Pledge &

Hypothecation

Pledge & Hypothecation (1)

Permitted under S.12 of Depositories Act, 96
Free balance & locking balances permitted.
Both pledg0r & pledgee to have beneficial A/c with same Depository may be with
different DP (inter depository pledge NOT permitted)
Pledge: Unilateral right (without reference to borrower) to appropriate securities in case
of default.
Hypothecation : Consent of the pledger for appropriating the securities.
Procedure : Pledger initiates creation through his DP and Pledgee instructs his DP to
confirm.
On closure of loan, pledgee initiates the closure pledger instructs his DP to confirm the
closure.
Invocation of pledge/hypothecation as per the terms of agreement & bye Laws of
depository & SEBI regulations

Pledge / Hypothecation (2)

Steps:
Loan arrangement by the beneficial owner
Pledge transaction requires identification number (may be agreement form)
Transactions identified by Pledge Sequence Number
Separate instructions for each transaction
[entering agreement number optional in CDSL]
Requests in order & existence of securities in the A/c, DP accepts and
acknowledgement to pledger.
DP enters the details & system generates Pledge Sequence Number and
confirms the request.
Securities are debited from free balance to credited as pledge setup
balance.

Pledge/ Hypothecation (3)

Pledger submits duly stamped & singed PRF to the pledgee along
with the letter confirming pledge set-up.
Details electronically communicated
confirmation & displayed in the DP.

to

pledgees

DP

for

DP compares the details on the form with the DP system &

executes the order for accepting/ rejection
The reason for rejection (if any) displayed in DP of pledger
The acceptance appears in DP system of both pledger & pledgee
as status change
DP (pledgee) has to confirm before the expiry date mentioned in
the request form (not applicable for NSDL)
Upon confirmation of pledge, pledge securities are shown as
Pledge Balance

Pledge/Hypothecation (4)
Un-pledging/ closure:
Pledger submits instructions in prescribed form
If found in order, compare the details
Informs acceptance/ rejection
Communicate the closure electronically (DP System) to DP of Pledger
If in order, issues acknowledgement
Execute the acceptance. (or rejection, with reasons)
Securities moved from pledge balance to free/locked in balances
Some of the reasons for rejection specified at NSDL Not present with CDSL
where the reasons are marked in the field provided.
Unilateral closure by pledgee provided (no confirmation required from pledger)
[in CDSL pledge closure is referred as Unpledged]

Pledge/ Hypothecation (5)

Invocation of Pledge:
Pledgee can invoke the pledge in case of default by the pledger
Fills up IRF (Invocation Request Form) and submits to his DP
If in order, provides acknowledgement
Compares the details, enters the details as against the Pledge
instruction Number and verifies the details
Pledge Balance transferred to Beneficial Owner A/c to Free
Balance
No confirmation required from pledger (Confirmation is necessary
for hypothecation)
Invocation cannot be set-up for lock in securities (till lock in is
over)
[Invocation in case of hypothecation (not applicable for CDSL):
In case rejection by the borrower, DP enters he reasons and
communicates to DP system of the pledgee. ]

Pledge/ Hypothecation (6)

Corporate Benefits:
Ownership continues with he pledger
All corporate benefits (cash and non- cash Dividends, Bonus,
Rights etc.) will be for the borrower.
Securities arising out of share splits, consolidation, or exchange
under merger/ acquisition continues to have the pledge.

Corporate Actions (1)

Corporate Benefits:
Events affecting rights, obligations, or interest of the BO.s
[E.g.. Interest, Dividends, bonus,
redemption, call money payments]

rights,

splits,

merger,

Depository bye-laws: action taken by issuer relating to dates of

book closure, record dates, redemption/maturity dates, conversion
of debentures/warrants, call money dates etc.
Two Types :
Cash: monetary benefits (Depository only provides information of
persons entitled)
Non- cash: other than cash - bonus, rights, conversion of securities
etc. ( Depository facilitates distribution)

Corporate Actions (2)

Important Terms:
Record Date: Issuer announces a cut- off to determine the BO.s of the
securities. Depository System provides holding report in ISIN to the issuer
as at the end of Record Date
Book Closure: Issuer specifies Book Closure Start date and End date.
Depository generates holding report of B.Os as of the end of the day of
one day prior of the book closure start date.
Procedure:
Issuer/ RTA informs the depository about proposed Corporate Action and
details made available in DP system
Steps taken by DPs:
Well in advance update the tax structure, bank details, address etc.
Well in advance transfer transit accounts (settlement a/cs and
intermediary accounts) to BO.s
Balance lying with CM/Clearing Corporation/Intermediaries eligible are
eligible to receive corporate benefits and they hold the benefits in trust on
behalf of BO.s

