DEPOSITORIES ACT,1996

S.3 Certificate of commencement of business by depositories

1. **Requirement for Certificate**: no depository can function without obtaining a

certificate of commencement of business from the Securities and Exchange Board of India
(SEBI).
2. **Form of Certificate**: acc to sebi guidelines
3. **Conditions for Granting Certificate**: The regulatory authority, before granting the
certificate, must be satisfied that the depository has adequate systems and safeguards in
place to prevent the manipulation of records and transactions.
4. **Opportunity to be Heard**: The provision includes a procedural safeguard that ensures
the depository has a reasonable opportunity to present its case before the regulatory
authority decides whether to grant the certificate.

RIGHTS AND OBLIGATIONS OF DEPOSITORIES, PARTICIPANTS, ISSUERS AND BENEFICIAL

OWNERS

1. **Agreement between Depository and Participant**: s.4

- A depository must have an agreement with one or more participants who act as its
agents.
- The agreement's format must comply with the bye-laws, which are rules or regulations
set by the depository.

2. **Services Offered by Depository**: s.5

- Any person can, through a participant, enter into an agreement with a depository to use
its services.
- The agreement format must comply with the bye-laws set by the depository.

3. **Surrender of Certificate of Security**:s.6

- Anyone who wants to use a depository's services must surrender their physical certificate
of security to the issuer.
- The issuer, upon receiving the certificate, cancels it and updates its records to show the
depository as the registered owner of the security.
- The issuer informs the depository of this change.
- The depository, upon receiving this information, updates its records to show the person
who surrendered the certificate as the beneficial owner of the security.

s.7 Registration of transfer of securities with depository.

1. **Registration of Transfer**:
- Upon receiving intimation from a participant (likely a broker or financial intermediary),
the depository must register the transfer of securities in the name of the transferee (the
person receiving the securities).
2. **Special Cases**:
- The provision includes special provisions for registering transfers involving asset
reconstruction companies, banks, and financial institutions under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
- In such cases, the depository must also register any issue of new shares in favor of these
entities as part of the debt conversion process.

3. **Request for Physical Securities**:

- If a beneficial owner or transferee wishes to have physical custody of the securities, the
depository must inform the issuer (the company that issued the securities) accordingly.

s.8 Options to receive security certificate or hold securities with depository

This provision gives individuals subscribing to securities the choice between receiving
physical security certificates or holding the securities in a depository.
1. **Option to Receive Security Certificates or Use a Depository**:
- When subscribing to securities offered by an issuer, individuals have the choice to either:
a) Receive physical security certificates, or
b) Hold the securities with a depository.
2. **Procedure for Holding Securities with a Depository**:
- If an individual chooses to hold securities with a depository, the issuer (the company
offering the securities) must inform the depository about the allotment details.
- Upon receiving this information, the depository updates its records to show the
individual as the beneficial owner of the securities.

1. **Securities in Fungible Form**: s.9

- All securities held by a depository must be dematerialized (converted into electronic
form) and in a fungible form.
- Fungibility means that each unit of a security is identical and interchangeable with other
units, allowing for seamless trading and transfer.
**Exemption from Certain Sections of the Companies Act, 1956**:
- Certain sections of the Companies Act, 1956, related to the issuance and transfer of
securities, do not apply to depositories for securities held on behalf of beneficial owners.
This is because the depository is considered the registered owner, and the beneficial
owner's interests are protected.

3. **Rights of Depositories and Beneficial Owners**:s.10

- The depository is deemed the registered owner for the purpose of transferring
ownership of securities on behalf of the beneficial owner.
- The depository, as the registered owner, does not have any voting rights or other rights
regarding the securities it holds.
- The beneficial owner retains all rights and benefits, as well as liabilities, related to their
securities held by the depository.

4. **Register of Beneficial Owners**:s.11

 - Every depository must maintain a register and index of beneficial owners, following the
guidelines provided in sections 150, 151, and 152 of the Companies Act, 1956. This is to
ensure transparency and accountability in the ownership of securities held in depositories.

1. **Pledge or Hypothecation of Securities**: s.12

- A beneficial owner can create a pledge or hypothecation (a charge against the securities
to secure a debt) with the previous approval of the depository, subject to regulations and
bye-laws.
- The beneficial owner must inform the depository of the pledge or hypothecation, and the
depository must update its records accordingly, with the entry serving as evidence of the
pledge or hypothecation.

2. **Information Exchange Between Depositories and Issuers**:s.13

- Depositories must provide issuers with information about the transfer of securities to
beneficial owners at specified intervals and in the prescribed manner.
- Issuers must provide depositories with copies of relevant records regarding securities
held by the depository.

