Depository System

Prof. Atul Abhiman Agalawe

(M. Com, M.A, B. Ed, D.B.M)
 Securities
• It is financial instruments issued by corporate organizations for
collecting capital. It includes equity shares, preference shares,
debentures, bonds and others
• These securities certificate hold either in Physical format or
Electronic/ Dematerialized format.
 Physical Format Securities
• Risk
• Efforts in Duplicating
• Delay in Allotment of securities
• Delay in Transfer and Transmission of Securities
• Risk of Bad Delivery
Electronic/ Dematerialized Securities
 Depository System
• A system whereby transfer of securities takes place by means of book
entry on the ledgers of the Depository without physical movement of
scripts.
• A system in which securities of an investor are held by depository on
behalf, and at the request, of an investor in an Electronic Form.
• This system is also know as Scrip Less Trading system.
• The world’s first Depository was set up in 1947 in Germany
• NSDL -1996, CDSL-1999
• In this include Depository and Depository Participants
 Bank
Holds funds in an account
Funds are held in accounts having unique
numbers.
Transfers funds between accounts on
the instructions of the account holder
There is no physical handling of money.
Renders services like safe keeping of the money
(funds) of customers in book entry form.
A bank needs written consent of the customer
(like a cheque) for debiting his account.
Depository
Holds securities in an account
Securities are held in accounts having unique IDs
Transfers securities between accounts on the
instructions of the beneficiary owner account
holder.
There is no physical handing of securities during
allotment, transfers etc.
Renders services like safe keeping of securities
(shares, bonds, debentures etc.) of the
customers in book entry form.
A depository needs written consent
(Delivery Instruction Slip) of the account holder
for debiting his account.
 Importance of Depository System
• Growth in Securities Transactions
• To over limitation of Paper Certificates
• Reduce Cost and Efforts
• Paperless Trading
• To ensure Transparency in Securities Transactions
• Comply with Global Standards
• Centralized System in Securities Dealings
 Accounts in Dematerialization
De-mat • It holds securities (Shares, Debentures, bonds)
A/c
Trading A/c • For buying and selling Securities

Bank A/c • It may be savings or current accounts

• It holds money of investors

E-mail A/c • For mailing and information

 Benefits/Advantages to Investors
1. Quick Transfer of Securities
2. Paperless Work
3. No Risk
4. Safety
5. Complete Record
6. Automatic Credit
7. Security against Loan
8. No Concepts of lots
9. Nomination Facility
10.Reduction in Brokerage
 Benefits/Advantages to Company
• Up-to-date Information
• Quick Correspondence
• Better Investor – Company Relationships
• Reduction in Costs and Efforts
• More Funds
 Constituents of Depository system
Constituents
of
Depository
system

