Trading in Securities and

Regulations
 Dematerialization of Securities

Holding share certificates in physical format carries risks like

• certificate forgeries,
• loss of important share certificates,
• and delays in certificate transfers.
• Dematerialization allows customers to convert their physical certificates into electronic
format, thereby eliminating the aforementioned hassles.

Dematerialisation is a process through which physical securities such as share certificates and
other documents are converted into electronic format and held in a Demat Account
 Depository

A depository is a facility that functions as a safe keeper of things; it can be currencies, stocks, and securities.
Banks are examples of financial depositories. Similarly, NSDL and CDSL work as custodians of shares to
facilitate the trading system.

A depository is responsible for holding the securities of a shareholder in electronic form. These securities
could be in the form of bonds, government securities, and mutual funds units, which are held by a
registered Depository Participant (DP). A DP is an agent of the depository providing depository services
to traders and investors as per the Depositories Act, 1996.

Currently, there are two depositories registered with SEBI and are licensed to operate in India:

• NSDL (National Securities Depository Ltd.)

• CDSL (Central Depository Services (India) Ltd.)
 Short history of dematerialization

• Post-liberalisation of the Indian economy in 1991, the Securities and Exchange Board of
India (SEBI) was created in 1992 to regulate the capital markets.

• The SEBI in turn was instrumental in introducing the process of dematerialisation of

securities via the Depositories Act, 1996.

• Further under the Companies (Amendment) Act, 2000 it became mandatory to release
IPOs worth Rs 10 crore or more in dematerialised form only.

• Currently, you cannot trade in shares without a Demat account.

 Process of dematerialization
• Dematerialization starts with opening a Demat account. For Demat account opening, you
need to shortlist a Depository Participant (DP) that offers Demat services
• To convert the physical shares into an electronic/Demat form, a Dematerialization Request
Form (DRF), which is available with the Depository Participant (DP), has to be filled in and
deposited along with share certificates. On each share certificate, ‘Surrendered for
Dematerialization’ needs to be mentioned
• The DP needs to process this request along with the share certificates to the company and
simultaneously to registrars and transfer agents through the depository
• Once the request is approved, the share certificates in the physical form will be destroyed
and confirmation of dematerialization will be sent to the depository
• The depository will then confirm the dematerialization of shares to the DP. Once this is
done, a credit in the holding of shares will reflect in the investor’s account electronically
• This cycle takes about 15 to 30 days from the submission of the dematerialization request
• Dematerialization is possible only with a Demat account, therefore it is essential to learn
how to open a Demat account to understand dematerialization
 Benefits of dematerialization

There is a wide range of benefits of the dematerialisation of securities. Some of them are as follows:
Guarantees convenience
• Shares and transactions can occur remotely including via smartphone or computer.
• Conversion of securities into electronic equities deems you the legal owner of your shares.
• After this, certificates need not be transferred to the company’s registrar.

Reduced Costs

1.Stamp duty is not levied on your electronic securities

2.Holding charges levied are nominal

3.You can buy securities in odd lots and buy a single security

4. Due to the elimination of paperwork, the time required for completing a transaction gets reduced.
The process also becomes environment-friendly due to reduced use of paper.
 Benefits of dematerialization
Must include nominees
Including a nominee will allow the investor to grant a right to the nominee to operate the account in
his/her absence
Safeguards transactions
Securities are credited and transferred by electronic means. Hence, the risks associated with paper
securities, such as errors, fraudulency and theft, are averted.
Help with loan approval
Existing securities like bonds and debentures can be used as collateral to procure a loan, often at a
lower rate as securities become more liquid.
Reduces transaction costs for all stakeholders
There is a marked decrease in transaction costs as the depository ensures that entitlements are
directly credited to the investor’s account. The costs of paperless tracking and recording securities
becomes minimal. It allows stakeholders to focus on strategy and not clerical work, thereby
increasing participation, liquidity and profits.
 Benefits of dematerialization

Speed e-facility
It enables to send slips of instruction electronically to the depository participant.
Temporary freeze
You are also allowed to freeze your Demat account for a particular duration. However, you can
only use this facility when your account holds shares of a particular number.
Share transfer
Transferring shares using the Demat account becomes easier and more transparent
Easy and Quick Communication
No need to visit brokers or other offices for information sharing or orders – leads to increased
confidence of investors. Risk of delays is mitigated.
Increased market participation
Leads to increased volume of trading and liquidity in the market
 Problems with dematerialization

High frequency share trading

Easier communication and orders have made markets more liquid but also more volatile. Therefore
investors often focus more on short term profits than long term gains.

Technological challenge
People with low ability to handle computers fast or those with slow computers end up at a
disadvantage with those having better software and computer skills
 Stock Exchange

The stock exchange is a virtual market where buyers and sellers trade in existing
securities.
It is a market hosted by an institute or any such government body where shares, stocks,
debentures, bonds, futures, options, etc are traded.

A stock exchange is a meeting place for buyers and sellers.

