Depository Services.

Depositories : An Introduction
The erstwhile settlement system in the capital markets ,

was inefficient and increased risk , due to great time elapsing, by the time the trade was settled. The transfer was through the physical movement of certificates, a process fraught with delays and resultant risks. Transfer of ownership also inefficient, as it involved the movement of papers to the issuing co. for registration. This process could take more than 2 months, at the end of which most of the transfers would be bad delivery cases, because of faulty paper work. Plus theft, forgery and mutilation of certificates was also common.

Depositories : An Introduction
To obviate these problems, the Depositories Act, 1996

was passed, It provides for the setting up of Depositories with the objective of free transferability of securities, with speed accuracy and security. It does so by : making securities of public ltd companies freely transferable, dematerializing the securities in the depository mode, and providing for maintenance of ownership records in the book entry form. Thus companies right to use discretion in transferring securities , executing the transfer deed etc dispensed with, making securities freely transferable. Two depositories NSDL AND CDSL have come up , to provide instantaneous electronic transfer of securities

Scrip Based System.

Scrip based system of securities

transactions involves enormous paper work involving certificates and transfer deeds. Simply, securities are held in physical form. There is physical movement of securities certificates along with transfer deeds.

Scrip Based System - Problems

Time consuming (processing time by co.)

Bad deliveries due to signature difference Mistakes in completion of transfer deeds Tearing and mutilation of certificates Fake certificates Postal delays and charges etc.

Depository System.
A system in which securities of an investor are held by

depository on behalf, and at the request, of an investor in an Electronic Form. This system is also known as Scrip Less Trading system. In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork. Consequently, the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates.

Depository System.
The Depositories Act 1996, defines depositories as :

Any company registered under Companys Act 1956,& which has been granted registration under Sub Section12(1A) of SEBI Act,1992
Their principal function is to dematerialize securities and

enable transfer through the book entry form. There are basically four participants: 1. The Depository, 2. The Depository Participant, 3. The Issuing Company and 4. The Investor.

Depository System.
The depository model adopted in India provides for a

competitive multi-depository system. There can be various entities providing depository services. Such system is known as Multi-Depository System.
At present two Depositories are registered with SEBI.
NSDL

CDSL

NSDL.
NSDL promoted by IDBI, UTI, National Stock Exchange of

India Limited.,SBI, in 1996. It is a public limited company, which performs a wide range of functions through DPs, viz, 1. Maintenance of individuals holdings in electronic form 2. Dematerialization and Rematerialization 3. Transfers relating to settlement of trades. 4. Distribution of non cash corporate actions 5. Facility of freezing/locking investor accounts 6. Facility of pledging/hypothecation of securities.

Business Partners of NSDL

The DPs are the important link between the investors

and NSDL. Other business partners include the issuing companies, their share transfer agents , clearing houses, and clearing members. NSDL facilitates the settlement of trades carried out in the book entry segment of the stock exchanges. The actual settlement is performed by the clearing corporation/houses.

CDSL
CDSL is the second depository set up by the Bombay

Stock Exchange and co sponsored by SBI, BOI, BOB and HDFC Bank, in the year 1999. BSE has 45% stake in it , while the banks have 55% stake. CDSL has more than 163 DPs in 91 cities across 168 locations covering 320 cities. CDSL has been the preferred platform for the Govt. of India for PSU disinvestments . Has also attained the membership of the Asia Pacific Central Depository Group(ACG). ACG has 22 member organizations including the depositories of Japan, Hongkong, Singapore etc.

A Bank-Depository Analogy

Bank
1.Holds funds in an account on behalf of a customer 2.Transfer funds between accounts on the instruction of the account holder. 3.Physical handling of funds is avoided. 4.Provides safe custody of fund

Depository
1.Holds securities in an account on behalf of an investor. 2.Transfer securities between accounts on the instruction of the account holder. 3.Physical handling of securities is avoided. 4.Provides safe custody of securities.

Who Is Depository Participant?

A Depository Participant (DP) is an agent of the

depository through which it interfaces with an investor. A DP can offer depository services only after it gets proper registration from SEBI. A DP is just like a Branch of a Bank.

Who Can become a Depository Participant?

