Working of depository system in india with research and analysis by hiresh ahluwalia

18,297 views

Published on

Published in: Business, Economy & Finance
2 Comments
8 Likes
Statistics
Notes
  • Stock market tips, Commodity tips, Nifty future tips, Nifty call put option tips, Banknifty, Stock future, Equity tips, NSESHARE MARKET FREE TIPS Intraday NSE BSE TIPSBSE free tips, Technical analysis, MCX tips, Operator calls, Here you will get researched calls as well as Be ahead in this volatile market.
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • pls tell .. how to download tis document..
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
No Downloads
Views
Total views
18,297
On SlideShare
0
From Embeds
0
Number of Embeds
6
Actions
Shares
0
Downloads
849
Comments
2
Likes
8
Embeds 0
No embeds

No notes for slide

Working of depository system in india with research and analysis by hiresh ahluwalia

  1. 1. A PROJECT REPORT ON A STUDY OF WORKING OF DEPOSITORY SYSTEM IN INDIA Submitted To: PunjabTechnicalUniversity, Jalandhar.InpartialfulfilmentofthedegreeinMasterofBusinessAdministration(MBA)( 2010-12 Batch)Project submitted to: Submitted By:Ms. Megha Sharma, Hiresh AhluwaliaAssistant Professor MBA (Finance)Dept. of Business Management Semester4thDAVIET, Jalandhar Univ. Roll No.100232243840 DAV INSTITUTE OF ENGINEERING & TECHNOLOGY JALANDHAR 1
  2. 2. DeclarationThis project titled “A Study of Working of Depository System in India”,is submitted inpartial fulfilment of the requirement for the award of degree of “Master of BusinessAdministration” of Punjab Technical University, Jalandhar.The compilation of this project is done by Hiresh Ahluwalia.This project work has been donefor MBA only and none of this research work has been submitted for any other degree.The assistance and help during the execution of the project has been fully acknowledged. Hiresh Ahluwalia 2
  3. 3. Guide‟s CertificateThis to certify that Hiresh Ahluwalia, a student of M.B.A 4thSemester, DAVIET Jalandharunder P.T.U Jalandhar, has undertaken the project on “A Study of Working of DepositorySystem in India‟‟, and has successfully completed this project under my guidance.This projectwas commissioned only for academic purposes, and is certified to be a bonafidework done by student. Date: Mrs. Megha Sharma Assistant Professor Department of Business Management DAVIET, Jalandhar 3
  4. 4. AcknowledgementAn exchange of ideas generates a new impetus to work in a better way. Apart from the abilitylabor and time devotion, able guidance and wholehearted co-operation are the two pillars forbuilding the success of a project. Whenever a person is helped or co-operated by others, hisheart is bound to pay gratitude to his benefactors.The satiation and pleasure that accompany the successful completion of task would beincomplete without acknowledging the contribution of the people who have made it possibleand whose constant guidance and encouragement served as a guiding light for the completionof the study.I take this opportunity to express my deep gratitude to Mrs.Megha Sharma, AssistantProfessor, Department of Business Management, DAVIET, Jalandhar, whose able guidancehelped immensely in the successful completion of this project.Last but not the least I would like to thank my parent and friends for their support andsuggestions. Hiresh Ahluwalia 4
  5. 5. PrefaceThis project report pertains to the making of the final project of M.B.A curriculum.Thepurpose of this project is to provide a detailed knowledge and in-depth information aboutworking of depository system in India.The first few chapters provides a theoretical framework of the depository, its functions, theparties constituting the depository system, working of NSDL and CDSL, dematerialisation,re-materialisation and types of DEMAT A/Cs. A detailed research on the topic “Investor‟sOpinions on Depository System‟s Services in India” is also conducted to determinecustomer‟s perceptions about depository system‟s services.I learned a lot about the topic in the courseof putting in much hard work in collecting therelevant information on the topic, which will be of a great use in future too. The project willbe of a great help to MBA finance students as it provides a detailed working of depository.It cannot be said with certainty that full justification has been done to the topic in the fewpages presented here, but I have tried my best to cover as much ground as possible about “Astudy of working of depository system in India“in this report. 5
  6. 6. INDEXCHAPTER NO. PARTICULARS PAGE NO. Declaration Guide certificate Acknowledgement I Preface II 1. Introduction to Depository 1 2. Review of Literature 14 3. Research Methodology 21 4. Working of Depository System 23 5. Conceptual Knowledge of Depositories‟ In India 34 6. Depository Accountand its Types 46 7. Analysis & Interpretation 56 8. Findings and Suggestions 67 9. Conclusion 68 Bibliography Annexure 6
  7. 7. LIST OF TABLESTABLE NO. PARTICULARS PAGE NO. 1 Duration of Holding and Trading in Securities (In Years) 56 2 Modes of Trading Used by Investor. 57 3 Different Areas of Investment in Securities Market. 58 4 Factors Important for a Trading Company to Enhance The 58 Loyalty of Its Customers. 5 Time Duration in Which Depository Participant Contacts its 59 Customers 6 Reasonability of Service Charges of DEMAT A/C 60 7.1 KMO and Bartletts Test 61 7.2 Correlation Matrix for V1to V6 Variables 62 7.3 Inverse of Correlation Matrix for V1to V6 Variables 63 7.4 Communalities Table 63 7.5 Total Variance Table 63 7.6 Rotated Component Matrix 65 7.7 Factors Influencing Different Functions and Services that an 65 Investor Should be Aware of While Trading Through the DEMAT Account 8 Personal Details 66 7
  8. 8. LIST OF FIGURESFIGURENO. PARTICULARS PAGE NO. 1 Duration of Holding and Trading in Securities (In Years) 56 2 Modes of Trading Used by Investor. 57 3 Different Areas of Investment in Securities Market. 58 4 Factors Important for a Trading Company to Enhance The 58 Loyalty of Its Customers. 5 Time Duration in Which Depository Participant Contacts its 59 Customers 6 Reasonability of Service Charges of DEMAT A/C 60 7.1 Screen Plot Graph 64 7.2 Component Plot Graph 64 8
  9. 9. CHAPTER-1INTRODUCTION TO DEPOSITORY 9
  10. 10. INTRODUCTION TO DEPOSITORYA significant development of the 20th century particularly in its later part is expansion offinancial market world over which mostly was driven by globalization, technology,innovations and increasing trade volume. India has not been an exception with probablylargest number of listed companies with a very large investor population and ever increasingvolumes of trades.However, this continuous growth in activities increased problems associated with stocktrading. Most of these problems arose due to the intrinsic nature of paper based trading andsettlement, like theft or loss of share certificates. This system required handling of hugevolumes of paper leading to increased costs and inefficiencies. The process beginning frombuying shares through the stock exchanges till getting the certificates duly endorsed in thebuyer‟s name was indeed quite complex and time-consuming and was riddled with a varietyof problems. Growing number of investors participating in the capital market has increasedthe possibility of being hit by a bad delivery, The cost and time spent by the brokers forrectification of these bad deliveries tends to be higher with the geographical spread of theclients. The increase in trade volumes lead to exponential rise in the back office operationsthus limiting the growth potential of the broking members. The inconvenience faced byinvestors (in areas that are far flung and away from the main metros) in settlement of tradealso limits the opportunity for such investors, especially in participating in auction trading.The physical form of holding and trading in securities also acted as a bottleneck for brokingcommunity in capital market operations. Risk exposure of the investor also increased due tothis trading in paper. Some of these associated risks were: delay in transfer of shares,possibility of forgery on various documents leading to bad deliveries, legal disputes etc., andpossibility of theft of share certificates, prevalence of fake certificates in the market,mutilation or loss of share certificates in transit. Thus, the system of security transactions wasnot as investor-friendly as it ought to be. In this scenario dematerialized trading underdepository system is certainly a welcome move. This popular financial service emerged inGermany first time.Meaning of depositoryA 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 10
