ROLE OF DEPOSITORY PARTICIPANT IN DEMATERIALIZATION: A LEGAL VIEW

I. ABSTRACT
A thriving, dynamic capital market is the fundamental underpinning of economic transformation and prosperity.
The Indian capital market has expanded dramatically in the recent decade. The volume of business has
skyrocketed. India now boasts the world's largest investor population. It has also increased the number of
investors and the volume of transaction significantly. The introduction of screen-based trading has resulted in a
large increase in secondary market business volumes. The increased volume of trade necessitated the
development of improved market infrastructure to serve the clearing and settlement function. The method for
transferring actual shares and transfer documents has caused the securities market to become bogged down in
paper work, impeding the market's expansion. This has exposed the investor to the danger of faulty delivery,
transfer and registration delays, bogus certifications and forgeries, loss in transit, and so on. The introduction of
the Depository System cleared the door for the establishment of infrastructure to eliminate the issues and
hazards associated with the physical trading system while boosting the efficiency of the clearing and settlement
system. The advent of depositories gave rise to a new sort of stock transaction known as "dematerialization,"
which is the process of turning your physical shares and assets into digital or electronic form. The Author,
through this paper would analyze the role of a depository participant in dematerialization from legal point of
view.

II. INTRODUCTION
Investment is critical in moulding an undeveloped or developing country. However underdeveloped countries
have a difficult time obtaining adequate finance for growth. In order to go forward and achieve the majority of
financial and economic growth, India need a high level of saving and investment. There are several risk factors
associated with investing. As a result, for India to attract investors, market efficiency and investor protection are
essential. A well-functioning securities market can result in consistent economic development. In order
to improve the market efficiency, a well established securities depository system was always required and that
is what The Depositories Act of 1996 did, by aiding in the development of the settlement system. Once the
settle system was established, apart from owning securities, the system now provided services linked to
securities transactions and thereby  reduces bureaucracy and promotes open trading. It also helps to the liquidity
of an investment in securities. Stock exchanges, which serve as trading venues for securities, also play a
significant role in the capital market.
Many features of technology have become a gift in the twenty-first century. The 'depository' system, which is an
electronic manner of keeping securities, is one such benefit. There was a period when corporations issued
tangible share certificates. The certificate was expected to be kept secure by the investors and forwarded to the
buyer after the share was sold. With the implementation of the Depositories Act of 1996, there is no longer any
paperwork involved, and all entries are now done electronically. With the establishment of depositories, a new
sort of stock trading mechanism known as 'dematerialization' was established. Dematerialization is the act of
turning your physical shares and securities into digital or electronic form, with the goal of making the process of
purchasing, selling, transferring, and holding shares more efficient and error-free. In the securities market,
dematerialization is a minor but significant concept. On a basic level, it is the process by which a monetary
master's physical claims are taken/surrendered by/to the association/recorder and severely erased, with a
comparable number of securities credited in the examiners' secure record. The method of dematerialization of
offers was developed primarily to address issues with physical offer confirmation settlement and to give
electronic safe havens for securities traded on the esteem and commitment displays.

