MAHRASHTRA NATIONAL LAW UNIVERSITY, MUMBAI

ECONOMICS IV
SEMESTER IV
FIRST DRAFT

TOPIC: DEPOSITORY SYSTEM IN INDIA- WITH SPECIAL

REFERENCE TO NSDL AND CDSL

Submitted To: Prof. Rohit Jadhav (Course Instructor)

Submitted By: Sakshi Salunke

Enrolment No.: 2017043

SY B.A LL. B(Hons.) 2018-19

INDEX
INTRODUCTION
Technology has alerted the face of Indian stock markets in the post liberalization period. The
depositories are an important intermediary in the securities market. In India, the Depositories
Act defines a depository to mean "a company formed and registered under the Companies Act,
1956 and which has been granted a certificate of registration under sub-section (IA) of section
12 of the Securities and Exchange Board of India Act, 1992."1 The principal unction of a
depository is to dematerialize securities and enable their transactions in book-entry form.
Depositories are integral institutions in the Indian Capital Market and their functionality can
be compared to banking entities. Their role comes into play from the time an investor plans on
investing. In India, there are two depositories namely National Securities Depository Limited
(NSDL) or Central Depository Services (India) Limited (CDSL) that are registered with SEBI.
A depository system is a place to deposit something for safekeeping as banks in which funds
or securities are deposited by other under the terms of depository agreements. The principle
function of a depository is to dematerialize securities and to enable their transactions in book-
entry form. Depository system essentially aims at eliminating the voluminous and unwieldy
paper work involved in the scrip-based system offers scope for paperless trading through state-
of-the-art technology. An electronic record of ownership or securities is maintained by it as an
institution. The storage and handling of certificates is hence immediately obviated which
produces a reduction in costs such as back office cost for handling, transporting and storing
certificates.

Depository participant is an institution like bank for securities. When an investor hands over
securities to a depository participant, investor’s account is credited. The investor’s depository
system account will show their holdings. His account is updated for his transactions of sale and
purchase but without physical movement of scripts or transfer deeds. In depository setup, share
certificates of the investor’s are dematerialised. ‘Dematerialisation’ or ‘Demat’ is a process
whereby investors securities such as shares, debentures, etc. are converted into electronic data
and stored in computers by a depository. Securities registered in investor’s name are
surrendered to depository participant (DP) and these are sent to the respective companies who
will cancel them after demat and credit investor’s depository account with the DP. The

1
https://www.researchgate.net/publication/322006770_Depository_System
https://www.epw.in/system/files/pdf/2003_38/20/Indian_Securities_Depository_System.pdf?0=ip_login_no_cac
he%3D894572d0e20d340d6efdf8a2ef686d55
securities on Demat appear as balances in one’s depository account. These balances are
transferable like physical shares. If later, investors wish to have these ‘demat’ securities
converted back into paper certificates, the depository does this and their names are added in
the records of depository as beneficial owners. The beneficial ownership will be with the
investors but the legal ownership rests with the depository. Consequently, benefits like interest,
dividend, and rights: bonus and voting rights rests with the investors. Since the depository is
to get securities transferred in its name, the company maintains the ownership register in which
the depository name gets registered. Thus, the name of depository figures in the register of
company instead of several owners. Since transfer will be affected only in depository, it is not
requisite for the register of company to get updated on every transaction of sale and purchase
of company’s share. The hardships currently face by the investors get alleviated and also offers
options for conversion of shares from electronic to physical or paper form through a process of
rematerialization. Depository system is indeed, tested by time and long prevalent in numerous
advance countries and has been playing an important role in stock markets around the world.

The depository system comprises of:

1) Depository
2) Depository Participants (DPs)
3) Companies/issuer
4) Investors

The inception of first depository was established way back in 1947 in Germany. In India it is
relatively new concept introduced in 1996 with the enactment of Depositories Act, 1996. Their
operations are carried out in accordance with regulations made by SEBI, bye-laws and rules of
Depositories Act and SEBI (Depositories and Participants) Regulations Act,1996.

Constituents of Depository System:

➢ Depository:
Depository functions like a securities bank, where the dematerialised physical securities
are traded and held in custody. This facilitates faster risk free and low-cost settlement.
Depository is much like a bank and performs several activities that are like a bank
depository:
• Enables surrender and withdrawal of securities to and from the depository
through the process of ‘Demat’ and ‘remat’.
 • Maintains investors’ holdings in electronic form
• Effects settlement of securities traded in depository mode on the stock
exchanges,
• Carries out settlement of trades not done on the stock exchanges (off market
trades).

In India, a depository must be promoted as a corporate body under Companies Act, 1956. It is
also to be registered as a depository with SEBI. It starts operations after obtaining a certificate
of commencement of business from SEBI. It must develop automatic data processing systems
to protect against unauthorised access. A network to link up with depository participants,
issuers and issuer’s agent must be created.

LITERATURE REVIEW

The Depository System in India has been in existence for few years only. It was started in the
year 1996. Due to this reason not, many studies have been conducted on this subject. Rao, D.M
and Pramannik, A.K. in their paper titled “Depository System- An Attempt to Scripless
Trading” have discussed the mechanism of the scripless trading, Depository, its rights and
obligations. They have also discussed the relation of Depository with other agencies,
relationship between Depository and beneficial owner, between Depository and Participants,
between depository and Issuer Company, between Depository and SEBI and the relationship
between the Depositories Act and the Companies Act.

Sahoo, M.S. (1995) in his article “The Depositories Ordinance, 1995 Explained”, have
highlighted the provisions of the Depositories Ordinance 1995, which provide a legal basis for
the establishment of Depositories in securities with a view to ensure free and expeditious
transfer of securities.

RESEARCH QUESTIONS

➢
OBJECTIVES
The main objective is to study the trading and settlement procedure in the exchange with online
procedure and manual procedure that existed before online trading. Another objective of the
study is greater benefits of depositories. The study of dematerialization of shares procedures,
demat account, transfer of securities and trading and settlement of demat securities. The study
of services provided by NSDL.

METHODOLOGY
For the preparation of any project report the collection of relevant data is very much essential
there are basically two broad methods for collecting data which are followed in a report of
secondary data collection such as from printed material, text books and from internet.

HYPOTHESIS

CONCLUSION
BIBLIOGRAPHY