3. **Option to Opt Out**:s.14

- If a beneficial owner wishes to opt out of holding securities in a depository, they must
inform the depository.
- The depository, upon receiving the intimation, updates its records and informs the issuer.
- The issuer, upon receiving the information and fulfilling specified conditions and payment
of fees, must issue the physical certificate of securities to the beneficial owner or transferee.

4. **Application of Bankers' Books Evidence Act, 1891**:s.15

- The Bankers' Books Evidence Act, 1891, which deals with the admissibility of bank
records as evidence, applies to depositories as if they were banks. This likely pertains to the
records maintained by depositories regarding securities transactions.

1. **Indemnification for Losses**: 16

- If a beneficial owner suffers a loss due to the negligence of the depository or the
participant, the depository must indemnify the beneficial owner.
- If the depository indemnifies the loss caused by the negligence of the participant, the
depository has the right to recover the amount from the participant.

2. **Rights and Obligations**:17

- The rights and obligations of depositories, participants, and issuers whose securities are
held in a depository are to be specified by regulations under the Act.
- This means that the specific duties, responsibilities, and privileges of these entities will be
outlined in the regulations, ensuring clarity and compliance within the depository system.

**Eligibility Criteria for Securities Admission**:

- The regulations will specify the criteria for securities to be admitted into the depository.
- This ensures that only eligible securities are allowed into the depository system,
maintaining standards and security for investors.
ENQUIRY AND INSPECTION

s.18 Power of Board to call for information and enquiry

This provision grants the Securities and Exchange Board of India (SEBI) the power to call for
information and conduct inquiries or inspections related to securities held in a depository.

1. **Power to Call for Information**:

- SEBI, if satisfied that it is necessary in the public interest or the interest of investors, can
order:
a) Issuers, depositories, participants, or beneficial owners to provide written information
about securities held in a depository, or
b) Authorize a person to conduct an enquiry or inspection into the affairs of the issuer,
beneficial owner, depository, or participant.

2. **Compliance with Information Requests**:

- Directors, managers, partners, secretaries, officers, or employees of the depository,
issuer, participant, or beneficial owner must provide all requested information, records, and
documents to the person conducting the enquiry or inspection upon demand.

s.19 Power of Board to give directions in certain cases.

This provision grants the Securities and Exchange Board of India (SEBI) the power to issue
directions in certain cases where it is deemed necessary for the interest of investors or the
orderly development of the securities market, or to prevent detrimental conduct by a
depository, participant, or issuer.
1. **Power to Issue Directions**:
- After conducting an enquiry or inspection, if SEBI is satisfied that it is necessary:
a) in the interest of investors or the orderly development of the securities market, or
b) to prevent detrimental conduct by a depository or participant,
- SEBI may issue directions to:
- Any depository, participant, or person associated with the securities market, or
- Any issuer,
- as deemed appropriate in the interest of investors or the securities market.
2. **Clarification on Power to Issue Directions**:
- The explanation clarifies that the power to issue directions includes the power to direct
any person who made a profit or averted a loss by engaging in a transaction or activity that
contravened the Act or its regulations, to disgorge an amount equivalent to the wrongful
gain or loss averted.

s.19A-G
1. **Penalty for Failure to Furnish Information, Returns, etc. (Section 19A)**:
- Failure to furnish required information, documents, returns, or reports to SEBI within the
specified time.
- Penalty: Not less than one lakh rupees per day of failure, up to a maximum of one crore
rupees.

2. **Penalty for Failure to Enter into an Agreement (Section 19B)**:

- Failure to enter into an agreement as required under the Act or regulations.
- Penalty: Not less than one lakh rupees per day of failure, up to a maximum of one crore
rupees.

3. **Penalty for Failure to Redress Investors' Grievances (Section 19C)**:

- Failure to redress investors' grievances within the specified time after being called upon
by SEBI.
- Penalty: Not less than one lakh rupees per day of failure, up to a maximum of one crore
rupees.

4. **Penalty for Delay in Dematerialisation or Issue of Certificate of Securities (Section

19D)**:
- Failure to dematerialise or issue certificates of securities upon opting out of a depository
by investors within the specified time.
- Penalty: Not less than one lakh rupees per day of failure, up to a maximum of one crore
rupees.

5. **Penalty for Failure to Reconcile Records (Section 19E)**:

- Failure to reconcile records of dematerialised securities with all securities issued by the
issuer as specified.
- Penalty: Not less than one lakh rupees per day of failure, up to a maximum of one crore
rupees.

6. **Penalty for Failure to Comply with SEBI Directions (Section 19F)**:

- Failure to comply with directions issued by SEBI under Section 19.
- Penalty: Not less than one lakh rupees per day of failure, up to a maximum of one crore
rupees.