Corporate Actions (3)

Advancement in electronic payment system (NEFT/RTGS etc.)
SEBI ( March 13)
Listed companies (either directly or through RTA) shall use any RBI
approved electronic payment mode [ ECS LECS (local ECS), RECS
(Regional ECS, NECS (National ECS), NEFT etc.
Maintain requisite bank details.
Depositories to ensure correct account particulars of investors are
available in the data base
For physical holding: RTA to take step to update bank details of the
investors.
If MICR code/ IFSC is not available or failed, physical payment
instruments to be used. Bank account particulars of the investors
to printed.

Corporate Actions (4)

Non- monetary Benefits:
Particulars of holding of BO.s received from depository.
Option given to investors to get allotted in physical form or in
demat from ( both for demat account holders and others)
If option is not indicated, securities in the form in which the
investor is holding his securities will be issued.
Issuer/R&T Agent informs the allotment details to Depository and
Depository credits the entries to BO.s
If mismatch is observed, Depository rejects such records and
Depository requests for rectification.
If issuer/R&T Agent is unable to rectify the mismatch, issue in
physical form.
Statement of transactions issued by DPs indicates updated
holdings after execution of corporate action

Corporate Actions (5)

Rights Issue:
Issuer/ R&T Agent dispatch the application form to the BO.
B.O to state whether he requires allotment in Demat or Physical
Merger/Amalgamation/Capital Reduction/Sub division etc. held in
old ISIN will be debited and new shares with new ISIN will be
credited.
Interest on Debt Securities will be paid by issuer/ R&T Agent.
Govt Securities : RBI credits the interest to Depository and the
Depository distribute the interest to BO.s.

Public Issues (1)

The issuers issues (create and sell) new securities in the primary market to
raise funds.
Can be through public issue (initial or follow on public offer) or private
placement.
Every listed company making an initial offering of Rs. 10 cr and above only in
Demat Form (as per Indian Companies Act)
SEBI guidelines to encourage issue in demat form:
Issuer to enter an agreement with depositories
Option to investors either in demat or physical mode
Trading in securities making an IPO shall be in demat only.
Option to investor in application form;
For allotment in demat provide : Depository name, DPs name, DP-ID and BO
A/c number
[in case no option is exercised, allotment in physical form]

Public Issue (2)

Issuer/R&T Agent provides details of successful allottees to
Depositories and execution date
Depository credits the securities on the execution date.
Issuer/ R&T Agent sends the allotment advice.
Statement provided by DPs will indicate the balance of allotment
Investor not having DP A/c at the time of applying and intend for
allotment in demat form:
Fill the application form (except Client ID) and approach DP with
payment instrument.
DP obtains the account opening form and duly executed DP-Client
agreement .
DP mentions Client-ID in the application form before dispatching to
the collecting bank.

Debt Instruments & Govt. Securities (1)

Debt Instrument/Security : Agreement to repay
interest, within a given time frame.

a loan, with

Categories: Bonds, Debentures, CP, G. Sec, TB etc. subordinated

bonds, floating rate bonds/debentures, Deep Discount bonds,
Secured/ Unsecured, Zero coupon bonds, Variable rate bonds.
Financial Institutions/ corporates issues bonds/ debentures/ CP
G.Sec/ T Bills are issued by Govt State or Central
All type of instruments admitted in depository system (includes
even unlisted/ privately placed or even single holder )
Unique identification is linked to features of security, ISIN and a
descriptor.
Instrument Descriptor indicates: Issuer, interest rate, security
name, redemption date & face value.
Depository also forwards details of instrument to all DPs.

Debt Instruments & Govt. Securities (2)

Issuer may offer demat facility requesting depository details the instrument
along with Letter of Intent.
Tripartite agreement : Depository, Issuer & RTA
Similar to equity except that debt instrument has a limited life
Key features:
ISIN like Equity. Features are different (with equity) different coupon rate,
redemption date, put/call date, secured/ unsecured etc.)
Letter of Allotment (LOA) on issue of secured debenture, allots LOA till the
charge is created.
Debenture Certificate issued in lieu of LOA
Depository allots ISIN to LOA and latter changed to Debenture
Time Value of money execution date is important while transferring the
securities.
Redemption : ISIN is de- activated

Debt Instruments & Govt. Securities (3)

