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A depository is a central location for keeping securities In other words it is a facility for holding securities either in certificated or uncertificated form In today's electronic world it is transfer of ownership in electronic mode In other words it is a place where securities are stored, recorded on behalf of investors A depository works as a nominee, custodian on behalf of investors. This is leading to a system of immobilization and dematerialization of share certificates
Group of 30 private sector recommended the formation of central depository in order to provide speed and accuracy to stock exchange In Indian stock exchange there was no transparency, bad deliveries, delay in transfer, forgery The depository system aims at replacing the manual system of transfer by simple book entries system
Objectives of a Depository
Reduce the time for transfer of securities Avoid the risk of settlement Enhance liquidity and efficiency Reduce cost of transaction for the investor Create a system for central handling of securities Promotes countrys competitiveness by complying with international standards
Activities of Depository
Accepting deposit of securities for custody Making computerized book entry Providing for withdrawal of securities Distribution of dividend and interest Redemption of securities on maturity BENIFITES TO INVESTORS:Eliminates paper work The risk of bad deliveries, fraud, will not exist It shortens settlement time and investor can increase its volume Investor can change portfolio more frequency Distribution of dividends,interest,etc becomes easier The cost of transfer is less a share transfers are exempted from stamp duty
Benefits to companies
The company will be able to know the particulars of beneficial periodically Investors complaints will be less It will be possible to send annual reports without delay BENEFITS TO CAPITAL MARKET The capital market will be more transparent as trading, clearing and settlement are done through computers The market becomes automated due to use of computers and telecommunication Confidence of investors improves Foreign investor will start participating It increases the volume of trade by number and value
Registration
Registration of Depository with sebi is must THE application for registration must be submitted in prescribed form along with fee of 50000. The sponsor of a depository can be 1 Public financial institution 2 Banks 3 Foregin banks operating in India 4 Recognised stock exchange 5 Institutions engaged in financial services. SEBI prohibits depository to carry on any activity other than that of depository At 51%of equity capital should be held by a depository and holding of NRI should be maximum of 49% A depository is required to pay an annual fee or RS10000 With 1year of registration depository should apply for commencement of business
Ownership records maintained by depository or DP will be accepted as legal evidence DEPOSITORY CONSTITUENTS 1.Depository 2.DP 3.Benificial owner 4.Issuer Depository is a custodian of securities and helps in transfer of shares and have no right over securities. He should have an adequate mechanism for reviewing,monitoring,and evaluating records DEPOSITORY PATICIPANT It is the link between depository and the owner of securities. The depository and DP are to be registered with SEDI Provide statement of accounts, reconcile his records with depository on daily basis and submit periodic returns THE BENEFICIAL OWNER;-He is the real owner of the securities and has all the rights and liabilities associated with it. Issuer is the company which issues securities. He gives choice to investors regarding holding the securities in physical form or demat form The investor is free to exercise this option either at the time of applying or later on An investor will have to open an account with the depository and is issued a client number T
Drawbacks
1 Multiple depositories----A depository is a service institution so investor wants better service at reduced cost. The cost of capital i.e. 100 crores will be born by the investor. A single depository system should be present as it reduces cost and inter depository movement of messages 2.Inter depository competition will hamper the interest of the investors 3The retail investor wants to hold the securities in scrip form because of old habit, lack of awareness or tax evasion. As long as demat is made compulsory the investors will hold shares in scrip form
Remedial Measures
SEBI has undertaken a public awareness program me To increase the volume sebi has made dematting compulsory for institutional investor SEBI has allowed delivery of demat securities in physical form as well .An investor purchasing shares in physical segment may get delivery in demat shares