28 The Depositories Act, 1996:

An Analysis

28.1 Objectives
The Depositories Act,
1996, aims at
(a) a legal basis for providing for:
establishment of depositories to conduct
maintenance of ownership records of securities and the task of
ownership records throughout by book effect changes in
(b) dematerialisation of securities in entry;
the depositories mode as
option to an investor to choose between well as giving
holding
holding securities in a dematerialised form in securities as at
present or
a
depository;
(makingthe securities fungible;
(d) making the shares, debentures and any interest
thereon of a public limited
company freely transferable; and
(e) exempting all transfers of shares within a
depository from stamp duty.
28.2 Salient features of Depositories
Act, 1996
The Depositories Act, 1996 extends to the whole of
India.
It contains 31 sections
grouped into six Chapters. The salient features of the
Depositories Act, 1996 are:
The Act makes provision for setting up of multiple Depositories in India.
a

Every Depository shall be required to be registered with SEBI and shall

obtain from it the certificate to commence business.
The investors shall have the option to retain their shareholdings in the
physical mode or convert it in dematerialised form (Demat).
unvestors who opt for Demat shall have to register themselves with one or
more participants.

h e securities held in Demat mode shall be fungible, ie, they shall cease
nave any distinctive
folio or certificate number.
 671 SERVIC TO BE
ACT, 1996: AN ANALYSIS RENI RED BY
DEPOsITORIES
A
Para 28.5 THE
670 28.5-1 Who can render
DEPOSITO
ara 28.5
The Depository would only registered owner.
be the Investors shall
b the
Anybody to be
Depository services ?
names will appearin
the records of the e eligible to provide
beneficial owners and their
and liabilities will be
with the investors
only.Deposi- () beformed. and depositorysservices must
tory. All ights, benefits
system will be made automati.
registered as
red with SEBI as company under the
(b) be registered
a
Ownership changes in the Depository There will
the basis of delivery versus payment.
of ownership in
be regular, mandatly on
the Depository's r tloOw have framed depository under the Companies Act,
bye-laws with the
a
SEBI Act, 1992,
of information about the details record to (h
the company concerned. obtained a certificate of previous approval of SEB,
have
N o stamp duty shall be charged on shares transferred in the Demat ( haveone or more commencement of
ode. participants to render depository business from SEBI,
Securities held in Demat mode may be pledged. have adequate systems and services on its behalf, and
and transactions to the safeguards to
prevent
satisfaction of SEBI, manipulation of records
28.3 Meaning of Depository ( have been
established by one or more of
The Depositories Act, 1996 defines "Depository" as "an organisation where ser institution (i) bank (iti) foreign bank the following () public financial
a
a
body corporate
a (iv) recognized stock exchange (v)
rate constituted orengaged providing financial services
ties of a shareholder are held in the form of electronic accounts in the sanme in
ay as
bank holds money".
clearing or settlement recognized foreign country for (vi) a body corpo
in
The Depositories Act, 1996 requires a depository to be a
company registered unde services
Central Government (vii) an in securities market and approved
providing custodial,
the Companies Act and with SEBI under the SEBI institution by the
(Depository and Participant services established outside India engaged in
Regulations, 1996. So far only two Depositories have been allowed by SERI t and approved by the providing financial
Central Government.
function, viz, National Securities Depository Limited (NSDL) and Central Deposi. 28.5-2 Securities eligible for
tory Services (India) Ltd. (CDSL). depository servicesS
The Depository services are available
A Depository acts in respect of securities
through the medium of his agent called "Depository Participant' SEBI. The eligibility criteria for admission of securities into
may be specified by
as