Can be allotted directly in demat form credited on receipt of allotment
details from issuer/ RTA.
Corporate Action: Interest payments like in equity (issuer will send the I/W
directly to the investors)
Call Option: issuer has an option to refund at any time earlier than the
redemption date
Put option: Investor has an option to claim refund at any time before the
redemption date
In Call Option, procedure is like normal redemption
Investors can use existing DP A/cs for debt instruments.
Dematerialization process is same as equity
Investor has to mark submitted for dematerialization before handing over
to DP
Single transaction statement is issued (covering all investments debt &
equity)

Debt Instruments & Govt. Securities (4): CD

Can hold in separate account or all in single account
Minimum size Rs.1.00 lakh- for transacting in depository system
Dematerialization as in the case of Equity [in space provided for endorsement
indicate surrendered for dematerialization and credit to my Demat A/c ..
Can be allotted in demat form ( like IPO/ Bonus/ Rights etc.)
Settlement : Seller authorizes DP through Delivery Instructions to debit his
account and transfer the security to Buyer. Settlement of funds outside the
depository.
Redemption :
Issuer opens a redemption A/c with DP (for all CDs issued)
Investor gives DIS (Delivery Instruction Slip) to his DP to transfer the CD to
Issuers Redemption A/c.
Transfer to take place before 3 p.m. at least prior to 1working days prior to
maturity date.
On sighting the redemption A/c, issuer initiates redemption.
Details of Redemption A/c only to first investor (FIMMDA)
Banks & FI.s to issue CD only in Dematerialized form.

Debt Instruments & Govt. Securities (5) : CP

Amount : Min Rs. 5 lakhs and in multiples (in units of Rs. 5 lakhs)
Choice for holding in separate a/c or all holding in one account
Dematerialization:
Issuer to make arrangement with the
Depository. submit CP with DRF etc. statements to contain the
details
Allotment can be in demat
Issuer provides details to Issuing & Paying Agent (IPA)
Details of IPA certificate and other documents provided to
Depository one day prior to value date
On the allotment date, IPA transfer securities from allotment
account to subscribers A/c.

Debt Instruments & Govt. Securities (6) CP

Settlement:
Price /settlement of amount decided by buyer & seller
Seller authorizes his DP to transfer securities to Buyers DP A/c
Buyer gets the credit immediately ( if SI is giver)
Redemption:
IPA opens redemption A/c with DP at the time of issue (IPA copy given to
the investors have the details of redemption A/c. For secondary
transactions, seller will provide IPA copy to buyer)
BO to transfer the CP before 3.00 pm one day prior to due date (to
arrange the repayment)
On repayment , balance in the redemption A/c is extinguished by carrying
out debit type corporate action
Banks, F.Is, PDs, Satellite dealers (SD) required to hold only in demat form
(RBI)
For buying & selling of debt instruments, delivery/ receipt of debt
instrument is like equity shares.

Debt Instruments & Govt. Securities (7) G.Sec

Two Types : Dated securities (maturity period more than one year)
& TBs (maturity up to one year)
Activities (issue, settlement, distribution of interest, redemption)
handled by Public Debt Office (PDO) of RBI.
Corporate/ institutions/ individuals can subscribe Can hold in physical form or in book-entry form (SGL form)
Two types of SGLs
SGL -1: opened with RBI directly by entities fulfilling the eligibility
criteria prescribed by RBI for own investments
SGL 2 (can be opened by entities permitted to open SGL-1 A/c)
to keep accounts of constituents, who are not eligible to open SGL1 A/c.
Entities to keep record of sub- account of investors and SGL-2 will
show consolidated balances

Debt Instruments & Govt. Securities (8) G. Secs

Features :
Depositories permitted to maintain SGL A/cs of investors through DPs
Investor need NOT have to open separate A/c.
G.Sec are in depository system on account of dematerialization,
transfer from SGL A/cs, fresh issue.
Demateriazation of securities:
Partial dematerailzation NOT permitted.
Requests accepted with holders with PDO.
Documents to be submitted : certificate, DRF- GS (DRF for G.Secs
For CDSL no separate DRF for G.Sec),
[information to be filled ; (a) Option exercises as submitted Physical
G.Sec to . Depository name, A/c No, Name, Security name, Face
value in words and figures, certificate number]

Debt Instruments & Govt. Securities (9) G.Sec

Scrutiny by DP:
Holders name in DRF- GS & certificate
Enclosing the certificates
Signature in DRF GS & DP account opening
Trust & Corporates Registration number of signatories in the form
of transfer,
ISIN,
Security descriptor
Tallying of face value in DRF GS with the certificate

Debt Instruments & Govt. Securities (10) G. Sec

Objections for G.Secs:
Depository acts as RTA & discharges RTA functions.
On receipt of certificates with DRSGS, depository G.Sec Cell
matches the details and informs the DP on mismatches, if any.
DRN is kept pending till rectification is received from DP.
DP does not generate fresh request until electronic intimation for
rejection is receive.
Depository G.Sec Cell rejects the requests incase of rejection by
RBI (signature mismatch/ non- registration of signatories)
DP intimates the client with rejection memo sent by depositorys
G. Sec Cell.