 Role of stock exchange in the capital market-functions

• Stock exchange provides a ready and continuous market for purchase and sale of securities.

•Facilitates evaluation of securities. Stock exchange is useful for the evaluation of industrial
securities.

•Encourages capital formation.

•Provides safety and security in dealings.

 Functions of the Stock Exchange

•Liquidity and Marketability: It enables high liquidity. The securities can be sold at a
moment’s notice and be converted to cash.

•Price Determination: A stock exchange enables this process via constant valuation of all the
securities based on demand and supply. Prices of shares of various companies can be
tracked via the index we call the Sensex.

•Safety: The government strictly governs and regulates the stock exchanges thus all
transactions are within legal framework.

•Contribution to the Economy: Stock exchange deals in already-issued securities. But these
securities are continuously sold and resold and so on. This allows the funds to be mobilized
and channelized instead of sitting idle. This boosts the economy.
 Role of SEBI in monitoring the stock exchanges

The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the
interests of the investors in securities and to promote the development of, and to regulate,
the securities market and for matters connected therewith and incidental thereto.

Regulator of the financial markets in India was established on 12th April 1988.
It was initially established as a non-statutory body, i.e. it had no control over anything but later in
1992, it was declared an autonomous body with statutory powers.
 Role of SEBI:

This regulatory authority acts as a watchdog for all the capital market participants and its main
purpose is to provide such an environment for the financial market enthusiasts that facilitate the
efficient and smooth working of the securities market.
To make this happen, it ensures that the three main participants of the financial market are taken
care of, i.e. issuers of securities, investors, and financial intermediaries.

1. Issuers of securities

2. Investor

3. Financial Intermediaries
 SEBI’s Role

SEBI has the following functions:

•SEBI regulates Capital Markets through certain measures it takes.

•Protects the interests of traders and investors, thereby, promoting fairness in the stock exchange.

•SEBI regulates how the security markets and stock exchanges function.

•SEBI regulates how transfer agents, stock brokers and merchant bankers, etc, function.

•SEBI handles the registration activity of new brokers, financial advisors, etc.

•SEBI encourages the formation of Self-regulatory Organizations.

•SEBI promotes investor learning opportunities.

•SEBI makes rules to prevent malpractice.

•SEBI manages and controls a ‘complaints’ division.

 Functions of SEBI:

The main primary three functions are-

1.Protective Function

2.Regulatory Function

3.Development Function
 Protective Functions

As the name suggests, these functions are performed by SEBI to protect the interest of investors
and other financial participants.
It includes-

•Checking price rigging

•Prevent insider trading

•Promote fair practices

•Create awareness among investors

•Prohibit fraudulent and unfair trade practices

 Regulatory Functions

These functions are basically performed to keep a check on the functioning of the business in the
financial markets.

•Designing guidelines and code of conduct for the proper functioning of financial intermediaries and
corporate.

•Regulation of takeover of companies

•Conducting inquiries and audit of exchanges

•Registration of brokers, sub-brokers, merchant bankers etc.

•Levying of fees

•Performing and exercising powers

•Register and regulate credit rating agency

 Development Functions

This regulatory authority performs certain development functions also that include but they are not
limited to-

•Imparting training to intermediaries

•Promotion of fair trading and reduction of malpractices

•Carry out research work

•Encouraging self-regulating organizations

•Buy-sell mutual funds directly from Asset Management Company (AMC) through a broker
 Objectives of SEBI:

The objectives of the Stock Exchange Board of India are:

1. Protection to the investors

The primary objective of SEBI is to protect the interest of people in the stock market and
provide a healthy environment for them.

2. Prevention of malpractices
This was the reason why SEBI was formed. Among the main objectives, preventing
malpractices is one of them.

3. Fair and proper functioning

SEBI is responsible for the orderly functioning of the capital markets and keeps a close check
over the activities of the financial intermediaries such as brokers, sub-brokers, etc.
 SEBI’s Board

The SEBI Board consist of nine members-

1.One Chairman appointed by the Government of India

2.Two members who are officers from Union Finance Ministry

3.One member from Reserve Bank of India

4.Five members appointed by the Union Government of India

 Powers of SEBI:

• When it comes to stock exchanges, SEBI has the power to regulate and approve any laws related
to functions in the stock exchanges.

• It has the powers to access the books of records and accounts for all the stock exchanges and it
can arrange for periodical checks and returns into the workings of the stock exchanges.

• It can also conduct hearings and pass judgments if there are any malpractices detected on the
stock exchanges.
• When it comes to the treatment of companies, it has the power to get companies listed and de-
listed from any stock exchange in the country.

• It has the power to completely regulate all aspects of insider trading and announce penalties and
expulsions if a company is caught doing something unethical.

• It can also make companies list their shares in more than one stock exchange if they see that it will
be beneficial to investors.

• Coming to investor protection, SEBI has the power to draft legal rules to ensure the protection of
the general public.

• It also has the power to regulate the registration of brokers and other middlemen who will deal
with investors in the market.
Thank You!