  11. 11. the investors through a registered Depository Participant. It also provides services related totransactions in securities.Depositories Act, 1996The Depositories Act, 1996 provides for the establishment of depositories in securities withthe objective of ensuring free transferability of securities with speed, accuracy and securityby (a) making securities freely transferable subject to certain exceptions; (b)dematerialization of the securities in the depository mode; and (c) providing for maintenanceof ownership records in a book entry form. In order to streamline the settlement process, theAct envisages transfer of ownership of securities electronically by book entry. The Act hasmade the securities of all companies freely transferable in the depository mode, restricting thecompany‟s right to use discretion in effecting the transfer of securities. The other proceduraland the transfer deed requirements stated in the Companies Act have also been dispensedwith.Eligibility Criteria for a Depository – Any of the following may promote a depository:1. A public financial Institution as defined in section 4A of the Companies Act, 1956;2. A bank included in the Second Schedule to the Reserve Bank of India Act, 1934;3. A foreign bank operating in India with the approval of the Reserve Bank of India;4. A recognised stock exchange;5. An institution engaged in providing financial services where not less than 75% of theequity is held jointly or severally by these institutions;6. A custodian of securities approved by Government of India, and7. A foreign financial services institution approved by Government of India.The promoters of a depository are also known as its sponsors. A depository company musthave a minimum net worth of Rs. 100 crore. The sponsor(s) of the depository have to hold atleast 51% of the equity capital of the depository company. Participants of that depository, ifany, can hold the balance of the equity capital. However, no single participant can hold, atany point of time, more than 5% of the equity capital. No foreign entity, individually orcollectively either as a sponsor or as a DP, or as a sponsor and DP together, can hold morethan 20% of the equity capital of the depository. 11
  12. 12. Registration– As per the provisions of the SEBI Act, a depository can deal in securities onlyafter obtaining a certificate of registration from SEBI. The sponsors of the proposeddepository should apply to SEBI for a certificate of registration in the prescribed form. Onbeing satisfied with the eligibility parameters of a company to act as a depository, SEBI maygrant a certificate of registration subject to certain conditions.Commencement of Business – A depository that has obtained registration as stated above,can function only if it obtains a certificate of commencement of business from SEBI. Adepository must apply for and obtain a certificate of commencement of business from SEBIwithin one year from the date of receiving the certificate of registration from SEBI.SEBI grants a certificate of commencement of business if it is satisfied that the depositoryhas adequate systems and safeguards to prevent manipulation of records and transactions.SEBI takes into account all matters relevant to the efficient and orderly functioning of thedepository. It particularly examines whether : 1. The depository has a net worth of not less than Rs. 100 crore; 2. The Bye-Laws of the depository have been approved by SEBI; 3. The automatic data processing systems of the depository have been protected against unauthorised access, alteration, destruction, disclosure or dissemination of records and data; 4. The network, through which continuous electronic means of communication are established between the depository, participants, issuers and issuers agents, is secure against unauthorised entry or access. 5. The depository has established standard transmission and encryption formats for electronic communication of data between the depository, participants, issuers and issuers agents; 6. The physical or electronic access to the premises, facilities, automatic data processing systems, data storage sites and facilities including back-up sites, and to the electronic data communication network connecting the DPs, issuers and issuers agents is controlled, monitored and recorded; 7. The depository has a detailed operational manual explaining all aspects of its functioning, including the interface and method of transmission of information between the depository, issuers, issuers agents, DPs and beneficial owners; 12
  13. 13. 8. The depository has established adequate procedures and facilities to ensure that its records are protected against loss or destruction and arrangements have been made for maintaining back-up facilities at a location different from that of the depository; 9. The depository has made 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; 10. The granting of certificate of commencement of business is in the interest of investors in securities market.Agreement between Depository and Issuers – If either the issuer (a company which hasissued securities) or the investor opts to hold his securities in a demat form, the issuer entersinto an agreement with the depository to enable the investors to dematerialise their securities.No such agreement is necessary where :i. Depository, is the issuer of securities, or;ii. The State or Central Government is the issuer of government securities.Where the issuer has appointed a registrar to the issue or share transfer, the depository entersinto a tripartite agreement with the Issuer and Registrar & Transfer (R&T) Agent, as the casemay be, for the securities declared eligible for dematerialisation. At present, NSDL isdischarging the responsibility of R&T Agent for the securities issued by State and CentralGovernments.Rights and Obligations of Depositories – Depositories have the rights and obligationsconferred upon them under the Depositories Act, the regulations made under the DepositoriesAct, Bye-Laws approved by SEBI, and the agreements made with the participants, issuersand their R&T agents.Every depository must have adequate mechanisms for reviewing, monitoring and evaluatingthe depositorys controls, systems, procedures and safeguards. It should conduct an annualinspection of these procedures and forward a copy of the inspection report to SEBI. Thedepository is also required to ensure that the integrity of the automatic data processingsystems is maintained at all times and take all precautions necessary to ensure that the records 13
  14. 14. are not lost, destroyed or tampered with. In the event of loss or destruction, sufficient back upof records should be available at a different place. Adequate measures should be taken,including insurance, to protect the interests of the beneficial owners against any risks.Every depository is required to extend all such co-operation to the beneficial owners, issuers,issuers agents, custodians of securities, other depositories and clearing organisations, as isnecessary for the effective, prompt and accurate clearance and settlement of securitiestransactions and conduct of business.The depository should indemnify beneficial owners of securities for any loss caused to themdue to the negligence of the DP. However, where the loss is caused due to the negligence of aDP, the depository shall have the right to recover it from such DPs.Bye-Laws– A depository is required to make Bye-Laws governing its operations. The Bye-Laws have to be in conformity with the Depositories Act and the regulations madethereunder, and need to be approved by SEBI before becoming effective.Depository– Every depository is required to maintain the following records and documents.These have to be preserved for a minimum period of five years.1. Records of securities dematerialised and rematerialised.2. The names of the transferor, transferee, and the dates of transfer of securities.3. A register and an index of beneficial owners.4. Details of the holdings of the securities of beneficial owners as at the end of each day.5. Records of instructions received from, and sent to, participants, issuers, issuers agents andbeneficial owners.6. Records of approval, notice, entry and cancellation of pledge or hypothecation.7. Details of participants.8. Details of securities declared to be eligible for dematerialisation in the depository.9. Such other records as may be specified by SEBI for carrying on the activities as adepository 14
  15. 15. Comparison between banks and depository-Similarity: 1. Promoted by reputed persons and institutions: Both bank and depository are Promoted by persons and institutions ofrepute and good standing. For e.g.-HDFC bank was promoted by housing Development Corporation Ltd. and similarly NSDL is promoted by Industrial Development Bank of India Limited (IDBI), Unit Trust of India (UTI) and National Stock Exchange of India Limited (NSE). 2. Renders safe keeping services: Both banks and depository provide safe keeping services. Banks provides safe custody of cash and locker facility for keeping valuable articles to its clients. Depositories also provide safe keeping of shares, debentures, bonds, government securities, mutual fund units to its clients. 3. Central office and branches:Like bank every depository has one central office which is the main office and other branch offices which are situated in different cities and follow the guidelines of central office. 4. Charge of fees- banks charge fees for locker facilities to its clients, similarly depository charges fees for safe keep of share certificates in electronic form. 5. Transfer of funds and securities : Funds/securities are transferred only at the instruction of the account holder 6. Written confirmation of transfer (of shares and currencies ) 7. Account is operated by power of attorney: a person under power of attorney can operate the account. 8. Customers are entitled to get statement s of accounts 9. Nomination facility : in case of bank accounts customer can nominate any person to whom account will be transferred in case of death of the person similarly in case of depository, a customer can nominate a person to whom the shares will be transferred. 10. Currencies (in case of banks ) and shares (in case of depositories) when held do not have any distinctive number 15