According to SEBI (Depositories and Participants) Regulations, financial institu- determined by SEBI Regulations. This depository have been
tions, banks, custodians, stock brokers, etc., can admit certain provides flexibility to SEBI, for example, to
become depOSitory participants.A instruments like units of mutual funds in the
Depository Participant (DP) acts as a service provider to the investors instrument to be under the depository mode need not be a depository mode. An
a custodian of the
electronic accounts of the clients and taking care of by acting as Securities Contracts (Regulation) Act, 1956. security as defined in the
settlement thereof. DP acts as an interface between trading and
Investor and
Depository. 28.5-3 Are all eligible securities required to be in the
28.4 Benefits of depository mode?
depository system It is not necessary that al eligible securities must be in the
depository mode. In the
The benefits from the scheme of the depository legislation, the investor has been given
supremacy. If he
depository system are following: wishes to avail of the depository services in respect of any eligible security, whether
(a) It
reduces the cost of issue and transfer of existing or to be issued, the issuer who has entered into an agreement with one or
securities by the issuer.
(b It reduces the scope for theft, more
depositories has to give him the facility. The investor has the choice of holding
forgery or damage to security certiticates. physical securities or opting fora depository based ownership record. At the time
() It entitles the transferee to all
the rights associated with the of fresh issue, the issuer who has entered into an agreement with the depository is
immediately on settlement of securities under obligation to give the option to the investors either to receive the security
(d) It enhances the
purchase transaction.
velocity of the securities in certificates under the paper based system (non-depository mode) or opt to hold
the market. The circulation and hence liquidity in
investors can trade in securities securities with a depoSitory (depository mode). The
decision on whether or not to
without immediately on allotment hold securities within the depository mode andif
in the
depository mode with which
waiting for receipt of security certificates.
Aenasitory or participant, wouldbe entirely with investor. Such freedom can be
the

the time of the initial offer of the security by indicating his choice
28.5 Services to be exercised
either at
rendered by form or at any subsequent time.lHe will also have the freedom to

Depository service for securities Depository

a the application
The in
switch from depository mode to non-depository mode vice versa. Under
and
Switcnomnanies
ction making public otter ot any security shall issue the same only
entry record of securities to effect usually refers to making a bok
Depositories Act, 1996, (a) allotmenttransfer of ownership. In computerize
the context or u in
naterialised torm bycomplying with the provisions of the Depositories Act,
made thereunder.
securnties are rellected of securities, regulations
(b) transfer of 1996 and
existence of security through book entry ownershp
certificates etc. system only and do not
I
 FREE TRANSFERABILITY OF SERVICES Para 28.8
ANALYSISS
673
DEPOsITORIES ACT, 1996: AN 672
THE
Para 28.6 28.6-1 Fungibility