Debt Instruments & Govt. Securities (11) G- Sec

Holding in SGL -I or II :
Submit DRF GS with SGL credit advice and request letter of
value free transfer
DP to ensure filling up of the details in the DRFGS:
Option exercised : Transfer of SGL securities to . (depository
name) not applicable to CDSL.
A/c No, Name, name of security, face value in words and figures
[Each Depositories may have other specific requirements]
SGL A/c must have been registered with PDO RBI Mumbai ( i.e..
SGL Account No with prefix BY
ISIN & and Loan Code to be filled by DP in DRF- GS.
DP provides acknowledgement .

Debt Instruments & Govt. Securities (12) G. Sec

Scrutiny by DP (DRFGS)
Signature of client with specimen available with the DP
Order of holders name with DP A/c
Loan Code and face value
Separate DRF GS for different Loan Code/ ISIN
Loan code/ ISIN to be verified at two level before entering the
details
Entry of number of securities in the quantity field (in the
depository system)
Entry of DRN in the space provided in DRFGS
Maker/Checker for data entry & fill the authorization portion in
request form
Dispatch DRFGS with other formswithin 7 working days to
Depository G. Sec Cell.
On receipt of credit confirmation from RBI, DP system affords credit
[ RBI will NOT register during Shut Period and dematerialization
may take more time]

Debt Instruments & Govt. Securities (13) G. Sec

Settlement of RBI Trades
Transactions when counter party has balances with other SGL entity:
Purchase:
The buying client submits inter SGL trade purchase instructions in the
form prescribed to DP
Make available funds to the depository to purchase.
Based on purchase instructions, executes the dematerialization
instruction at least one prior to the day of trade settlement at RBI
DP forwards the purchase instructions to the depository.
Depository executes the designate form and submits to RBI.
On settlement day, RBI credits the SGL 2 a/c of the depository and
debits the CA for the funds.
On receipt of the information about crediting of securities from RBI,
depository confirms the receipt of securities to the client.

Debt Instruments & Govt. Securities (14) G. Sec

Corporate Benefits
DP updates B.Os A/c (bank a/c details, address etc.) well in
advance of the interest payment/ redemption due date
Depository distributes the interest to clients before EOD of the due
date, after RBI makes the funds available to depository.
Redemption amount is paid before EOD of the redemption due
date after redemption amount is made available by RBI.
The depository makes payments directly to the client/ bank
account.

Debt Instruments & Govt. Securities (15) G. Sec

Rematerialization:
SGL -2 can be converted in to physical or book entry form.
Application form to depository (through DP) in RRF GS
DP ensured sufficient free balance in the A/c.
DP blocks the balance and intimates to Depository.
RRFGS forward to depository within 7 days.
Depository forwards rematerilization request in the prescribed form (if
the physical securities are required)
Upon receipt of confirmation from RBI, Depository confirms acceptance
of RRF GS and forwards physical certificate along with form for transfer
to the client.
For credit of other SGL A/c with other entity, after RBI approval,
depository confirms acceptance of RRF to DP.
Depository removes the balance from client account and informs.

Foreign Portfolio Investors (FPIs) -1

SEBI Notification - FPI Regulations 2014 : for registration &
Procedures for foreign investors.
DDPs : Designated Depository Participants in respect of FPIs.
Single route to foreign investors (FIIs, Sub Accounts & QFIs under
portfolio investment. All existing FIIs , Sub Accounts & QFIs deemed
to be FPIs fro June 1, 2014.
Eligibility (conditions to be satisfied):
Not resident in India
Resident of a country whose security market regulator is signatory to
International Organization of Securities Commissions Multilateral
Memorandum of Understanding (Appendix A signatories) or signatory
to bilateral Memorandum of Understanding with the Board.
If applicant is a bank, central bank is a member of Bank of
International Settlement .

