Prepared by :

Chirag Vaghela
2258

An effective and fully developed depository system is

essential for maintaining and enhancing the efficiency of a
mature capital market
Before introduction of Depository system, the problems faced
by investors and corporate in handling large volume of paper
were as follows:

Bad deliveries
Fake certificates
Loss of certificates in transit
Mutilation of certificates
Delays in transfer
Long settlement cycles
Mismatch of signatures
Delay in refund and remission of dividend etc
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The first depository was set up way back in 1947 in Germany.

In India it is a 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 ,by-laws and rules of Depositories
Act and SEBI (Depositories and Participants) Regulations Act
1996

The term Depository means a place where a deposit of money,

securities, property etc is deposited for safekeeping under the
terms of depository agreement

A depository is an organization, which assists in the allotment

and transfer of securities and securities lending.
The shares here are held in the form of electronic accounts i.e.
dematerialized form and the depository system revolves around
the concept of paper-less or scrip-less trading.

It holds the securities of the investors in the form of electronic

book entries avoiding risks associated with paper

It is not mandatory and is left to the investor to decide

Depositories carry out its operations

functionaries called business partners

through

various

A depository system is governed by the following acts

Securities & Exchange Board of India Act 1992

The SEBI(Depositories and Participants) Regulations, 1996

Bye laws of depository

Business rules of depository

The Companies Act 1956

Presently there are two Depositories working in India:

National Securities Depository Limited(NSDL)
It was registered by the SEBI on June 7 1996 as Indias first
Depository to facilitate trading and settlement of securities in the
demat form. It is promoted by IDBI, UTI, NSE

Central Depository Services (India) Limited (CSDL)

It commenced its operations during Feb. 1999 and was
promoted by Stock Exchange Mumbai in association with
Bank of Baroda, Bank of India, SBI and HDFC Bank

At present 10 Stock Exchanges are connected to the Depositories

1.
NSE
2.
The SE , Mumbai
3.
Calcutta Stock Exchange
4.
Delhi SE
5.
Ludhiana SE
6.
Bangalore SE
7.
Over the counter exchange of India
8.
Madras SE
9.
Inter connected SE
10. Ahmadabad SE
Market trade: trade done settled through a SE and clearing
corporation.
Off market trades: trades done privately without involvement of
stock brokers and SE
Again investor may either choose to invest privately, through SB
or DP
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Depository
Depository Participant (DP)
Securities, Issuers and Registrars and Share Transfer Agents
Stock Exchanges and Stock Broker
Clearing Corporation/ Clearing House and Clearing Members
Banking system
Investors
Depository : it is an organization where the securities are held in
electronic form and carries out the securities transaction by book
entry
DP : DP is an agent of the depository and functions as the
interacting medium between the depository and the investor
He should be registered with the SEBI

Must possess requisite qualifications prescribed by the

concerned depository of which he is a participant
He is responsible for maintaining the investors securities a/c
with the depository and handles them as per the investors
written instructions
He is linked to a broker who trades on behalf of investors.
To avail their services an account similar to a bank a/c has to be
opened with the DP
As per SEBI Regulations , financial institutions, banks,
custodians, stock brokers etc can become DPs
However investors may choose DPs of their choice and also deal
with 1 or more DP;s at a time
Securities, Issuers and Registrars and Share Transfer Agents:
Equation: an agreement between the depository , issuer of
security and the designated registrar/ share transfer agents for
the underlying security in the cases of issues like transfer of
securities by their beneficial owners
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Securities, Issuers and Registrars and Share Transfer Agents: eg:

an agreement between the depository , issuer of security and the
designated registrar/ share transfer agents for the underlying
security in the cases of issues like transfer of securities by their
beneficial owners
Stock Exchanges and Stock Brokers
SE is an organized market for dealings in securities commonly
referred as secondary market. One of its main functions is price
discovery i.e. to cause prices to reflect currently available
information about a security
SB are members of SE primarily engaged in 2 main activities i.e.
buy and sell securities for their clients charging a comm. and as
dealers or traders and dealers they buy and sell on their own a/c
for trading gains

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Clearing Corporation/ Clearing House and Clearing Members