Denositories Act, 1996, specifies that all securities held in a depository are
28.5-4 Who is a participant?
under the SERI.
and is registered as such
Participant is an agent of depository The participants shall have such rights.
Act ible. That is all certiticates ot the same security are inter-changeable in the
T e that investors lose the right to obtain the exact certificate they surrender at
services.
1992 to render depository SEBI (Depositories
the regulations viz. t time of entry into depository. It is hke withdrawing money from the bank
obligations as may be specified by admission of any Dere
Participants) Regulations,
1996. The eligibility criteria for erson kthout bothering about the distinctive number of the currencies (Section 9).
been determined by SEBI by Regulations, Banks, custodia. iians,
as a participant has
bank, state financial corporation, an instituti
ution 28.7 How does an investor avail services of a depository?
public financial institutions, foreignclearing corporation,
services,
stock broker, non-
engaged in providing financial to an issue or share transter agent The services that an investor may avail from the depository are set out below :
banking finance companies and Registrar are
eligible for registration as participant. (Im the case of existing securities:An investor, before availing the services of
vis-a-vis participant a depository, shall enter into an agreement with the depository through a
28.5-5 Responsibilities of a depository
The depository does not render services directly but only through an agent who is participant and then shall surrender security certificate to the issuer. The
issuer, on receipt of security certificate shall cancel them and substitute in
registered as a participant with SEBI. Therelationship betweenadepository and the
the bye-laws of thhe its records the name of the depository as the registered owner in respect of
participant is that of a principal and agent and is governed by that security and inform the depository accordingly. The depository shall
depository and the agreement between them. The depository shall maintain
ownership records in the name of each participant and each such participant shall there-after enter the name of the investor in its records as beneficial owner.
act as the agent of the depository, further maintain ownership records in respect of (b) In the case of fresh issue : At the tinme of initial offer, the investor would
individual investors. The depository shal, however, indemnity the investor for any indicate the choice in the application form. If the investor opts to hold a
loss caused to him due to negligence of depository and/or participant. The security in the depository mode, the issuer shall intimate the concerned
depository in turn shall raise consequential claims on the concerned participant,
depository about the details of allotment of a security made in favour of
28.5-6 Status of the depository in the records of the issuer investors and records the depository as registered owner of the securities. On
receipt ofsuch information, the depository shall enter in its recordsthe name
By fiction of law, the depository is deemed to bearegistered owner of the securities. of allottees as the beneficial owners. In such case a
In respect of the securities held in a depository, the name of the depository shall prior agreement by the
investor with the depository as well as an agreement between the issuer
appear in the records of the issuer as registered owner of the securities and such
company and depository may be necessary.
registered owner shall have the right to effect the transfer of securities on behalf
of the beneficial owner but shall not have voting and other rights associated with (c)In the case of exit from the depository:If a beneficial owner or a transferee
the securities. of a security desires to take away a
security from depository, he shall inform
the depository of his intention. The
28.5-7 Status of an investor who avails of depository services depository in turn shall make appropriate
entries in its records and inform the issuer. The issuer shall make
arrange-
ments for the issue of certificate of securities to the investor.
lfdepository
an
investorin avails of depository services, the is replaced by the
name ofthe
the records of the issuer, as the depository becomes the registered
name

owner of the securities held by the investor. The status of the investor
(a) In the case of transfer within the depository: The depository shall record all
changes trom transfers of securities made among the beneticial owners on
that of a registered owner,
again by fiction of law, tobeneficial owner. The name receipt of
of the investor suitable intimation to the effect that a genuine purchase transaction has
appears on the records of the depository as beneficial owmer in
been settled.
respect of the securities held by him. The beneficial owner shall continue to have
the rights and benefits and be (e) In the case of pledge : Before creation of any pledge or hypothecation in
subject to all the liabilities associated with the
securities held by the
depository on his behalf. respect a security, the
of owner is required to obtain prior
beneficial
approval of the depository and on creation of pledge or hypothecation, the
28.6 Dematerialisation of securities beneficial owner shall give intimation of such pledge or hypothecation to the
depository. The depository shall make appropriate entries in its records
The Depositories Act, 1996, envisages dematerialisation in the which will be admissible as evidence.
depository mode. in
Such case the securities held in a depository shall be dematerialised
a
and the
Gwnership of the securities shall be reflected
securities outside the through book entry only. 1nc 28.8 Free transferability of services
depository
shall be represented by physical scripts. It refers to a situation where on receipt of intimation regarding settlement of
purchase transaction, the transfer ot a security is effected immediately and the
 DEPOSITORY Para 28.11
BYE-LAws OF A
1996: AN ANALYSIS
THE
D E P O S I T O R I E S
ACT,
674 675 issuers and their relationship with the
Para 28.10
with the secs regulate depositories, participants,
obligations associated
to
and the issuer.d Once (e)
all the rights nobody including
investors,
i r a n s t e r e e enjoys enforce attendance of
call for information, s u m m o n and
t r a n s a c t i o n is settled,
tStory
c a n Withhold the
can withhold
the
genuine purchase
or regulatory
authornty
transfer of tomonitor, inspect,
of documents, conduct inquiries and audit of
participant, any intermediary witnesses and production
investors of securities,
secunty participants,
depositories,
the eligibility criteria of the securities for
transferable
s e c u r i t i e s freely and
28.8-1 Types of
therein of
a public limitedd (d to
the
specify securities
debentures and any interest made freely company
transterable. The admission into
a depository,
Only the shares, companies)
have been
shall nd issuer in the interest of
directions to any depository, participant
unlisted or
well as depository
(listed as
such a company
or
the concerned have (h to give
Board of directors of of such security. Any other securities
the market,
a transfer or
discretion to refuse or
withhold
o r any unit of uity investors
the bye-laws of a depository and amend or a revoke any bye-laws
any of a private company
f o r example,
shares o r debentures than a public limited com
tual ( to approve
issuer other
issued by any are
fund, o r anv security
be subject to the restrictions contain of the depository.
not freely
transferable and would issuer and termo
the
of the c o n c e r n e d
articles of association or the bye-laws issue. of a depository
28.11 Bye-laws
28.8-2 Is it required to have
a transfer deed for
transfer
ofsecurities withinthe
A depository
has to frame bye-laws with the previous approval of SEBI consistent
depository mode?
associated paraphernalia stipulated in sectiont 56 of with the the regulations made by SEBI thereunder. SEBI
provisions of the Act and the
The transfer deed and all other
has, however, the power to direct depository to amend or revoke any bye-laws
not apply to the transfer etfected within
the Companies Act, 2013 shal with for transferof already made wherever it considers expedient so to do. If the depository fails
or
mode. However, this tormaly neeas to De compliled
depository
securities outside the depository
mode. In case of the securities in the denosit neplects to comply withthe
amend or revoke the bye-laws on its own.
SEBI,
directions of SEBI may make the bye-laws or
basis of intimation (contrarr
mode, the would effect the transter on the
depository
note or some other suitable evidence to the etfect
that a purchase transaction has 28.11-1 Contents of the bye-laws
been settled) received through participants.
The bye-laws of a depository would include:
28.9 Rematerialisation () the eligibility criteria for admission and removal of securities into/from the
Rematerialisation is a process of converting the dematerialised securities into
depository,
physical form. If an investor desires to convert his securities into the physical form, (b) the conditions subject to which the securities shall be dealt with,