III. REVIEW OF LITERATURE

Sarkar, A.K. (2017) in his article discussed the consequences of the Depositories Act of 1996, which prepared
the way for scripless trading and share transfers based only on book entry, were examined in his
article “Implications of the Depositories Act, 1996.” To speed up the settlement of securities transactions, he
advocated that clearing houses should be formed. He suggests that the government take control of various firms'
activities to ensure that the law is successfully implemented.
Aggarwal, V.K. and Dixit, S.K. (2015) in their article titled, "The Depositories Legislation: A Critical
Evaluation" looked at the legislative basis for the Indian Depository System. They looked at the Depositories
Act of 1996 in this perspective. They discussed the advantages of paperless trading and the services provided by
a Depository System.
Bhatt & Bhatt (2012) in their paper entitled "Financial Performance Evaluation of Depositories in India (A
Comparative Study of NSDL & CDSL)" investigates how the trend of electronicization of securities market
activities, notably Dematerialization, has enabled the Indian capital market to climb to previously unfathomable
heights. The stock market in India has developed at an exponential rate.
Chaudhary & Malik (2011) in their paper “Depository system in India: An analysis” backs up the assertion
that NSDL, with a 57% holding in the Indian Securities Market, houses the bulk of the market players. As a
result, it serves as the dominant organisation, with a majority of the system's participants. The document also
notes that, based on its results, the majority of respondents were satisfied with the current depository cost
structure, indicating that the current charge structure maintained by NSDL is beneficial.
Kaur (2013) in her paper "Investors choice between DEMAT and REMAT, as well as understanding of
depository and its different rules" describes the Indian depository system, with a specific focus on the reasons
for investors' preferences between REMAT and DEMAT of securities. Finally, she points out that the number
of DEMAT account holders has been steadily expanding over the last few years.
IV. RESEARCH OBJECTIVES
The main objective of the study is to examine the role of National Securities Depository Limited in Demat. The
objectives are:
i) To investigate NSDL in full, including its historical background and organisational structure, in order to
identify the primary goal for why it was established in India.
ii) To provide an overview of NSDL's activities and procedures for attaining its goals.
iii) Understanding the Basic structure of Depository Participants and Dematerialisation.

V. RESEARCH QUESTIONS
(a) What is the Role of depository participant? 
(b) What is the need for Depository Participant in India?
(c)Legal frame work for regulating Depository Participant and Dematerialization?
(d) What are the Securities that are eligible for Dematerialization
(e)What are the benefits for dematerialization

VI. METHODOLOGY
The researcher aimed to analyse and make a detailed and critical evaluation of the working and operations of
the National Securities Depository and the System of Dematerialisation, hence only secondary data was
employed in this study.

VII. ANALYSIS
A. ROLE AND NEED OF DEPOSITORY PARTICIPANT 
According to Black's Law Dictionary, a "depositary particpant" is "the entity of a financial the Institution
allowing the storage of data and information. The person or entity to whom something is entrusted, as
"depository" is the location where it is kept.  The depositary's role is to keep the property in proper condition
and to restore it to the investor on demand." In exchange for fees, a depository participant allows an investor to
trade on his platform and provides him with regular profit and loss statements; they also hold his shares in a
dematerialized form. A depository participant is a person who acts as a go-between between an investor and a
depository, facilitating their activities. The Depository Participants carries out the following activities: Opening
account for investors, Re-materialize and dematerialization of securities, Pledging and  un-pledging of  loans
against shares, The setting of transactions done on stock exchanges in connection with depositories, Transfer of
securities and Corporate action benefits such as directly transferring securities into the Demat account or bank
accounts of customers. They monitor and track trade transactions linked to securities and act as a link between
the Depositories and investors thereby ensuring investments held electronically are safe and secure
According to the Securities and Exchange Board of India's guidelines, all cash related institutions, banks,
supervisors, stockbrokers, and so have to satisfy a set of conditions to operate as Depository Participants. The
financial professional, also known as a substantial proprietor, must create a demat account with any Depository
Participant in order to dematerialize his property and trade securities. The financial institutions, banks,
stockbrokers, and other organizations that provide this service are called Depository Participant (DP). When the
securities are traded the Depository Participant also transfers the ownership of the security through electronic
mode.  All these service providers act as a nominee of the investor, who keeps the securities or share on their
behalf. The main function of the depository participant is to transfer the share on behalf of investors and to
collect dividends, bonuses, and shares on the behalf of investors electronically.

