DEPOSITORIES AND ITS ROLE

IN INDIA

P . MANIKANDAN
2022501013
 DEPOSITORY

A depository can be defined as an institution where the investors can

keep their financial assets such as equities, bonds, mutual fund units etc.,
in the dematerialized form and transactions could be effected on it.
 HISTORY

• 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 and1996.
 NECESSITY OF DEPOSITORY

• 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 corporates
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.
 SERVICES OFFERED BY DEPOSITORY

• Through a system of paperless securities, depositories have made the going

easier to other institutions as well such as Stock Exchanges and its clearing
houses, stock broking firms, equity issuing companies, share transfer agents
etc.
• Dematerialization is a process where in securities certificates held in physical
form converted into electronic form and credited to demat account of an
investor opened with a depository participants.
 SERVICES

• Maintenance of accounts of investors.

• Dematerialization and re-materialization of shares.
• Settlement of market transaction through the release and receipt of securities in
the investor's account.
• Off market transfers.
• Inter-depository transfers.
• Distribution of non-financial benefits from corporates to its shareholders.
• Nomination facilities.
• Transmission of shares
• Hypothecation of dematerialized securities for a bank loan.
• Freezing of account to protect one's holdings when he is temporarily out of the
scene etc.
 DEPOSITORY PARTICIPANT

• A Depository Participant (DP) is a registered agent of the depository concerned

and it is through the DP that an investor gets the services of a depository.
• To avail this service, one has to open a Depository Account with the DP and
shares for Dematerialization have to be surrendered.
• Banks, Non Banking Financial Companies (NBC) and Stock Brokers can act as
Depository Participants after obtaining the required approval from SEBI and
also complying with other statutory requirements.
 DEPOSITORY SYSTEM:HOW IT WORKS

• A depository system carries out its activities through various associates that
include depository participants (DP), issuing companies and their share transfer
agents, clearing corporation of Stock Exchanges etc.
• The depository is electronically linked to each of these business partners via
satellite links or through leased lines.
• This integrated system including the electronic links and the software at NSDL
and each business partners end is called the National Electronic Settlement and
Transfer System. (NEST)
 BENEFITS OF DEPOSITORY SYSTEM

• In the depository system, the ownership and transfer of securities takes place
by means of electronic book entries.
• Bad deliveries could be eliminated since shares are registered in the electronic
form that can not be mutilated easily.
• Elimination of all risks associated with physical certificates.
• Dealing in physical securities has associated security risks of theft of stocks,
mutilation of certificates, and loss of certificates during movements through
and from the registrars etc. Such problems do not arise in the depository
environment.
• Immediate transfer and registration of securities: In the depository
environment, once the securities are credited to the investors account on pay
out, he becomes the legal owner of the securities.
• There is no further need to send it to the company's registrar for registration.
Else, having purchased securities in the physical environment, the investor has
to send it to the company's registrar so that the change of ownership can be
registered and this usually takes many months.
• Elimination of problems related to selling securities on behalf of a minor. A
natural guardian is not required to take court approval for selling demat
securities on behalf of a minor.
• Eliminates the risk of being the introducing broker: Elimination of
problems related to address Change, Transmission etc. In case of change of
address or transmission of demat shares, investors are saved from undergoing
the entire change procedure with each company or registrar.
• Investors have to only inform their DP with all relevant documents and the
required changes are effected in the database of all the companies, where the
investor is a registered holder of securities.
• No matter how much is the volume of the transaction, the charge per
transaction is the same. (i.e. For a transaction of 10 shares or 1 million
shares, the transaction cost is the same).

• Faster disbursement of non cash corporate benefits: NSDL provides

for direct credit of non cash corporate entitlements like rights, bonus
etc to an investor's account, thereby ensuring faster disbursement and
avoiding risk of loss of certificates in transit.

• • No stamp duty for transfer of any kind of securities in the depository.