of pledge / hypothecation shall be charged to the Participant of the pledgor/ hypothecator. No fee shall be charged when a pledge / hypothecation is closed or invoked.

• FEE FOR DEMATERIALISATION & REMATERIALISATION

No fee shall be charged by the depository for dematerialisation of securities. Participant shall be charged the following fee for rematerialisation of securities:

• a fee of Rs.10 for every hundred securities or part thereof ; or

• a flat fee of Rs.10 per certificate, • whichever is higher.

No rematerialisation fee shall be charged for Government Securities.

Thank You