A clearing corporation is a central organization created to
facilitate efficient , fast and economical settlement of
transactions at a SE . it being an internal department of a SE is
an independent entity
The members of Clearing Corporation brokerage firms, banks or
other financial institutions who are called as clearing members.
E.g. : all trades done at NSE & OTCEI are settled through
National Securities Clearing Corporation Limited (NSCCL)
It acts as a central mechanism for consolidating and settling
transactions instead of the member firms settling each trade
individually amongst themselves, Banking system
Depository essentially plays a dual role i.e. of a depository and a
limited bank
It maintains current a/cs for participants and executes fund
transactions relating to securities transactions for participants
Investors :may be individuals or corporate who have acquired
shares either in primary market or in secondary market
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Opening of depository system

Dematerialization
Settlement of trades in dematerialized securities
Account transfer
Transfer ,transmission and transposition
Pledge and hypothecation
Redemption or repurchase
Stock lending and borrowing
Corporate action
Account freezing
Nomination
Demat of debt instruments
Dealing in GOVT securities

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Opening of depository system: SEBI has made compulsory

trading of shares of all the companies listed in stock exchanges
in demat form W.E.F 2.Jan.2002
Hence if the investor wants to trade in respect of the companies
which have established connectivity with NSDL & CSDL, he may
have to open a beneficiary a/c
Beneficiary a/c is an a/c opened by the investor or a broker with
a DP of his choice to hold shares in demat form and undertake
scrip less trading
For opening demat a/c, the following documents are required:
1.

2.
3.

Demat opening form duly filled

Address proof
photograph

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Once a demat a/c is opened investor must sign an agreement

with the DP and the investor will be allotted an account no. called
as client identity
No minimum balance is required
The investor is provided with a transaction statement by his DP
at regular intervals based on which the investor will know his
security balances
Dematerialization: It means conversion of the physical
certificates into dematerialized holdings at the request of the
investor.
Only shares registered in the name of the a/c holder are
accepted for dematerialization at the depository

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Procedure:
First open a demat a/c or security a/c with any DP of investors
choice
Obtain a/c no. from his DP
A dematerialization request form (DRF) to be submitted to the DP
who intimates depository of the request
DP then submits the certificate along with the DRF to the
registrar who confirms the demat request
Registrar validates the request, updates records ,destroys the
certificates and informs depository who in turn credits the DP a/c
Depository participant updates the investor a/c and informs the
investor
Once the company is admitted into depository system, an ISIN
(international securities identification number) is allotted by the
depository. This no. is unique for each security of the company
that is admitted in the depository
The entire process takes about 15 days time.
However when large no. of certificates are submitted from
institutions, it takes up to 30 days for demat
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An investor may demat a part of his holdings and hold the

balance in physical mode for the same security
Demat shares are fungible because they do not have any
distinctive or certificate numbers
Rematerialisation
It means conversion of demat holdings back into certificates
If the investors wish to get the securities in physical form ,all he
has to do is to request DP for remat

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Procedure :
Investor must fill up a remat request form (RRF)
The DP will forward the request to depository after verifying that
the shareholder has the necessary balances
Depository will in turn intimate the registrar
RTA (registrar & transfer agent) will print the certificates and
dispatch the same to the investor
Settlement of trades in dematerialized securities
The following stock exchanges have been admitted on the
depository to conduct this activity
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

NSE
The SE , Mumbai
Calcutta Stock Exchange
Delhi SE
Ludhiana SE
Bangalore SE
Over the counter exchange of India
Madras SE
nter connected SE
Ahmedabad SE

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Account transfer :
Depository gives effect to all transfers resulting from the
settlement of trades and other transactions that take place
between various beneficial owners.
Buying of securities:
It is similar to buying of physical securities
Procedure:
Investor purchases securities in any of the SE connected to
Depository through a broker
Investor pays broker
Broker pays clearing corporation
On the pay out day broker receives credit for securities