  16. 16. Differentiation:Bank Account Vs. Demat AccountA Bank A Depository (like CDSL)For opening a bank account, such as a A demat account is opened by an investorsavings bank account, a minimum balance without any securities, i.e. with zero balance.has to be deposited along with the accountA customer having an account with a bank An account holder of the depository is calledis called as an Account Holder. as Beneficial Owner (of the securities).A bank is entitled to use funds lying in the A depository is not entitled to use thesavings or current deposit accounts of the securities lying in the demat accounts of thecustomers in the normal course of business customers and hence does not pay any interestand pays interest to them for the use. to them.A bank account can be operated upon A demat account can be opened, operated“jointly”, or, by “either or survivor” of the upon only by ALL the account holdersaccount holders or by “any one/two/three JOINTLY, at present.of", the joint account holders.In the bank account, addition or deletion In the demat account, addition or deletion ofof name(s) of one or more of the account name(s) of one or more of the account holdersholders is permitted. (beneficial owners) is NOT permitted.In the bank account, there is no In demat account, the beneficial owners isrequirement of execution of an agreement required to sign a DP-BO agreement beforebetween the bank and account holder at opening the demat account.the time of opening the accountImmobilization and DematerializationConversion of securities from physical (paper) form to electronic form can be achieved bytwo methods Immobilization or Dematerialization.Under the immobilization method, after giving credit of the securities in electronic form,physical certificates are stored or lodged with an organization, which acts as a custodian – asecurities depository. Subsequent transactions in such immobilized securities take placethrough book-entries.Under the dematerialization method, the securities, issued in physical form are destroyed andexactly equal numbers of securities are created in the depository system, which are credited 16
  17. 17. into the account of the investor. Unlike physical securities, the securities converted intoelectronic form do not have any distinctive numbers and they are treated as equal andreplaceable in all ways i.e. securities in electronic form are fungible. All subsequenttransactions (transfer of ownership) of such securities take place in book-entry form.India has adopted dematerialization method whereas immobilization has been adopted bysome of the countries like Hong Kong and USA. Japan has adopted both, dematerialization aswell as immobilization for achieving a paper-less securities market.Whether a country has adopted immobilization or dematerialization, the investor has a rightto get the securities converted back into physical form through a process called asrematerialisation, in case of need.Availing of various services offered by a depositoryA depository in India cannot open a demat account of an investor and / or provide services tosuch a person directly. For opening a demat account or availing the services offered by thedepository, a person is required to approach a Depository Participant (DP) who is an agent ofthe depository, complete the account opening formalities as per the Depositories Act, SEBIregulations, depository byelaws. Thereafter, the investor can receive securities in the demataccount as well as tender the securities held by him / her in physical form fordematerialization to the DP (as explained in the subsequent part) and hold the same in bookentry form in the account.When an investor holds securities in physical form, his / her name is recorded as registeredowner in the books of the company. As per the laws currently in force in India, when thesecurities are converted in electronic form by way of dematerialization, name of thedepository is registered in the books of the company as registered owner. However, theinvestor continues to be the real owner of the securities and is entitled to receive all thebenefits such as dividend, interest, bonus shares etc. in respect of the said security and assuch is called as Beneficial Owner (BO) under the depository system.Today “demat” has become a common word. The institutional and individual investorsspread all over India are found to be making an extensive use of the depository participantservices for holding their securities in electronic form. 17
  18. 18. LEGAL FRAMEWORKIntroductionThe depositories in India are regulated under the following legal framework:• The Depositories Act, 1996• SEBI (Depositories and Participants) Regulations, 1996• Companies Act, 1956• Securities and Exchange Board of India Act, 1992• Prevention of Money Laundering Act, 2002Apart from the above-mentioned Acts and Regulations, following govern the business andoperations of a depository.• Bye Laws of the depository• Operating Instructions of the depository 18
  19. 19. The Depositories Act, 1996 gives power to depositories to make bye-lawsBut such bye laws should be consistent with the provisions of this Act and the SEBIRegulations. Such bye-laws shall provide for:a) The eligibility criteria for admission and removal of securities in the depository;b) The conditions subject to which the securities shall be dealt with;c) The eligibility criteria for admission of any person as a participant;d) The manner and procedure for dematerialisation of securities;e) The procedure for transactions within the depository;f) The manner in which securities shall be dealt with or withdrawn from a depository;g) The procedure for ensuring safeguards to protect the interests of participants and beneficialowners;h) The conditions of admission into and withdrawal from a participant by beneficial owner;i) The procedure for conveying information to the participants and beneficial owners ondividend declaration, shareholder meetings and other matters of interest to the beneficialowners;j) The manner of distribution of dividends, interest and monetary benefits received from thecompany among beneficial owners;k) The manner of creating pledge or hypothecation in respect of securities held with adepository;l) Inter se rights and obligations among the depository, issuer, participants, and beneficialowners;m) The manner and the periodicity of furnishing information to the Board, issuer and otherpersons;n) The procedure for resolving disputes involving depository, issuer, company or a beneficialowner;o) The procedure for proceeding against the participant committing breach of the regulationsand provisions for suspension and expulsion of participants from the depository andcancellation of agreements entered with the depository;p) The internal control standards including procedure for auditing, and monitoring.Reviewing 19
  20. 20. SEBI (Depositories and Participants) Regulations, 1996Board (SEBI) grants a certificate of registration to a depository subject to the followingconditions, namely:a) The depository shall pay the registration fee specified within fifteen days of receipt ofintimation from the Board;b) The depository shall comply with the provisions of the Act, the Depositories Ordinance,the bye-laws, agreements and these regulations;c) The depository shall not carryon any activity other than that of a depository unless theactivity is incidental to the activity of the depository;d) the sponsor shall, at all times, hold at least fifty one per cent of the equity capital of thedepository and the balance of the equity capital of the depository shall be held by itsparticipants;e) No participant shall at any time, hold more than five per cent of the equity capital of thedepository;f) If any information previously submitted by the depository or the sponsor to the Board isfound to be false or misleading in any material particular, or if there is any change in suchinformation, the depository shall forthwith inform the Board in writing;g) The depository shall redress the grievances of the participants and the beneficial ownerswithin thirty days of the date of receipt of any complaint from aParticipant or a beneficial owner and keep the Board informed about the number and thenature of redressals:h) The depository shall make an application for commencement of business under regulation14 within one year from the date of grant of certificate of registration under this regulation;andi) The depository shall amend its bye-laws as directed by SEBI.Certificate of Commencement of BusinessThe Board shall take into account for considering grant of certificate of commencement ofbusiness, the following points, namely, whethera) The depository has a net worth of not less than rupees one hundred crore;b) The bye-laws of the depository have been approved by the Board;c) The automatic data processing systems of the depository have been protected againstunauthorised access, alteration, destruction, disclosure or dissemination of records and data: 20
