Depositories Law in India

LL.M.
By
Prof. Semanti Choudhury
March 13, 2015

Introduction
What is dematerialization of

shares?
What is a demat account?
What is the role of a
depository in
dematerialization?
Who is a DP?
What are the laws governing

What is dematerialization
of shares?
Dematerialisation is the process by which physical

certificates of an investor are converted to an

equivalent number of securities in electronic form.
Every investor who wishes to trade on the
exchange is required to open a beneficial
owner account with a depository through a
participant. This account is popularly known as
demat a/c
Every share bought by the investor is credited to
his demat a/c and every share sold by the investor
is debited from his account
Dematerialization makes it easy to transact in
shares.

Benefits of
dematerialization
Safe way of holding securities. No problem

of losing or theft of physical certificates or

delivery of fake securities
Prompt transfer of securities
No stamp duty on transfer of demat shares
Reduction of paper work and transaction
cost
Facilitates dealing with securities such as
transfer, pledge etc.
Automatic credit into demat account of
shares, arising out of

Process of
dematerialization
Filling up of DRF (Demat Request Form) available with

DP by investor
Surrender of physical certificates with the DP
DP intimates the request for dematerialization to the
Depository
DP submits the certificates to the the Issuer Company.
Issuer company confirms the dematerialisation request
from depository.
After dematerialising the certificates, Registrar updates
accounts and informs depository regarding completion
of dematerialisation.
Depository updates its accounts and informs the DP.
DP updates the demat account of the investor.

Who is a depository?
Depositories Act, 1996 (DP Act) enacted for

regulation of depositories in securities in India

Depository is not defined in SEBI Act, SCRA or
Companies Act. DP Act defines depository as a
company granted a certificate of registration under S.
12(1A) of SEBI Act.
A depository is an organisation which holds
securities(like shares, debentures, bonds, government
securities, mutual fund units etc.)of investors in
electronic form at the request of the investors through
a registered Depository Participant.It also provides
services related to transactions in securities.
National Securities Depository Limited(NSDL) and
Central Depository Services (India) Limited (CDSL)

Depositories Act
Section 2(1)(e) of DP Act: A depository is a company

who has been granted a certificate of registration

under Section 12 (1A) of SEBI Act
Section 3 of DP Act: No one can act as a depository
unless a certificate of commencement of business is
issued by SEBI
Section 4 of DP Act: Depository to enter into an
agreement with participant to act as agent
Section 5 of DP Act: Any person can enter into an
agreement with the depository through a participant
to avail its services
Section 11 of DP Act: Depository to maintain index of
beneficial owners

DP Act contd
Section 10 of DP Act: Depository deemed to be a

registered owner for the purposes of effecting transfer

of ownership on behalf of the beneficial owner. All rights
and liabilities with respect to the shares are exercised
Section 13 of DP Act: Pledge and hypothecation of
shares can be done by beneficial owner of the shares
through the depository. Entry in the records of the
depository is evidence of creation of pledge on shares
Sections 19A- 19G- Penalty provisions
Section 20 and 21- Penalty for contravention of the
provisions of the Act
Section 26 of DP Act: Power of depositories to make
bye-laws

Depository Participants
(DP)
A Depository Participant (DP) is an agent of

the depository through which it interfaces with

the investorand provides depository services.
Public financialinstitutions, scheduled
commercial banks,foreign banks operating in
India with the approval of the Reserve Bank of
India, state financial corporations,custodians,
stock-brokers, clearing corporations /clearing
houses, NBFCs and Registrar to an Issue or
Share Transfer Agent complying with the
requirements prescribed by SEBI can be
registered as DP. [ Reg. 19(a) of DP
Regulations]

SEBI (Depositories and Participants)

Regulations, 1996 (DP Regulations)

REGISTRATION OF A DEPOSITORY
Regulation 3: Application for grant of certificate of registration

as a depository to be made by the sponsor in Form A

accompanied by prescribed fees and draft bye-laws of the
depository.
Sponsor defined in Reg. 2(g): Any person who proposes to
establish a depository and undertake the responsibilities of
the sponsor. Any person holding more than 51% share capital
of the depository as a sponsor and undertakes to perform the
obligations of the sponsor is deemed to be a sponsor.
Reg. 7: Condition for grant of certificate of registration
Reg. 10: Application for certificate of commencement of
business to be made by a person granted a certificate of
registration under Reg. 7 with one year
Reg. 13: Consideration for certificate of commencement of
business
Reg 14: Grant of certificate of commencement of business

REGISTRATION OF A DEPOSITORY
Regulation 6: SEBI to only consider applications

made by following categories of people:

Public financial institution
Scheduled commercial banks
Foreign banks operating in India with approval of RBI
A recognized stock exchange
Any body corporate providing financial services and

and n which more than 75% of the shares are held by

any of the abovementioned entities
Any institution established outside India and engaged
in providing financial services with approval of Central
Government
Any body corporate recognized for providing custodial
or clearing and settlement services outside India.

Reg. 6B: Inserted by 2012 Amendment to DP Act.

Restriction of holding shares in a depository. No

person can hold shares in a depository unless he
meets fit and proper criteria. Approval of SEBI
required for holding more than 2% shares/voting
rights in a depository.
Few conditions under Reg. 7
not carry on any activity other than that of a depository

or an activity incidental to the activity of the depository

the sponsor shall, at all times, hold at least 51% of the
equity share capital of the depository
No one to hold more than 5% equity in depository other
than the sponsor
Foreign residents can hold upto 49% in a depository
FII not to have any representation in the BoD

CORPORATE GOVERNANCE NORMS

Chapter IIA of the DP Regulations dealing with governance

of the depository inserted in 2012 Amendment. Introduced

corporate governance norms in the management.
Board to comprise of shareholder directors, public interest

directors and managing director

"public interest director" means an independent director,
representing the interests of investors in securities market
and who is not having any association, directly or indirectly,
which in the opinion of the Board, is in conflict with his role
Director representing the employees to be considered a
shareholders director
Appointment, termination and renewal of directors including
MD are subject to approval of SEBI.
MD is an ex-officio director appointed for a term of 3-5 years.
Cannot be a shareholder or associate of shareholder of
depository, any DP or shareholder or agent of DP

Reg. 13: Consideration for grant of certificate of

commencement of business:
Net worth of Rs. 100 crore
automatic data processing systems of the depository have been

protected against unauthorised access, alteration, destruction,

disclosure or dissemination of records and data
physical or electronic access to the premises, facilities,
automatic data processing systems, data storage sites and
facilities including back up sites and facilities and to the
electronic data communication network connecting the
depository, participants, issuers and issuers' agents is
controlled, monitored and recorded
Detailed operations manual
adequate arrangements including insurance for indemnifying
the beneficial owners for any loss that may be caused to such
beneficial owners by the wrongful act, negligence or default of
the depository or its participants or of any employee of the
depository or participant

REGISTRATION OF A PARTICIPANT
Reg. 16: Application for certificate of initial

registration in Form E made through depository

accompanies by prescribed fees
Reg. 19: Consideration for grant of certificate of
initial registration:
Net worth requirements for certain applicants
Fit and proper person criteria
Adequate infrastructure

Reg. 20: Grant of certificate of initial registration

which is valid for 5 years

Reg. 20A: Grant of certificate of permanent
registration. Application to be made 3 months prior
to the expiry of certificate of initial registration