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He gives instructions to DP to debit clearing a/c and credit

clients a/c
Investor receives shares into his a/c
Investor has to make sure that the broker transfers the securities
into his a/c before the book closure
Or else the company may hive corporate benefits to the broker
Selling of securities: procedure
Investor sells securities in any SE linked to depository through a
broker
Investor gives instruction to DP to debit his a/c and credit
broker a/c
Before the pay-in day, investors broker transfers the securities
to clearing corporation
Broker receives payment from SE
Investor receives payment from broker
Sale in demat form is similar to sale under physical mode
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Transfer:
Depository being electronically linked to DPs, issuer company or
registrar & transfer agent and the clearing corporation of the SE,
serves as an integrated set up for maintenance of investor a/cs
Hence , here transfer of securities occur merely by passing book
entries in the records of the depository as and when instructed
by the beneficial owners
Transmission:
the claimant will have to fill a TRF i.e a transmission request
form supported by documents like death certificate, succession
certificate etc
The DP after verifying that the application is genuine, will
transfer securities to demat a/c of claimant
Demat transmission all the formalities can be completed in one
go

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Transposition
Security certificates for this purpose must be submitted along
with TRF and DRF to the DP
Procedure:
Both borrower (pledger) and lender (pledgee) must have
depository a/cs
Details of securities to be pledged should be submitted by the
pledger to his DP in a standard format
Pledgee should confirm the request through his DP
Once this is done, securities are pledged. Then the financial
transactions between pledger and pledgee are handled outside
the depository system

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After the loan is repaid, the borrower can request for a closure of
pledge by instructing his DP
If the pledgee agrees , the investor may change the securities
offered in a pledge.

Redemption or repurchase
This occurs when the securities are surrendered to the issuer
either on maturity or in pursuance of an option given by the
issuer , in lieu of agreed consideration.
The consideration may be in cash or new securities in lieu of
existing securities

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Stock lending and borrowing :

It involves lending and borrowing of securities under an
approved scheme
It is executed through approved intermediaries duly registered
with SEBI under the securities lending act 1997
Intermediaries may deal in a depository system only through a
special a/c known as intermediary a/c opened with a participant
Nomination :
Like shares in physical form, shares in electronic form also can
be nominated
Nomination can be made only by individuals holding beneficiary
a/c
Minor can nominate only through guardian
It can be made demat a/c wise and not security wise

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Demat of debt instruments :

Debt instruments can also be held in demat form
Instruments like bonds, debentures, CPs, CDs
From Oct 31st 2001, RBI has mentioned that banks and financial
institutions shall make investment in debt and bonds only in
demat form
Investor need not open separate demat a/c for demat of debt or
instruments
Procedure for demat of debt instruments is same as that of
equity shares
The investor has to ensure that before the certificates are
handed over to the DP for demat, he marks surrendered for
dematerialisation on the face of the certificates

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Dealing in GOVT securities :

A subscriber to GOVT securities who opts for SGL securities may

open an SGL a/c with RBI or any other approved entity on its own
a/c are held in SGL 1 a/c and investments held on a/c of other
clients are held in SGL 2 a/c

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To ensure safety to the investors the following measures are

existing:
DP cannot effect any debit or credit in the demat a/c of the
investor the valid authorisation of the investor
Regular reconciliation between DP and depositories
Periodic inspection by depositories of the office of DP and
registrar ( RTA)
All investors have a right to receive their statement of a/cs
periodically from the DP
If the depository goes bankrupt, the creditors of the DP will have
no access to the holdings in the name of the clients of the DP.
Such investors may however transfer their holdings to another
DP
Compulsory internal audit of operations of DP by practicing
Chartered Accountant every quarter
Steps to be taken for safe keeping and back up of data at all
levels
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To the nation:
Growing and more liquid markets
Increase in competitiveness in the international market place
attracting many investors
Improved prospects for privatisation of public sector units by
creating a conducive environment
Considerable reduction in delay
Minimises settlement risk and fraud restoring investors faith in
the capital markets

To the investing public :

Reduction of risks associated with loss, mutilation, theft and

forgery of physical scrip
Elimination of financial loss from loss of physical scrip
Greater liquidity from speedier settlements
Reduction in delays in registration
Faster receipt of corporate benefits
Reduced transaction costs through greater efficiency
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To issuers:
Up-to-date knowledge of shareholders names and addresses
Reduction in printing and distribution costs of new issues
Easy transfer of corporate benefits
Improved ability to attract international investors without having
to incur expenditure of issuance in overseas markets

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Thank You

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