  21. 21. d) the network through which continuous electronic means of communications areestablished between the depository, participants, issuers and issuer‟s agents is secure againstunauthorised entry or access;e) The depository has established standard transmission and encryption formats for electroniccommunications of data between the depository, participants, issuers and issuers‟ agents;f) the physical or electronic access to the premises, facilities, automatic data processingsystems, data storage sites and facilities including back up sites and facilities and to theelectronic data communication network connecting the depository, participants, issuers andissuer‟s agents is controlled, monitored and recorded;g) the depository has a detailed operations manual explaining all aspects of its functioning,including the interface and method of transmission of information between the depository,-issuers, issuers‟ agents, participants and beneficial owners;h) the depository has established adequate procedures and facilities to ensure that its recordsare protected against loss or destruction and arrangements have been made for maintainingback up facilities at a location different from that of the depository;i) the depository has made adequate arrangements including insurance for indemnifying thebeneficial owners for any loss that may be caused to suchbeneficial owners by the wrongfulact, negligence or default of the depository orits participants or of any employee of thedepository or participant; andj) The grant of certificate of commencement of business is in the interest of investors in thesecurities market.The Board shall, before granting a certificate of commencement of business makes aDepositoryPhysical verification of the infrastructure facilities and systems established by theDepository.Record of Services by Depository Participant (DP)i) Types of recordsEvery participant shall maintain the following records and documents, namely:a) Records of all the transactions entered into with a depository and with a beneficial owner;b) Details of securities dematerialised, rematerialised on behalf of beneficial owners withwhom it has entered into an agreement;c) Records of instructions received from beneficial owners and statements of accountprovided to beneficial owners; and 21
  22. 22. d) Records of approval, notice, entry and cancellation of pledge or hypothecation, as the casemay be.Every participant shall make available for the inspection of the depository in which it is aparticipant all records referred above. Every participant shall allow persons authorised by thedepository in which it is a participant to enter its premises during normal office hours andinspect its records.Every participant shall intimate the Board the place where the records and documents aremaintained.The participant shall preserve records and documents for a minimum period of five years.ii) Where records are kept electronically by the participant, it shall ensure that the integrity ofthe data processing systems is maintained at all times and take all precautions necessary toensure that the records are not lost. Destroyed or tampered with and in the event of loss ordestruction, ensure that sufficient back up of records is available at all times at a differentplace.iii) If a participant enters into an agreement with more than one depository, it shall maintainthe specified records separately in respect of each depository.iv) No participant shall assign or delegate its functions as participant to any other person,without the prior approval of the depository.Agreement by IssuerEvery issuer whose securities have been declared as eligible to be held in dematerialised formin a depository shall enter into an agreement with the depository.Records to be maintained by DepositoryEvery depository shall maintain the following records and documents, namely:a) Records of securities dematerialised and rematerialized;b) The names of the transferor, transferee, and the dates of transfer of securities;c) A register and an index of beneficial owners;d) Records of instructions received from and sent to participants, Issuers, issuers‟ agents andbeneficial owners;e) Records of approval, notice, entry and cancellation or pledge or hypothecation, as the casemay be;f) Details of participants; 22
  23. 23. CHAPTER-2REVIEW OF LITERATURE 23
  24. 24. REVIEW OF LITERATURET. Koshy, 1997, “Depository in the Debt Market:The Unfinished Agenda”Though the Indian capital market is over 100 years old, it continues mainly as a market forequity related products. Debt is more or less financed through banks and financialinstitutions, although in the recent past, financial markets are playing an increasinglysignificant role. Even the Government securities market essentially consists of primary issuesand inter-institutional trades.However, due to a variety of institutional and regulatory reasons,the Indian debt market has not been able to achieve even a fraction of its truepotential.Although an exemption in stamp duty may appear to be against the interests of StateGovernments – owing to a loss in revenue – the resultant increase in liquidity will go a longway in improving their fund raising efforts as also of their state financial institutions andmunicipalities for infrastructure projects. The National Securities Depository Limited(NSDL) has already taken up this matter with the State Governments. NSDL has requestedfor a revenue- neutral policy change which will imply the levying of a one-time charge at thetime of issue and eliminating duty at the time of transfer.This research paper explain differentadvantages whichdebt market participants will enjoy if they join the NSDLLC Gupta, Naveen Jain, 2003, “Indian Securities Depository system, what has GoneWrong?”Unknowingly and unintentionally‟ the share depository system is adversely affecting millionof small investors and hurting the equity market‟s growth by causing such investors togradually withdraw from the market. This paper attempts to explain how this has come aboutand what corrective action is neededTrinath Tadakamalla, 2004, "Dematerialized Securities"Dematerialized securities are securities that are not on paper and a certificate to that effectdoes not exist. They exist in the form of entries in the book of depositories. Essentially,unlike the traditional method of possessing a share certificate to the effect of ownership ofshares, in the demat system, the shares are held in a dematerialized form. This system worksthrough a depository who is registered with the Securities and Exchange Board of India(SEBI) to perform the functions of a depository as regulated by SEBI.Under Section 68 B of the Companies Act, inserted by the Companies (Amendment) Act, 24
  25. 25. 2000, it is mandated that every initial public offer made by a listed company in the excess ofRs 10 Crores has to be issued in dematerialized form by complying with the requisiteprovisions of the Depositories Act, 1996. This article explains Dematerialized securities andDematerialization process.Iti Jain& Sudhanshu Roy, 2004, “Dematerialisation of Securities”This paper is mainly a study of the „dematerialisation‟ process in the Indian capital market,which was introduced through the aforesaid enactment. The paper is divided into five parts.First part introduces the depository system in India and also looks at the need and objectivesof the depository system in India. Second part introduces the process of dematerialisationlooking at the players involved in dematerialisation. Third part further dissects the dematprocess and looks at the procedure involved in dematerialisation of securities. Second lastpart looks at the pros and cons of dematerialisation while the last part finally concludes thepaper evaluating the success and failure of the dematerialisation in the Indian capital market.Dr. M. T. Raju, Dr. Prabhakar R. Patil, 2005, “Dematerialisation of Equity Shares inIndia: Liquidity, Returns and Volatility”Dematerialisation of shares is an important milestone in the annals of Indian Capital Markets.Understanding and measuring the impact of it on various segments is necessary since itstirred the microstructure of Indian capital markets in general and stock exchanges inparticular. Demand and Supply forces determine prices of a product. Liquidity plays animportant role in the interplay of demand and supply forces. The impact of dematerialisationon liquidity in the Indian stock exchanges is quantified and analysed. Quality of shareschanged for better owing to dematerialisation and thus investors are expected to earn higherreturns as a natural step, albeit, for some time only. Changes in quality of shares are expectedto cause changes in demand and supply for shares, which in turn, influences the levels inshare prices (volatility). All these three issues are studied in the present paper. Liquidity andreturns improved substantially in the post-demat period while volatility was very much belowthe daily changes permitted. 25