In terms of the Depositories Act, 1996, SEBI (Depositories & Participants) Regulations,1996, only the following entities are eligible to become a Depository Participant: Financial Institutions, Banks, including approved foreign bank Stockbrokers, A clearing corporation or a clearing house of a stock exchange A non-banking finance company, A registrar to an issue or share transfer agent

Types of Ownership.
The registered owner is that person whose name is

registered in the register of members of the company (issuer) For the securities dematerialized, NSDL/CDSL is the Registered Owner in the books of the issuer. But Registered Owner does not enjoy any right and liability attached with the security. Beneficial owner is that person who enjoys all rights, duties, and liabilities attached with the security. It means voting right, dividend right, bonus share right , etc are all exercised by the Beneficial owner.

Benefits of depository system

Depository system provides benefits to:

The investors, and

The issuers.

Benefits to Investors

The transactions in electronic mode eliminated the risk and problems of delays. The risk of bad deliveries is totally eliminated There is no requisite of filling up the transfer deeds, payment of transfer stamp duty and a lot of other paper work at the end of the investor. It totally eliminates the risk associated with fraudulent interception of certificates in postages or transits.. Transfer of ownership of securities is immediate in case of depository mode. The investment, automatically, becomes more liquid.

Benefits to Investors

The problem of odd lot is also eliminated, as the depository mode does not have any concept of market lot. Holding investments in equity and debt in a single account. Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately. Transmission of securities is done by DP eliminating correspondence with companies. Nomination facility.

Benefits to Issuers

The company saves a lot of paper work which otherwise is required in the physical mode. The company saves a postal cost for the dispatch of right shares, bonus shares or share certificates after affecting the transfer. By offering depository services to its shareholders, a company may send a positive sign to its shareholders about its concern for their welfare. Depository services adds liquidity to the security thus fund raising capacity of the company.

ACCOUNT OPENING

In order to avail of depository facilities, an investor has to open a beneficiary account with a depository participant of his choice. This is similar to opening a bank account to use the banking services. Just as one can hold funds in a bank account and transfer funds across accounts without actually handling cash; one can hold securities in a depository account and transfer securities across depository accounts without actually handling share certificates The account holder is called 'beneficial owner' in a depository system and the account is known as 'beneficiary account'.

Features of Beneficiary Account

No minimum balance is required to be retained in a beneficiary account. An investor can close a beneficiary account with one DP and open an account with another DP. To dematerialize existing physical holdings, the beneficiary account must be opened in the same ownership pattern in which the securities are held in the physical form e.g: If one certificate is in individual name and another certificate is jointly held by X & Y, two different accounts should be opened

What is dematerialization?

Dematerialization is the process by which physical certificates of securities of an investor are converted to an equivalent number of securities in electronic form and credited into the investors account with his/her DP. It is to be noted that an investor can hold shares in physical form but for the purpose of trading in stock exchanges shares should be in electronic form.

Process of dematerialization

An investor intending to dematerialize its securities needs to have an account with a DP. The client (registered owner) will submit a request to the DP in the Dematerialization Request Form for dematerialization, along with the certificates of securities to be dematerialized. Before submission, the client has to deface the certificates by writing "SURRENDERED FOR DEMATERIALISATION". The DP will verify that the form is duly filled in and the number of certificates, number of securities and the security type (equity, debenture etc.) are as given in the DRF. If the form and security count is in order, the DP will issue an acknowledgement slip duly signed and stamped, to the client. .

Process of dematerialization

After intimating NSDL electronically, the DP sends the securities to the concerned Issuer/ R&T agent. NSDL in turn informs the Issuer/ R&T agent electronically, using NSDL Depository system, about the request for dematerialization. If the Issuer/ R&T agent finds the certificates in order, it registers NSDL as the holder of the securities (the investor will be the beneficial owner) and communicates to NSDL the confirmation of request electronically. On receiving such confirmation, NSDL credits the securities in the depository account of the investor with the DP. This procedure takes 15to 30 days.

Rematerialisation

Rematerialisation is the process by which a client can get his electronic holdings converted into physical certificates. A client can rematerialise his dematerialized holdings at any point of time. The rematerialisation process is completed within 30 days. The securities sent for rematerialisation cannot be traded.

Procedure of Rematerialisation

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. The DP releases the request to NSDL and sends the request form to the Issuer/ R&T agent. The Issuer/ R&T agent then prints the certificates, dispatches the same to the client and simultaneously electronically confirms the acceptance of the request to NSDL. Thereafter, the clients blocked balance are debited.