Depository Beneficial Issuer

Depository
Participants Owner Company
 Depository
• It is an organization which holds the securities of a
shareholder in the form of electronic accounts
(dematerialized form), in the same way a bank holds the
money.
• A custodian of its clients’ securities.
• Interfaces with its investors through its agents called
“depository participants”.
• Link between the company and investors
• The depository model adopted in India is a multi-
depository system where there are various entities
providing depository services.
• At present, there are two depositories registered with
SEBI.
 National Securities Depository Limited
• First and the largest depository in India –
established in 1996,Mumbai
• It is a public limited company formed under
the Companies Act,1956.
• NSDL interacts with investors and clearing
members through market intermediaries
called depository participants.
• SHCIL is the first depository participant
registered with NSDL.
• Promoted by IDBI, UTI and NSE
 Central Depository Services (India) Limited
• It is the second depository in India.
• It commenced its operations in February 1999.
• It was promoted by Bombay Stock Exchange in
association with leading banks such as State
Bank Of India, Bank of Baroda, HDFC bank,
Union bank of India, Centurion bank.
• CDSL was set up with the objective of providing
convenient, dependable and secure depository
services at affordable cost to all market
participants.
• An investor can hold almost all his securities in
one account with CDSL.
 Functions of NSDL and CDSL
• Maintenance of individual investors’ beneficial holdings in electronic form.
• Dematerialization and rematerialisation of securities.
• Account transfer for settlement of trades in electronic shares.
• Facility for freezing or locking of investor accounts.
• Facility for pledge and hypothecation of securities.
 Depository Participant
• Depository Participant provides services to the investors and acts as a custodian of the electronic
accounts of the clients.
• DP takes care of trading and settlement and acts as an intermediary between Investor and Depository.
• 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.
• The DP has a unique number for identification.
• As per SEBI Regulations , financial institutions, banks, custodians, stock brokers etc.
can become DP’s.
• Investors may choose DP’s of their choice and also deal with 1 or more DP;s at a
time
 Beneficial Owner
• “Beneficial Owner” is a person in whose name a de-mat
account is opened with Depository for the purpose of
holding securities in the electronic form
• It means a person who is engaged in buying and selling of
securities issued by the companies and is registered his/ her
securities with the depository in the form of book entry.
• He/ she has all the rights and liabilities associated with the
securities.
• He may be Individual, Partnership Firm, HUF, Company
• He open the de-mat account with DP.
• He has to pay charges to the DP for providing services.
 Issuer Company
• The issuer is the co. which issues the
securities.
• It maintains a register for recording the
names of the registered owners of securities
and the depositories.
• The issuer sends a list of shareholders who
opt for the depository system.
• only listed companies issues securities in
dematerialized form.
 Dematerialization

Rematerialisation
Concepts/Terms
Related to
Depository System
Fungibility

ISIN
 Dematerialization
• It is a process of conversion of physical share – certificate into electronic –
form. So, when a shareholder uses the dematerialization facility, company
take back the shares, through depository – system and equal numbers of
shares are credited in his account in e-form.
 Rematerialisation
• It is the exact reverse of Dematerialization. It refers to the process of
issuing physical securities in place of the securities held electronically in
book-entry form with a depository.
 Fungibility
• State of being interchangeable.
• Fungibility is the ability of a goods or assets to be interchanged for another goods or assets of like kind.
• Some financial assets are fungible while some are not fungible.
• Land and goods are not fungible, because value depend upon quality.
• Currency notes, stocks, bonds are fungible, because value cannot be changed in any situation.
• Fungibility is a property exhibited by any goods, assets, or commodities, making them eligible for interchange or substitution with
anything identical in form, quality, value, or function.
• Fungible assets are interchangeable, such as precious metals, sweet crude oil, bonds, shares, futures contracts, fiat and digital
money, packaged products, etc.
• Automobiles, precious stones, gems, trading cards, and real estate are not interchangeable and considered non-fungible.
• Financial instruments like bonds, stocks, and futures contracts are fungible as they can be traded or substituted with equal units of
each other between two marketplaces or stock exchanges. 
• Dematerialized securities are fungible, so not consider serial numbers of securities, certificate number or folio number.
 International Securities Identification Number
• An International Securities Identification Number (ISIN) is a code that
uniquely identifies a specific securities issue.
• The organization that allocates ISINs in any particular country is the
country's respective National Numbering Agency (NNA).
• In India, the task of issuing ISIN for various securities has been
assigned by the Securities and Exchange Board of India (SEBI) to the
National Securities Depository Limited (NSDL).
• For the government securities, the allotment of the ISIN code is
regulated by the Reserve Bank of India (RBI).
 INE002A01018
• ISIN of Reliance Industry
• IN – India
• E- Company Type
• 002A-Company Serial Number
• 01-Equity
• 01-Issue Number
• 8-Check digit
 Functioning of Depository System
In case of conversion of Physical certificate into electronic/
Dematerialization Process
In case of IPO/FPO
Transfer of securities
– Off Mode
– Market Mode
Physical Securities → Electronic Form
In case of IPO/FPO
 Transfer of Securities
Off Market Trade Market Trade