  26. 26. Prof.G. Vasudha, 2006, “Dematerialisation: An Introduction”Dematerialisation is the process of converting the physical form of shares into electronicform. Prior to dematerialisation the Indian stock markets have faced several problems likedelay in the transfer of certificates, forgery of certificates etc. Dematerialisation helps toovercome these problems as well as reduces the transaction time as compared to the physicalsegment. The article discusses the procedures, advantages and problems of dematerialisation.The Indian Stock markets have seen a major change with the introduction of depositorysystem and scrip less trading mechanism. There were various problems like inordinate delaysin the transfer of share certificates, delay in receipt of securities and inadequate infrastructurein banking and postal segments to handle a large volume of application and storage of sharecertificates .To overcome these problems physical dealing in securities should be eliminated .The Indian stock market introduced the system of dematerialisation recognizing the need forscrip less trading.Narendra Jadhav, 2007,“Development of SecuritiesMarket – The Indian Experience”Well-developed securities markets are the backbone of any financial system. Apart fromproviding the medium for channelizing funds for investment purposes, they aid in pricing ofassets and serve as a barometer of the financial health of the economy. The Indian securitiesmarkets have witnessed reforms in the post-liberalization era in terms of market design,technological developments, settlement practices and introduction of new instruments. Themarkets have achieved tremendous stability and as a result, have attracted huge investmentsby foreign investors. There still is tremendous scope for improvement in both the equitymarket and the government securities market. However, it is the corporate debt market, whichneeds to be given particular emphasis given its importance for providing long-term financefor development.Nidheesh K B , 2008,“Demat Processing in India”A new phase in the Indian stock markets began in the 1970s, with the introduction of ForeignExchange Regulation Act (FERA) that led to divestment of foreign equity by themultinational companies, which created a surge in retail investing. The early 1980s witnessedanother surge in stock markets when major companies such as Reliance accessed equitymarkets for resource mobilisation that evinced huge interest from retail investors. A new setof economic and financial sector reforms that began in the early 1990s gave further impetus 26
  27. 27. to the growth of the stock markets in India. As a part of the reform process, it becameimperative to strengthen the role of the capital markets that could play an important role inefficient mobilisation and allocation of financial resources to the real economy. Towards thisend, several measures were taken to streamline the processes and systems including settingup an efficient market infrastructure to enable Indian finance to grow further and mature. Theimportance of an efficient micro market infrastructure came into focus following theincidence of market abuses in securities and banking markets in 1991 and 2001 that led toextensive investigations by two respective Joint Parliamentary Committees. The Securitiesand Exchange Board of India (SEBI), which was set up in 1988 as an administrativearrangement, was given statutory powers with the enactment of the SEBI Act, 1992.Objectives of the study is To study and analyse the process of Dematerialisation andInvestors opinion towards Demat Processing., To know and explain procedure for opening ofDemat account and process of dematerialization of securities to eliminate the problem relatedwith physical holdings of securities., To explain the advantages of Dematerialisation ofsecurities, convince and make them to dematerialize their securities., To know the problemfaced by the investor and reason for physical holdings of securities without dematerializationof securities., To give awareness among the investors about Demat and to make them to openDemat Account.Dr. Kirit Somaiya, 2008, “Story of Demat Scams”21st Century India is moving in the direction of becoming a Developed Country. Importanceon the growth, Government investment in infrastructure from the year 2000 has changed thepicture of Indian economy. Rs 1,00,000 crore Government spending on the core andinfrastructure industries during 2001-03, has created a boom in the Indian Economy. Indianindustries have gained self-confidence to compete with the world. The boom in the economyresulted in the boom in finance industry and that of Capital Market. It is unique in India thatevery bull run in the Capital Market has got supplemented by a scam. Harshad Mehta Scam– 1992, the scam of CRB-NBFC, the plantation companies and the Ketan Parekh Scam.It isthe sad part of the Indian Capital Market that every IPO boom has a scam. It was during1986-88, the primary market momentum had a mini-scam of mini-steel plants and mini-cement plant public issues. These companies tapped the market, fooled the Small Investors,collected hundreds of crores of Rupees, diverted the funds. Small Investor was the loser.Thispaper is mainly a study of the difrent Demat Scams that take place in India 2006 27
  28. 28. NISM ,2010“Workbook for NISM-Series-VI: Depository Operations CertificationExamination”This workbook has been developed by the certification team of NISM. This workbook hasbeen developed by NISM in cooperation with the Examination Committee for DepositoryOperations Examination consisting of representatives from National Securities DepositoryLimited (NSDL) and Central Depository Services Limited (CDSL). This workbook has beendeveloped to assist candidates in preparing for the National Institute of Securities Markets(NISM) Certification Examination for Depository Operations. It provides basic informationabout indian capital market, working and functions of depository.Central Depository Services (India) Limited, 2010, “Inspection Manual”CDSL has formulated bye laws, operating instructions and also it comes out withamendments regularly through communiqués. It is very crucial for depository to ascertainwhether the RTA so registered carries on the operations in the overall interest of the capitalmarket and the investors. To achieve this objective, CDSL conducts regular Inspection of itsDPs and RTAs through their own staff and independent firms of professionals.The underlying focus of these inspections is to improve the operations of the RTA, to verifywhether RTA are aware of and adhere to the Act, Rules, Regulations, various communiquésissued by CDSL and to ensure better and efficient record keeping by them so that betterservices are provided to the investor.Prof. Sultan Singh &Sakshi Goyal, 2011, “Analysis of Factors Affecting the DecisionMaking of the Investors in Depository System”The present study is an attempt to study the factors affecting the decision making of theinvestors in depository system. The primary data are collected with the help of pre-testedstructured questionnaire on five point Likert scale from 294 respondents (investors) ofdifferent age, gender, education, occupation, income from the cities like Gurgoan,Chandigarh and New Delhi, selected on the basis of convenience sampling. The datacollected have been analysed with the help of various descriptive statistics like frequency andpresent and the results are tested by the use of ANOVA technique. Most of the investors areof the view that shorter settlement period, safety of securities with the depositories, attitude ofthe staff available with the DPs, timely services provided by the DPs to the investors,reduction in transaction cost, repatriation of sales proceeds of shares/debentures by NRIs aresome of the factors which affects the decision making of the investors in depository system. 28