Foreign Portfolio Investors (FPIs) - 2

Not a resident in a country identified by public statement of
Financial Action Task Force as Anti Money Laundering or Combating
Financing Terrorism deficiencies or not made significant progress in
addressing deficiencies.
Not a Non-resident Indian
Legally permitted to invest outside the country
Memorandum and Articles of Association permits.
Has sufficient experience, good track record, financially sound etc.
Grant of certificate in in the interest of the securities market
Fit and proper person based on criterial of SEBI
Any other criteria from time to time.

Categories of FPIs
Category I : Govt / Govt related investors/ sovereign wealth funds/
international/multilateral organizations
Category II:
(a) Regulated funds - Mutual Funds, Investment Trusts, insurance
companies
(b) Regulated persons - banks, AMCs, Investment Managers/
portfolio managers
(c) Broad based funds not appropriately regulated but investment
manager is appropriately regulated. (provided that investment
manager is registered as Category II foreign portfolio investor and
shall be liable and responsible)
(d) University & Pension funds
(e) University related endowments registered with Board as FII or
sub Accounts.

Designated Depository Participant

Board shall consider if satisfies conditions
Participant registered with Board
Custodian of securities registered with the Board
Multinational presence branches or agency relationships
Systems & procedures to comply Financial Action Task Force Standard, PMLA
2002 & Rules & circulars issued by Board
Fit and proper based on the criteria SEBI (intermediaries) Regulations 2008
Any other criteria by the Board.
Board can consider applications from global banks (if registered as
participant, custodian and have tie up with Authorized dealer Category -1
bank
FDI shall engage with DDP before investing & DDP, custodian of FPI to be
with same entity.

Rajiv Gandhi Equity Savings Scheme RGESS (1)

To encourage flow of savings of small investors to domestic capital
market ( 2012)
New Retail Investors:
Residents with gross income up to Rs. 12 lakhs, does not have any
demat a/c, or no transactions on RGESS opening/designation
date.
In case of joint a/cs second/third holders/ nominee eligible .
Tax Benefits:
Additional tax benefit - deduction up to Rs.25,000 for investment
up to Rs.50,000 in eligible securities (S. 80CCG). [over & above Rs.
one lakh under S.80C]
Benefit for three successive years (budget 2013)
Eligible Securities Shares of select companies under CNX 100 or
NSE or BSE 100, Maharatna, Navaratna or Miniratna PSUs:
Unit of RGESS complaint MFs/ ETFs
FPOs/IPOs and NFOs of above mentioned companies/MFs.

Rajiv Gandhi Equity Savings Scheme RGESS (2)

Other securities can also be held in the demat A/c
If the investors do not wish to get the credit of certain securities
to the a/c for RGESS, submit declaration within one month from
transaction.
Holdings for three years: fixed lock in for one year & flexible lock in
for two years
Declared securities cannot be sold/pledged during fixed lock in
period.
Securities can be sold/pledged during flexible lock in
conditions)

(with

At the end of flexible lock in : the demat a/c converted to regular

A/c

BSDA- Basic Savings Demat A/c (1)

Achieve financial inclusion, holding in demat & reduce cost of holding to retail
individuals
Eligibility:
Only one demat A/c sole or first holder
Existing joint A/c holders (other than first holders)
Only one A/c across the depositories
Value of holding not to exceed Rs.2.00 lakhs at any point of time.
Options:
To open new A/c (after the notification date -27-8-12)
To convert existing A/c on the date of next billing cycle based on the value of
holding as on the last previous billing cycle.

BSDA- Basic Savings Demat A/c (2)

Charges:
No AMC for holdings up to Rs.50,000
For above Rs.50000 to Rs. 2 lakhs Rs. 100
Value to be determined by DP based on daily closing balance
( price not available, take price as on last trading day & for
unlisted securities face value excluding value of suspended
securities.)
If value exceeds the limit, charges as per regular Non-BSDA A/c.
DPs to assess the eligibility of B.Os at every billing cycle and give
option to B.Os to convert existing A/c to BSDA.

BSDA- Basic Savings Demat A/c (3)

Services:
Transaction statements: to be sent end of each quarter, if no transaction, no
statement to be sent
No transaction & No holding statement need not be sent (to be provided in the
quarter when it become Zero)
Holding statement:
No transaction & Nil balance one yearly physical statement even when the
account has remained in such status for one year.
For others one yearly statement either physical or electronic
Electronic statements No charges
Physical: two free during the billing cycle, additional : max Rs.25
Register the mobile number for providing SMS
Issue two DIS (minimum) during opening the a/c
[All other conditions as applicable to regular A/c]