DEPOSITORY SYSTEM

Presented by: Rabia Chuadhary

OBJECTIVES OF THE STUDY

To understand the concept of Depository system in India. To understand the basic term and process in depository system like Dematerialisation and Rematerialisation. Get specific knowledge about NSDL and CSDL and its investor. Provide desirable information for the readers about Depository system

Ludhiana Stock Exchange

LSE was established in the year 1983.

Chairman Prof. Padam Prakash Kansal The exchange had a total of 284 brokers, out of which 79 were corporate brokers. For the settlement of dematerialized securities, the Ludhiana Stock Exchange has also been linked up with National Securities Depository Ltd. (NSDL). VISION AND MISSION STATEMENT Reaching small investors by providing services relating to Capital market including Trading Depository operations etc and creating Mass Awareness by way of education and training in the field of Capital market. To create educated investors and fulfilling the gap of skilled work force in the domain in Capital Market.

Meaning
A depository is an organization which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities.

Introduction of Depository system

It is a place to deposit something for safekeeping as bank in which funds or securities are deposited by other under the terms of depository agreements. The principal function - dematerialize securities and enable their transactions in book-entry form. The securities are transferred by debiting the transferors depository account and crediting the transferees depository account. A significant development of the 20th century particularly in its later part is expansion of financial market world over which mostly was driven by globalization, technology, innovations and increasing trade volume. This continuous growth in activities increased problems associated with stock trading. Most of these problems arose due to the intrinsic nature of paper based trading and settlement, like theft or loss of share certificates, possibility of forgery on various documents leading to bad deliveries, legal disputes, prevalence of fake certificates in the market, loss of share certificates in transit.

Comparison between bank and depositories

Basis of differentiation Form of deposits/holding Usage Facilitates Bank account
Funds

Depositories account
Securities

Safekeeping of money

Safekeeping of shares

Transfer of money (without actually handling money)

Transfer of shares (without actually handling shares)

Where to open Requirement of Pan Number Minimum balance

A bank of choice Not mandatory

A DP of choice Mandatory (effective from2006)

Specified by banks

No such requirements

Similarity
Promoted by reputed persons and institutions Renders safe keeping services Central office and branches Charge of fees Transfer of funds and securities Written confirmation of transfer (of shares and currencies) Customers are entitled to get statements of accounts Nomination facility

Need of Depositories system

To solve the problem of Intrinsic nature of paper based trading and settlement. Solve the problem of loss of share certificate in transit To reduce the paper leading cost and work is done with greater efficiency The cost and time spent by the brokers for rectification of these bad deliveries tends to be higher with the geographical spread of the clients. Stop delaying in transfer of shares, Reduces the possibility of forgery on various documents leading to bad deliveries, legal ,theft of share certificates, prevalence of fake certificates in the market

Benefits of Depositories
No bad deliveries No risk of loss, theft of share certificates No stamp duty for transfer of shares Reduced paper work Fast settlement cycles Low interest rates on loans granted against pledge of dematerialized securities by banks Increase in liquidity of your securities because of faster transfer and registration of securities in your account Instant disbursement of non-cash benefits like bonus and rights into your account

Depositories participants
A DP is an investors representative in the depository system and as per the SEBI guidelines, financial institutions/banks/custodians/stock brokers etc. can become DPs provided they meet the necessary requirements prescribed by SEBI.

Contd..
The regulations have selected various categories of market participants who are eligible to become depository participants who have a well-established customer interface network. These categories are: a) Public Financial Institutions b) Scheduled Banks c) RBI approved Foreign Banks Operating in India d) State Financial Corporations e) Certified Custodians of Securities f) Clearing corporations of Stock Exchanges g) Registered Stock Brokers h) Non-Banking Financial Companies

Dematerialisation
It is a process by which a client can get physical certificates converted into electronic balances maintained in its account with the depository participants. Securities held in dematerialization form are fungible. Each of the securities dematerialized in the NSDL/CDSL depository bears a distinctive ISIN identification number which is called International securities number which is unique for each security and Issued in any International standard organization member countries in accordance with the ISIN standards.