  29. 29. Opening demat account with DPs is easy but they charge for providing this service.Converting the securities into electronic from and selling the securities on behalf of theminors are difficult in the system. But they are of the view that T+3 and ruling settlement isthe result of the depository system. The education of the investors plays an important role indecision making where the difference in the opinions of the investors is found significant inmost of the cases, followed by other factors such as occupation, age, etc.NSDL, 2011“Handbook for NSDLDepository Operations Module” (published byNSDL),This handbook has been divided into four volumes for readers convenience. The firstvolumegives an overview of the Indian capital market and NSDL depository system. Thesecond volume deals with admission procedure for different business partners of NSDL, theirobligations, practices, systems and procedures to be followed by them and benefits and safetyof depository system. The third volume helps in acquiring a working level understanding ofcertain basic services offered by NSDL like account opening, dematerialisation, and transferof securities and related operations. The last volume deals with special services offered byNSDL like Pledge, Stock Lending and Borrowings, Corporate Actions, National SavingsCertificates / Kisan Vikas Patra (NSC/KVP) in demat form, Warehouse Receipts, MarketParticipants and Investor Database (MAPIN) and Tax Information Network (TIN).The procedures explained in the handbook are based on the Depositories Act, Securities andExchange Board of India (Depositories & Participants) Regulations and Byelaws & BusinessRules of NSDL. The book contains illustrations, flow charts and checklists for betterUnderstanding of various concepts and procedures. A sample test paper is given at the end ofthe fourth volume to help the candidates appearing for NCFM test form an assessment oftheir preparedness. A thorough understanding of this handbook will form a good base forqualifying the certification test.Readers may like to visit NSDL website www.nsdl.co.in for updates and to know the newprocedures introduced or changes brought about in the existing procedures. A feedback formis given at the end of the fourth volume. Readers may give their feedback, which will be ofgreat help in enhancing the value of this Handbook in its subsequent editions. 29
  30. 30. Atin Kumar Das on April 9, 2011, “Law relating to Depositories with Special Referenceto India: An Analytical Study”This article explains different laws that regulate working of depositories in India. Articleexplains the Depositories Act-1996, SEBI (Depositories and Participants) Regulations- 1996,Companies Act- 1956, Securities and Exchange Board of India Act- 1992 ,Prevention ofMoney Laundering Act-2002. Apart from the above-mentioned Acts and Regulations it alsoexplains Bye Laws of the depository, Operating Instructions of the depository 30
  31. 31. CHAPTER-3RESEARCH METHODOLOGY 31
  32. 32. RESEARCH METHODOLOGYResearch Methodology refers to search of knowledge. One can also define researchmethodology as a scientific and systematic search for required information on a specifictopic. In Research Methodology we study the various steps that are generally adopted by aresearcher in his research problem along with the logic behind them..In a research various methods are used. The selection of method depends on the nature ofproblem selected and kind of data necessary for the solution.OBJECTIVES OF THE STUDY To study the working system of depository in India To study the conceptual knowledge system of depository in India To provide information about the types of accounts that can be opened in depository. To know about the investors views regarding NSDL‟s services in IndiaResearch Design Used In the Project:-The research design used in this research is „exploratory research‟.Exploratory research: is one type of research design, which has as its primary objective theprovision of insights into and comprehension of the problem situation confronting theresearch.Exploratory research was performed to gain detailed knowledge and understanding of thefunctioning of depository in the country by using both primary and secondary data.Source of Data:- PRIMARY SOURCE OF DATA: the primary data is in the form of questionnaire which is used to gather investor‟s views about depository system‟s services in India. The sampling method used was basically convenience sampling.Sample size: The study is based on sample size of 60 people who have de-mat account inNSDL. 32
  33. 33. SECONDARY SOURCE OF DATA: For this project secondary data is also used. Secondary data is the data compiled by someone other than the user. It includes publisheddata in the form of documents, research papers, web pages and other organisational records.It is recommended to use secondary data in order to avoid duplicating of effort, running upunnecessary costs, and tiring of informants.Types of secondary data used-In this project the secondary data used was of the following types1. Internal secondary data – the data which is available within the organisation – was obtained from the website of Ludhiana Stock Exchange „www.lse.org‟.2. External secondary data is the data which is obtained from sources external to the organisation as commercial publications, government publications, professional organisations, trade associations professional marketing research agencies etc.All secondary data used in this project was in the electronic form, and was obtained from theinternet.Computerised databases used in this project1. Bibliographical data base is the one which is obtained from journals, government publications, magazines, newspapers etc. Such online publications were accessed to obtain definitions of terms used in this article.2. Full text database was obtained from the websites of NSDL and CDSL to get the details of working of depository. 33
  34. 34. CHAPTER-4WORKING OF DEPOSITORY SYSTEM 34
  35. 35. DEPOSITORY SYSTEMDepository system essentially aims at eliminating the voluminous and cumbersome paperwork involved in the scrip-based system and offers scope for „paperless‟ trading throughstate-of-the-art technology. It is an institution which maintains an electronic record ofownership or securities. The storage and handling of certificates is hence immediatelyeliminated which generates a reduction in costs like back office cost for handling,transporting and storing certificates.Depositary participant is an institution akin to bank for securities. When an investor handsover securities to a depository participant, investor‟s account is credited. The investor‟sdepository system account will show their holdings. His account is updated for histransactions of sale and purchase but without physical movement of scripts or transfer deeds.In depository system, share certificates belonging to the investors are dematerialised(demats). Dematerialisation or “Demat” is a process whereby investors‟ securities like shares,debentures etc., are converted into electronic data and stored in computers by a Depository.Securities registered in investor‟s name are surrendered to depository participant (DP) andthese are sent to the respective companies who will cancel them after “Dematerialization”and credit investor‟s depository account with the DP. The securities on Dematerializationappear as balances in one‟s depository account. These balances are transferable like physicalshares. If at a later date, investors wish to have these “demat” securities converted back intopaper certificates, the Depository does this and their names are entered in the records ofdepository as beneficial owners. The beneficial ownership will be with investor but legalownership will be with the depository. Consequently, benefits like interest, dividend, andrights: bonus and voting rights will be with investors. Since depository is to get securitiestransferred in its name, the depository name will be registered in the ownership registermaintained by the company. Thus, instead of name of several owners, the name of depositoryfigures in the register of company.Since transfer will be affected only in depository, register of company need not be updated onevery transactions of sale or purchase of company‟s share. It alleviates the hardshipscurrently faced by the investors and it also offers option for converting the shares fromelectronic to physical or paper form through a process of rematerialisation (remat).Depository system is, indeed, time tested and long prevalent in many advance countries andhas been playing a significant role in stock markets around the world. 35