B. LEGAL FRAME WORK

1. The Depositories Act, 1996
The Depositories Act of 1996 is a law that governs depositories in securities, as well as other matters linked to
or incidental to them. The Depository Act authorises the formation of depositories such as the National
Securities Depository Limited (NSDL) and the Central Depository Services Limited to provide electronic
depository services for securities traded in equity and debt markets, paving the path for Dematerialization. of
Securities in India. The Depositories Act established a dematerialization path for book-entry based securities
transfers and settlements. The Indian Parliament passed the Depository Act in order to create a legal framework
for the formation of depositories. The word "depository" refers to a recognised institution that facilitates the
electronic purchase or sale of securities such as shares, debentures, and bonds by investors. The Securities and
Exchange Board of India is in charge of the depository's registration, regulation, and inspection.
2. Securities and Exchange Board Of India (Depositories And Participants) Regulations, 2018
In May 1996, SEBI published Depositories and Participants Regulations establishing a dematerialization path
for book-entry based securities transfers and settlements. This rule was reformulated and amended twice, once
in 2012 and again in 2018, to provide depositories, participants, issuers, and issuer's agent greater rights and
duties in accordance with the agreements they agreed into. The new regulation compels issuers to enter up
arrangements with depositories to allow investors to dematerialize their securities. By ensuring continuous
communication between the stakeholders and participants, this amended regulation established a more coherent
cooperation between depositories, custodians of securities, and clearing organisations for having an effective
settlement of securities, by ensuring continuous communication between depositories, participants, issuers,
issuers' agents, and setting up of other stakeholders in the investment market.
3. Bye-laws of Depository 
NSDL drafted its Bye Laws and Business Rules in order to utilise the rights granted by the Depositories Act.
The Securities and Exchange Board of India has approved the Bye Laws. While the Bye Laws establish the
scope of NSDL's and its business partners' operations, the Business Rules describe the operational processes
that NSDL and its 'Business Partners' must follow.

C. SECURITIES ELIGIBLE FOR DEMATERIALIZATION

The market-carrying The principles of the SEBI apply to the whole Indian depository system. Securitized
commitments, cash promotion instruments, and unlisted securities, as well as basic resource units, rights under
total hypothesis designs, venture holdings, the firm document, and store presentation are all examples of
unlisted securities.1 By strategy for handouts delivered by messages, all Depository Participants are made aware
of a summary of securities open for demat in NSDL/CDSL store. The data is also available on the NSDL/CDSL
website, as well as in the monthly data release. A vault can deal in securities essentially after receiving
confirmation of enlistment from the Securities and Exchange Board of India Demonstration, as per the game
plans of the SEBI. Supporters of the planned storehouse should file an application with the SEBI for a
disclosure of enlistment in the form proposed. A depository that has obtained the above-mentioned selection can
only begin operations if it receives confirmation from SEBI. A Depository must , within one year after allowing
the underwriting of enlisting from SEBI, seek for and obtain confirmation of inceptions of business from the
SEBI. When the state or municipal government underwrites government securities, such understanding is not
required. Any organisation involved in the recording of the designation of securities or trade of obligation
pertaining in the record of a safe can use a Depository produced under the Stores Demonstration. Anyone who
wants to help the vault's operations can do so by synchronising with the vault's operations through one of its
personnel.2 A Depository Participant can provide vault benefits to a shop. A storehouse is unable to open
records or provide services to clients. Every storehouse must specify in its bye-laws which securities are
suitable for Demat keeping.

D. BENEFITS FOR DEMATERIALIZATION

 Allocation and fund transfer
The transfer of funds from the bank account is made more easier by integrating with the DEMAT Account, and
there is no additional price. This saves the investor the effort of writing a check or physically putting monies
into the DEMAT Account.
 Protected and secure
The DEMAT Account, which houses all of the digital shares, is the safest and most secure way to do business.
All dangers associated with actual stock ownership, such as theft, damage, forgery, and misplacing share
certificates, have been eliminated.

1
R. Olekar & C. Talwar (2017), Online trading & DEMAT account in India Some issues. International Journal of Management &
Social sciences research, April 2013, Vol. 2 , No.4, Pp 83-88
2
Chaudhary K & Malik R(2011), Depository System In India : An Appraisal. International Journal of Research in Social
Sciences,Volume 1 Issue 1,207-220
 Nominee facility
The DEMAT Account allows the investor to provide another person, whom he or she nominates, access to his
or her DEMAT Account while the investor is away. This occurs when the person/investor is not physically
present or has died, allowing the nominee to acquire management of the shares.
 Paperless transactions
The most significant advantage of a DEMAT Account is that it eliminates the need for paper. Since this
DEMAT Account is for keeping shares or securities in electronic/digital form, paper is nearly never used.
Furthermore, the Account has shown to be quite beneficial to businesses in terms of lowering their
administrative expenses and difficulties. 
 Easily traceable
An investor may monitor his portfolio from anywhere in the world with the aid of a DEMAT Account. Due to
the obvious increased engagement, the ability to monitor portfolio performance and make spontaneous
decisions to sell or acquire stocks based on the current market condition increases the odds of generating greater
gains.
 Helps in Receiving corporate benefits
The DEMAT Account facilitates the receipt of different advantages such as dividends, interest, and
reimbursements. The entire profit amount is deposited into the DEMAT account. Stock splits, bonus shares, and
rights shares are among the other benefits.