Parties involved
The Investor Depository Participant Depository Registrar and Share Transfer Company

Advantages
To The Company 1. Less paper work 2. Reduced cost. To The Investor 1. Less paper work 2. No filling of transfer deed and lodging

3. Better and faster facility for share 3. Easily transfer of shares. transfer.

4. No legal consequences for non 4. No loss of shares certificate, no compliance of rules and regulations. forgeries or frauds, No bad delivery of shares

Process for Dematerialisation

Demat Account
Demat" refers to a dematerialised account for individual Indian citizens to
trade in listed stocks or debentures in electronic form rather than paper, as required for investors by the Securities and Exchange Board of India (SEBI). In a Demat account, shares and securities are held electronically instead of the investor taking physical possession of certificates. A Demat account is opened by the investor while registering with an investment broker (or sub-broker). The demat account number is quoted for all transactions to enable electronic settlements of trades to take place.

Opening a Demat Account

Getting started 1. Choose a DP 2. Documents to be attached 1. Passport size photographs Proof of residence (POR) - Any one of Photo Ration Card with DOB / Photo Driving License with DOB / Passport copy / Electricity bill / Telephone bill Proof of identity (POI) - Any one of Passport copy / Photo Driving License with DOB / Voters ID Card / PAN Card / Photo Ration Card with DOB PAN card Fill up an account opening form 2. provided by DP, and sign an agreement with DP in a standard format prescribed by the depository. DP provides the investor with a copy of 3. the agreement and schedule of charges for his future reference. DP opens the account and provides the investor with a unique account number, 4. also known as Beneficiary Owner Identification Number (BO ID).

3.

4.

Rematerialisation
Rematerialisation is the process by which a client can get his electronic holdings converted into physical certificates. The client has to submit the rematerialisation request to the DP with whom he has an account. The DP enters the request in its system which blocks the client's holdings to that extent automatically.

Process for Rematerialisation

Types of Account

Depositories Act, 1996

The Depositories Act, 1996 provides for the establishment of depositories in securities with the objective of ensuring transferability of securities with speed, accuracy and security by (a)making securities freely transferable (b) dematerialization of the securities in the depository mode (c) providing for maintenance of ownership records in a book entry form. The promoters of a depository are also known as its sponsors. A depository company must have a minimum net worth of Rs. 100 crore. The sponsor(s) of the depository have to hold at least 51% of the equity capital of the depository company. Participants of that depository, if any, can hold the balance of the equity capital. However, no single participant can hold, at any point of time, more than 5% of the equity capital. No foreign entity, individually or collectively either as a sponsor or as a DP, or as a sponsor and DP together, can hold more than 20% of the equity capital of the depository.

Eligibility Criteria for a Depository

Any of the following may promote a depository: 1. A public financial Institution as defined in section 4A of the Companies Act, 1956; 2. A bank included in the Second Schedule to the Reserve Bank of India Act, 1934; 3. A foreign bank operating in India with the approval of the Reserve Bank of India; 4. A recognized stock exchange; 5. An institution engaged in providing financial services where not less than 75% of the equity is held jointly or severally by these institutions; 6. A custodian of securities approved by Government of India, and 7. A foreign financial services institution approved by Government of India.

NATIONAL SECURITIES DEPOSITORIES LIMITED

NSDL is a public limited company incorporated under the Companies Act, 1956. It had a paid up equity capital of Rs. 105 crore NSDL is the first and largest depository in India, and established in August 1996 It has 287 depository Participants. The following organisations are shareholders of NSDL as on March 31, 2005. 1. Industrial Development Bank of India 2. Administrator of the Specified Undertaking of the Unit Trust of India - DRF 3. National Stock Exchange 4. State Bank of India 5. Oriental Bank of Commerce 6. Citibank N.A. 7. Standard Chartered Bank 8. HDFC Bank Limited 9. The Hongkong and Shanghai Banking Corporation Limited 10. Deutsche Bank A.G. 11. Dena Bank 12. Canara Bank

CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED

This is the second depository in India. This was formed and registered in 1999. It has 625 Depository Participant. SHAREHOLDERS OF CDSL Bombay Stock Exchange Limited Bank of India, Bank of Baroda, State Bank of India and HDFC Bank Standard Chartered Bank Centurion Bank of Punjab Ltd Canara Bank Union Bank of India Bank of Maharashtra Jammu and Kashmir Bank Limited The Calcutta Stock Exchange Association Limited

NSDL and CDSL essentially perform the following functions through their various participants:

Enable surrender and withdrawal of securities to and from the depository. Maintain investor holdings in the electronic form. Effect settlement of securities traded on the Exchanges. Carry out settlement of trades not done on the Stock Exchanges i.e. Off Market Trades

 ANALYSIS & INTERPRETATION

Do you invest in shares? Interpretation:Almost there are same ratio of the respondents investing in shares and not investing. But majority of respondents i.e. 53% like to invest in shares

% of respodents
.

yes no

If yes, what is the form of your investment?

Interpretation:Maximum i.e. 65% of the respondents are having demat accounts with the DepositoryParticipants. As such there is increasing scope of organizations providing this facility.

% of respodents

phy demat

What is the duration of your investment? Interpretation:Maximum respondents (45%) invest for medium term of investment i.e. 6 months3years and very less respondents invest for long duration

% of respodents
.

0-6 mnths 6 mnths - 3yrs 3 yrs - 6 yrs

Do you have a demat account?

Interpretation:Maximum of the respondents is having demat account with various depository participants and very few i.e.38% are not having demat account.

% of respodents

. yes no

What are the sources of information? Interpretation:Friends and relatives are the maximum i.e. 35% sources of collection of information regarding the depository

% of respodents

consultants
newspapers friends others

Are you satisfied with the charge structure of the organization you are dealing with? Interpretation:There are very few respondents who are not satisfied with the charge structure provided by their depository participant.

% of respodents

highly sat

less satisfied
satisfied not satisfied

Reasons for non satisfaction with the particular organization Interpretation:Most of the respondents i.e. 35% are not satisfied due to lack of proper services provided. So, maintaining customer relationship is veryimportant

% of respodents

high cost

lack of services
lack of attention others

Finding
Most of the respondents i.e 53% are like to invest in shares Most of the holders are having DEAMT a/c i.e 62% Most of the investors likely to in shares Most of investors invest for mediun term of investment i.e bweteen 6 months to 3 years Almost all the respondents get through the inf by friends. Most of the respodents i.e 35% are less satisfied with the fee structure and proper sevices These are the finding helps me in knowing that, investors are now a days having knowledge about Depository system in India.

Recommendation
Volume of paper work is small but it is very complicated to maintain data in system so try to reduce that by regular audit and updating data Most of DPs do not have the necessary infrastructure to handle the high workload of transactions lending to many errors by DPs, so by giving full infrastructure information to every DP can avoid this problem. The pool a/c does not know the true owner of the shares and hence dividends are paid to the broker instead of owners, by this broker can do any manipulations or any fraud with the owner, for this the owner can loose his dividend. Hence for this try to pay the dividend directly to the owner. If the shares are forged which delivered by the broker the shareholder can loose that system and have to receive another lot of issued shares from the broker in 21 days, this system stands abused as soon as possible. The online trading is easy to work but it is costly to maintain and difficult to learn. It is known that stock exchanges are conducting classes on the awareness of the depository system of NSDL and CDSL. But it is not known by public. Information about the classes must be given news papers and media.

Conclusion
The growth rates of demat account holder in increasing over years. The Indian system of capital market is a Two Tire System. Indian government allows holding securities in any form i.e. either in physical securities or in electronic (demat) form. The transaction of securities is completely (i.e. 99.99) done through electronic format. The investors rarely utilize the Rematerialisation Request Form. Investors are not aware of the services offered by depositories. Most of the speculators do not utilize demat account in day-to-day online trading. They trade through broker pool account. Dematerialization process can be done through online trading by utilizing computers.