  36. 36. Constituents of Depository SystemThe depository system comprises of:i) Depositoryii) Depository Participants (DPs)iii) Companies/issueriv) Investorsi) Depository:Depository functions like a securities bank, where the dematerialized physical securities aretraded and held in custody. This facilitates faster risk free and low cost settlement. Depositoryis much like a bank and performs many activities that are similar to a bank depository:a) Enables surrender and withdrawal of securities to and from the depository through theprocess of „demat‟ and „remat‟,B) maintains investors‟ holdings in electronic form,c) Effects settlement of securities traded in depository mode on the stock exchanges,D) carries out settlement of trades not done on the stock exchanges (off market trades).In India a depository has to be promoted as a corporate body under Companies Act, 1956. Itis also to be registered as a depository with SEBI. It starts operations after obtaining acertificate of commencement of business from SEBI. It has to develop automatic dataprocessing systems to protect against unauthorised access. A network to link up withdepository participants, issuers and issuer‟s agent has to beCreated.Depository, operating in India, shall have a net worth of rupees one hundred croreandinstruments for which depository mode is open need not be a security as definedin theSecurities Contract (Regulations) Act 1956. The depository, holding securities,shall maintainownership records in the name of each participant. Despite the factthat legal ownership iswith depository, it does not have any voting right against thesecurities held by it. Rights areintact with investors. 36
  37. 37. There are two depositories inIndia at present i.e. 1. NSDL: National Securities Depository limited 2. CDSL:Central Depository Services (India) Limitedii) Depository Participants (DP):A DP is investors‟ representative in the depository system and as per the SEBI guidelines,financial institutions/banks/custodians/stock brokers etc. can become DPs provided they meetthe necessary requirements prescribed by SEBI. DP is also an agent of depository whichfunctions as a link between the depository and the beneficial owner of the securities. DP hasto get itself registered as such under the SEBI Act. The relationship between the depositoryand the DP will be of a principal and agent and their relation will be governed by the bye-laws of the depository and the agreement between them. Application for registration as DP isto be submitted to a depository with which it wants to be associated. The registration grantedis valid for five years and can be renewed. As depository holding the securities shall maintainownership records in the name of each DP, DP in return as an agent of depository,Shall maintain ownership records of every beneficial owner (investor) in book entry form.A DP is the first point of contact with the investor and serves as a link between the investorand the company through depository in dematerialisation of shares and other electronictransactions. A company is not allowed to entertain a demat request from investors directlyand investors have to necessarily initiate the process through a DP.Eligibility criteria for depository participants:The following entities are eligible for becoming depository participant in accordance withRegulation 19 of the SEBI (Depositories and Participants) Regulations, 1996.• A public financial institution as defined in Section 4A of the Companies Act, 1056.• A bank included in the second schedule of the Reserve Bank of India Act, 1934.• A foreign bank, operating in India with the approval of Reserve Bank of India.• A state financial corporation established under the provisions of section 3 of the StateFinancial Corporations Act, 1951.• An institution engaged in providing financial services, promoted by any of the fourinstitutions mentioned above.• A custodian of securities, who has been granted a certificate of registration by SEBI underSection 12(1A) of the SEBI Act, 1992.• A clearing corporation or a clearing house of a stock exchange. 37
  38. 38. • A stockbroker having a minimum net worth of rupees TWO CRORES. The aggregate valueof the portfolio of securities, of the BOs, held in dematerialized form in a depository throughhim, shall not exceed 100 times of the net worth of the stockbroker. (Not applicable for DPswho‟s net worth is Rs. ten crores). In case the stockbroker seeks to act as a participant inmore than one depository, he shall comply with the net worth criteria separately with eachsuch depository.• A non-banking finance company, having a net worth of not less than rupees fifty lakhsprovided that such company shall act as a participant only on behalf of itself and not onbehalf of any other person. Provided further that a non-banking finance company may act as aparticipant on behalf of any other entity, if it has a net worth of Rs. fifty crores in addition tothe net worth specified by any other authority.• A registrar to an issue or share transfer agent who has a minimum net worth ofRupees ten crores and who has been granted a certificate of registration by SEBICharacteristics of depository participant:1. Acts as an Agent of Depository2. Directly deal with customer3. Functions like Securities Bank4. Account opening5. Facilitates dematerialization6. Instant transfer on pay – out7. Credits to investor in IPO, rights, bonus8. Settles trades in electronic segmentiii) ISSUER / Companies:The issuer is the co. which issues the securities. It maintains a register for recording thenames of the registered owners of securities and the depositories. The issuer sends a list ofshareholders who opt for the depository system. And only those co.‟s can issue the securitieswhich are registered under stock exchanges 38
  39. 39. iv) BENEFICIAL OWNER/ INVESTOR:Beneficial owner is a person whose name is recorded as such with a depository. It means aperson who is engaged in buying and selling of securities issued by the companies and isregistered his/ her securities with the depository in the form of book entry. And he/ she has allthe rights and liabilities associated with the securitiesFacilities offered by depository system:1. Dematerialization: It is a process of conversion of physical share – certificate intoelectronic – form. So, when a shareholder uses the dematerialization facility, company takeback the shares, through depository – system and equal numbers of shares are credited in hisaccount in e-form.2. Rematerialization: Rematerialization is the exact reverse of Dematerialization. Itrefers to the process of issuing physical securities in place of the securities held electronicallyin book-entry form with a depository.Other Servicesa) Pledging Dematerialized Shares: Dematerialized shares could be pledged; in fact, thisis more advantageous as compared to pledging share certificates. After loan is repaid one canrequest for a closure of pledge by instructing one‟s DP through a standard format. Thepledgee on receiving the repayment as well as the request for closure of pledge will instructhis DP accordingly. Even the locked-in securities can be pledged. The pledger continues toremain the beneficiary holder of those securities even after the securities are pledged.b) Initial Public Offerings: Credits for public offers can be directly received into demataccount. In the public issue application form of depository eligible companies, there will be aprovision to indicate the manner in which securities should be allotted to the applicant. One isto mention one‟s client account number and the name and identification number of DP. Allallotment due to investor will be credited into required account.c) Receipt of Cash/non-cash Benefits: When any corporate event such as rights or bonusor dividend is announced for a particular security, depository will give the details of all theclients having electronic holdings in that security as of the record date to the registrar. The 39
  40. 40. registrar will then calculate the corporate benefits due to all the shareholders. Thedisbursement of cash benefits such as dividend/ interest will be done directly by the registrar.In case of non-cash benefits, depository will directly credit the securities entitlements in thedepository accounts of all those clients who have opted for electronic allotment based on theinformation provided by the registrar.d) Stock Lending and Borrowing: Through the depository account securities in thedemat form can be easily lent/ borrowed. Securities can be lent or borrowed in electronicform through an approved intermediary, who has opened a special „intermediary‟ accountwith a DP. Instructions are to be given to DP through a standard format (which is availablewith DP) to deposit securities with the intermediary. Similarly to borrow securities from theintermediary, one has to instruct DP through a standard format (which is available with yourDP).e) Transmission of Securities: Transmission of securities due to death, lunacy,bankruptcy, insolvency or by any other lawful means other than transfer is also possible inthe depository system. In the case of transmission, the claimant will have to fill in atransmission request form, (which is available with the DP) supported by valid documents.f) Freezing Account with DP: If at any time as a security measure one wishes that notransaction should be effected in one‟s account, one may advise one‟s DP accordingly. DPwill ensure that account of such investor is totally frozen until further instructions from him.Benefits of Depository System:1. This system will eliminate paper work as the book entry system does not need physicalmovement of certificates for transfer process.2. The risk of bad deliveries, fraud and misplaced, mutilated and lost share certificates willnot exist.3. The electronic media will shorten settlement time and hence the investor can save time andincrease the velocity of security movement.4. Investors will be able to change portfolio more frequently. 40