he may make a request with his Depository Participant (DP) to that effect. DP will (the eligibility criteria for admission of any person as a participant,
forvard his request to the Depository who, in turn, will intimate Registrar. the The )the manner and procedure for dematerialisation of securities,
Registrar wil then print certificates and dispatch the same to the investor. The
company shall substitute his name as the registered owner in place of the Deposi- ()the procedure for transactions within the depository,
tory in the Register of Members. ) the manner in which securities shall be dealt with or withdrawn from a
depository,
28.10 Powers of SEBl under the
Depositories Act, 1996 (g) the procedure for ensuring safeguards to protect the interests of
participants
Under the Depositories Act, 1996, and beneficial owners,
SEBI has been conferred the following powers
a) register the depositories and the participants under the SEBI Act, 1994,
to (h) the conditions of admission into and withdrawal from a
participant by a
() issue
certificate of commencement of business to the
beneficial owner,
to
being satisfied that the depository has depositories to () the procedure for conveying information to the participants and beneficial
adequate and
ensure against
manipulation of records and systems sareEa
transactions,
owners on dividend declaration, shareholder meetings and other
interest to the beneficial owners,
matters of
(c)to frarne regulations
under the SEBI Act as wellas under the
itories
Act, 1996 to
carry
out the Depos ( the manner of distribution of dividends, interest and
monetary benefits
(d) purposes of the Depositories Act, received from the company among beneticial owners,
tosuspend or cancel the certificate of
opportunity of being heard, registration after giving a rT (k the manner of creating pledge or nypotnecauon in
respect of securities held
with a depository,
 TEST YOUR KNOWLEDGE
ACT, 1996: AN ANALYSIS 677
Para 28.12 THE
DEPOSITORIES
676
depository, 15suer, particinan.. Distinctive number of shares
among the nts and 28.13