7. **Penalty for Failure to Conduct Business in a Fair Manner (Section 19FA)**:

- Failure by a depository to conduct its business with participants, issuers, or any person
associated with the securities markets in a fair manner.
- Penalty: Not less than five crore rupees but which may extend to twenty-five crore
rupees or three times the amount of gains made out of such failure, whichever is higher.

8. **Penalty for Contravention where no Separate Penalty Provided (Section 19G)**:

- Failure to comply with any provision of the Act, rules, regulations, or directions issued by
SEBI for which no separate penalty is provided.
- Penalty: Not less than one lakh rupees but which may extend to one crore rupees.
19H. Power to adjudicate.
This provision grants the Securities and Exchange Board of India (SEBI) the power to appoint
an adjudicating officer, not below the rank of a Division Chief, to adjudicate on matters
related to penalties under various sections of the SEBI Act.

1. **Appointment of Adjudicating Officer**:

- SEBI may appoint an officer not below the rank of a Division Chief to be an adjudicating
officer.
- The officer is responsible for holding inquiries in the prescribed manner after giving the
concerned person a reasonable opportunity to be heard.

2. **Powers of the Adjudicating Officer**:

- The adjudicating officer has the power to summon and enforce the attendance of any
person acquainted with the facts and circumstances of the case, to give evidence or produce
relevant documents.
- If, after the inquiry, the officer is satisfied that the person has failed to comply with the
specified provisions, he may impose a penalty as deemed fit according to those sections.

3. **Review by SEBI**:
- SEBI may call for and examine the record of any proceedings under this section.
- If SEBI considers the order passed by the adjudicating officer to be erroneous and not in
the interests of the securities market, it may pass an order enhancing the quantum of
penalty after making necessary inquiries.
- The person concerned must be given an opportunity to be heard before such an order is
passed.
- This review by SEBI must be done within three months from the date of the original
order.

**19-IA. Settlement of Administrative and Civil Proceedings:**

1. **Application for Settlement:**

- Any person against whom proceedings have been initiated or may be initiated under
Section 19 or Section 19H can file an application to the Board for settlement of the alleged
defaults.
2. **Board's Discretion:**
- The Board may agree to the settlement proposal after considering the nature, gravity,
and impact of defaults, upon payment of a specified sum or on other terms determined by
the Board according to SEBI regulations.
3. **Settlement Procedure:**
- The settlement procedure specified by the Board under the SEBI Act applies for this
purpose.
4. **No Appeal:**
- There is no provision for appeal under Section 23A against any order passed by the Board
or the adjudicating officer under this section.
5. **Funds Collection:**
 - All settlement amounts (excluding disgorgement amount and legal costs) realized under
this Act are credited to the Consolidated Fund of India.

**19-IB. Recovery of Amounts:**

1. **Penalty Payment Failure:**

- If a person fails to pay the penalty imposed under this Act, comply with a disgorgement
order, or pay any fees due to the Board, the Recovery Officer may recover the amount due
through various modes like attachment and sale of property, arrest, etc.
2. **Income Tax Act Reference:**
- The provisions of the Income Tax Act related to recovery apply with necessary
modifications, treating the amount due under this Act as income tax.
3. **Assistance from Local Administration:**
- The Recovery Officer can seek assistance from the local district administration.
4. **Priority in Recovery:**
- Recovery of amounts by the Recovery Officer for non-compliance with any SEBI direction
under Section 19 takes precedence over other claims against the person.

**19-IC. Continuance of Proceedings:**

1. **Liability of Legal Representative:**

- If a person dies, his legal representative is liable to pay any sum the deceased would have
been liable to pay if he had not died, except for penalties imposed after the person's death.
2. **Continuation of Proceedings:**
- Proceedings for disgorgement, refund, or recovery before the Recovery Officer initiated
against the deceased before his death are deemed to be initiated against the legal
representative and can be continued from the stage at which they stood on the date of the
deceased's death.
- Proceedings that could have been initiated against the deceased if he had survived may
be initiated against the legal representative.
3. **Personal Liability of Legal Representative:**
- Every legal representative is personally liable for any sum payable if, while his liability
remains undischarged, he disposes of or parts with any assets of the deceased's estate in his
possession. However, the liability is limited to the value of the asset disposed of.
4. **Limitation of Liability:**
- The liability of a legal representative is limited to the extent to which the estate of the
deceased is capable of meeting the liability.
5. **Definition of Legal Representative:**
- "Legal representative" means a person who in law represents the estate of a deceased
person, including any person who handles the deceased's estate. It also includes a person
on whom the estate devolves on the death of a party suing or sued in a representative
capacity.

**19J. Crediting Sums Realized by way of Penalties to Consolidated Fund of India:**

 - All sums realized by way of penalties under this Act are credited to the Consolidated
Fund of India.

[MISCELLANEOUS]