VIII. DEMATERIALIZED SECURITIES AND INTERNATIONAL LAW RULES IN CONFLICT

Buying and selling stocks may now be done over the internet, thanks to technology improvements and to make
the process of trading securities easier. These developments paved the way for an electronic form of securities
trading, as well as access to worldwide financial markets. 3 In today's electronic markets, even certificates issued
as confirmation of ownership of assets traded online take an electronic rather than a physical form. These
innovations in the financial and securities system has also aided in the acceleration of international transactions.
The reason for formulating and implementing technological improvements into the securities markets is that it
ensures lower transaction costs which in turn results in larger trading volume and make it simpler for securities
to reach to a larger mass of investors. These rules and regulatory changes should have a comparable effect as
conventional securities trading. Electronic trades, on the other hand, are still subject to a specific securities
market that is defined by specific securities legislation and is overseen by a specific jurisdiction. This simply
indicates that the rules or regulations of the listed nation have jurisdiction over trade disputes. Dematerialized
securities are nonetheless securities certificates in terms of proprietary law. The sole objective of these
certificates is to act as proof of the bearer's ownership. When a certificate is transmitted from one person to
another, ownership is transferred. Securities are negotiable instruments, thus even if they are dematerialized,
3
Effros, R.C., Current Legal Issues Affecting Central Banks, (Volume IV , IMF, April 1997). pp. 571-572
their negotiability will be retained. It should be understood that unless the electronic form of the certificate is
stolen or fraudulently exchanged with illegitimate entities, in which case the notion of securities negotiability
kicks in, the transition to trading securities electronically would be smooth and in the prescribed manner.
Finally, when it comes to securities regulation, the move from physical to electronic trading will have no effect
on disclosure regulations, therefore disclosure standards and securities fraud will continue to exist.

IX. CONCLUSION
India now has the one of largest number of companies in the world, . This boon has resulted in a substantial
growth in the number of transaction volume backed by a even larger number of retail and institutional investors.
Screen-based trading resulted in a significant increase in secondary market business volumes. Because of the
rising volume of trading, improved market infrastructure is required to support clearing and settlement
activities, which have previously been stressed. The process for transferring physical shares and transfer deeds
has rendered the securities market paper-bound, preventing it from expanding. This put the investor at risk of,
among other things, incorrect delivery, delays in transfer and registration, fraud and bogus certificates, and loss
in transit. The Depository System cleared the path for a systematic infrastructure to be developed, reducing the
issues and dangers connected with modes of physical trading and boosting the clearing and settlement system's
efficiency. The Demat System is concerned with the electronic conversion of physical securities, as well as
scripless mode of trading and quick settlement cycles. Electronic book entries are used in the Demat System to
record ownership and transfer of securities. Without a doubt, dematerialisation of securities has reduced the risk
of bad delivery, excessive delays in title transfer, high stamp duty, and other issues. In the case of
dematerialisation of securities subsequent instances of conflicts of law, rules should be applied in such cases, It
can be concluded that dematerialization of securities has no effect on the value ad character of such securities,
especially as private law allows securities to be traded and the certificate provided in exchange for the
acquisition of a security is just an evidence of ownership.. As a result, a certificate of this type will have the
same legal effect regardless of its format. When it comes to addressing any discrepancy between laws and
securities rules involving dematerialized and demobilised securities, utilising a different process than that used
for materialised and mobilised securities is pointless.