inter serightsand obligations mandatory requirement of distinguishing each security by an appropriate

beneticial owners, m
The.
intormation to SEBI ice owever, it does not prohibit a
offurnishing is not required. from
companymode.
7) the m a n n e r and the periodicity and number
nct number for its securities which are outside the depository having
other persons,
d i s t i n c t

involving depository, issuer, co

() the procedure for resolving disputes n8 14 Exercise of membership rights in respect of securities held by a
or a beneticial owner,

against the participants committing bren Depository

(o)the procedure forproceeding parts.hof
for suspension and expulsion of
the regulations and provisions
cancellation of agreements entered into
thePants Denository as registered wner, has not any voting rights or any other rights
The
a
from the depository and
in
ocDect of securities held by it on behalf of the beneficial owners. The beneficial
tory,
for
tner shall be entitled to all the rights and benefits (including the right to vote) and
p) the internal control standards
including procedures auditing, revien.d Owne

and monitoring.
ewing he Subject to all the liabilities in respect of securities held by a depository.

28.12 Stamp duty on security certificates

28.15 The evidential value of the records of the depository
At the time of fresh issue of securities (shares or otherw*se) either issued in the fou The depository has been treated as a bank for the purposes of the Bankers' Book
of physical certificate directly to investors or throughrecords of a depository t Bvidence Act, 1891. The ownership records of securities maintained by deposit0
issuer shall pay the stamp duty on the total amount of the security issued by it,evenm ries, whether maintained in the form of books or machine readable forms, shall be
though there may be no physical securities (instrument) which can be stamped accepted as prima facie evidence in all legal proceedings.
executed).
28.16 Cognizance of offence by Courts
28.12-1 Payment of stamp duty at the time of entry into the depository
No court shall take cognizance of any offence under the
Entry by an investor into a depository by surrendering the security certificates a complaint made by the Central Government or State
Depositories Act except on
Government or SEBI.
involve
change of registered ownership as the investor becomes the beneficial
owner and the depository becomesthe registered owner in respect of the security.
Such change of registered ownership of shares from an investor to a depository has 28.17 Penalty for offences under the Depositories Act
been exempted from stamp duty. A maximum penalty of
imprisonment for a term which may extend to ten years or
fine up to rupees twenty five crores or both can be
28.12-2 Stamp duty in the case of transfer of securities within the deposito- imposed.
ries
All transters of securities involve
Test your knowledge
change in registered ownership and/or beneficial
OWTership. If such change is in respect of shares within the depository mode, no 1. Broadly examine the salient features of the Depositories Act, 1996.
stamp duty shall be payable. [Hints: para 28.2]
28.12-3 2. Who can render Depository Services?
Stamp duty payable while opting out of
depository Hints: para 28.5-1]
t an investor opts to exit from a depository, the
the
depository to the investor. Such registered ownership changes from 3. What is a depository? Describe the working of a depository.
change ownership in
of of shares shal
1ot
attract stamp duty. However, when the investor seeksrespect the issue of physical
[Hints: paras 28.3 and 28.7]
4. What is a Depository? What are the benetits of Depository System?
ceruticate of securities
from the issuer, the issue of
such certificates shall attrae
starnp duty as is payable on the issue of Hints: paras 28.3 and 28.4]

23.12-4 Stamp
duplicate certificates. 5. Which securities are eligible tor depository services? Are all
eligible securities
duty in respect of transactions required to be in the depository
mode?
The transactions outside the outside the depository moue and 28.5-3]
Hints: paras 28.5-2
depository mode attract stamp duty as at resent. 6. "All securities held in depository mode become fungible". Comment
p
Hints: para 28.6]
 THE DEPOSITORIES ACT, 1996: AN ANALYSIS 678

7. Enumerate the powers of SEBI under the Depositories Act, 1996.

Hints: para 28.10]1
8. Distinguish between Dematerialisation' and Rematerialisation' of shares.
[Hints: paras 28.6 and 28.9]