  41. 41. 5. The capital market will be more transparent as the trading, clearing and settlementmechanism have to be highly automated and interlinked with the depository among them.6. The market will be highly automated and efficient due to the usage of computing andtelecommunication technology for the back office activities for all the capital market players.DEMATERIALISATION PROCESS Appointing DP Any investor who intends to transact through depository system has to engage one depository participant (DP). He can approach a DP of his choice and open an account with him just like one opens an account with a bank. Investor gets an identification number called Client ID (just as one gets ones bank account number) which serves as a reference point for all his transactions with D.P. Every investor before getting his holding dematerialised has to enter into an agreement with the depository through a participant. This step is necessary whether investor already has securities or securities are yet to be issued in a fresh issue. The investor contracts only with that depository which accepts his security in „depository mode‟ since it is not necessary that all eligible securities must be in depository mode and with all the depositories. The decision on whether or not to hold securities within the depository mode 41
  42. 42. and if in depository mode, with which depository or participants, would be entirely withthe investor.ii) Request for „Demat‟After any agreement is entered for getting securities dematerialised and his account isopened, the investor makes an application to depository participants in form called„Dematerialisation Request Form‟ (DRF) to be provided by the DP and hands over hisshare certificates duly cancelled by writing‟ surrendered for dematerialisation‟ to them fordemat. The DP will accept certificates registered only in investor‟s name.The request for dematerialisation with the depository participants is sent to the depositorythrough depository network with which DP is connected.Simultaneously DP submits the securities certificates to the issuer company or it‟sRegistrar of transfer.iii) Approach the Company or Registrar of TransferThe depository will electronically intimate the issuer or its „Registrar and transfer agent‟of the dematerialisation request. The issuer or the „Registrar and transferAgent‟ has to verify the validity of the security certificates as well as the fact that theDRF has been made by the person recorded as a member in its Register of Members. Ifthe issuer or its Registrar is satisfied, it dematerialises the scrip and updates its record.iv) Confirmation of DematThe Registrar to transfer or the concerned company when satisfied with the case of demathas to inform the depository of the completion of dematerialisation authorising anelectronic credit for that security in favour of the investor.v) Crediting the Client‟s AccountDP credits investor‟s account with the number of shares so dematerialised and thereafterinvestor hold the securities in electronic form. If there is rejection of demat request thensuch credit is not given. After crediting the account, the client is sending the necessaryinformation in form of a statement like we get bank statement after bank transactions. 42
  43. 43. Demat AccountDefinition: Demat account is a safe and convenient means of holding securities just like a bank account is for funds. Today, practically 99.9% settlement (of shares) takes place on demat mode only. Thus, it is advisable to have a Beneficiary Owner (BO) account to trade at the exchanges.Benefits Of Demat Account 1. A safe and convenient way of holding securities (equity and debt instruments both). 2. Transactions involving physical securities are costlier than those involving dematerialised securities (just like the transactions through a bank teller are costlier than ATM transactions). Therefore, charges applicable to an investor are lesser for each transaction. 3. Securities can be transferred at an instruction immediately. 4. Increased liquidity, as securities can be sold at any time during the trading hours (between 9:55 AM to 3:30 PM on all working days), and payment can be received in a very short period of time. 5. No stamp duty charges. 6. Risks like forgery, thefts, bad delivery, delays in transfer etc., associated with physical certificates, are eliminated. 7. Pledging of securities in a short period of time. 8. Reduced paper work and transaction cost. 9. Odd-lot shares can also be traded (can be even 1 share). 10. Nomination facility available. 11. Any change in address or bank account details can be electronically intimated to all companies in which investor holds any securities, without having to inform each of them separately. 12. Securities are transferred by the DP itself, so no need to correspond with the companies. 13. Shares arising out of bonus, split, consolidation, merger etc. are automatically credited into the demat account of the investor. 43
  44. 44. 14. Shares allotted in public issues are directly credited into demat account of the applicants in quick time.Opening a Demat Accountto start dealing in securities in electronic form, one needs to open a demat account with a DPof his choice. An investor already having shares in physical form should ensure that he getsthe account opened in the same set of names as appearing on the share certificate; otherwise anew account can be opened in any desired pattern by the investor.Opening a Demat Account Documents to be attachedGetting started 1. Passport size photographs 1. Choose a DP 2. Proof of residence (POR) - Any one of 2. Fill up an account opening form Photo Ration Card with DOB / Photo provided by DP, and sign an Driving License with DOB / Passport agreement with DP in a standard copy / Electricity bill / Telephone bill format prescribed by the depository. 3. Proof of identity (POI) - Any one of 3. DP provides the investor with a copy Passport copy / Photo Driving License of the agreement and schedule of with DOB / Voters ID Card / PAN charges for his future reference. Card / Photo Ration Card with DOB 4. DP opens the account and provides the 4. PAN card investor with a unique account number, also known as Beneficiary Owner Identification Number (BO ID).Note: 1. The agreement required to be signed by the investor details the rights and duties of the investor and DP. 2. DP may revise the charges by giving a 30 days prior notice. SEBI has rationalized the cost structure for isation by removing account opening charges, transaction charges for credit of securities and custody charges, effective from January 28, 2005. 44
  45. 45. Re materialisation processRematerialisation is a process of converting electronic holdings of investor back intoshare certificates in paper form. The process of rematerialisation is also carried outthrough DP and the process has to be completed within a period of 30 days. Thus,once security is dematerialised it is not necessary that investor is to continue indepository mode for all times to come. He can switch over to remat whereby he getsback physical possession of security scripts. The client of DP has to submit a requestfor remat. This request is forwarded for necessary action to depository. Thedepository confirms the rematerialisation request to the Registrar and TransferAgents. The Registrar updates the accounts and prints the desired certificate. Thedepository is informed by Registrar and certificate is sent to the investor.Thedepository updates its records and communicates to DP to incorporatenecessarychanges in the account of the client. 45
  46. 46. CHAPTER-5CONCEPTUAL KNOWLEDGE OF DEPOSITORIES‟ IN INDIA 46
  47. 47. CONCEPTUAL KNOWLEDGE OF DEPOSITORIES‟ IN INDIAThere are two depositories inIndia at present i.e. 1. NSDL: National Securities Depository limited 2. CDSL:Central Depository Services (India) LimitedNational Securities Depository LimitedIn a span of about nine years, investors have switched over to electronic [demat] settlementand National Securities Depository Limited (NSDL) stands at the centre of this change. Inorder to provide quality service to the users of depository, NSDL launched a certificationprogramme in depository operations in May 1999. This certification is conducted usingNCFM infrastructure created by NSE and is called "NSDL - Depository Operations Module".The programme is aimed at certifying whether an individual has adequate knowledge ofdepository operations, to be able to service investors. Depository Participants are required toappoint at least one person who has qualified in the certification programme at each of theirservice centres. This handbook is meant to help the candidates in their preparation for thecertification programme. National Securities Depository Limited is the first depository to be set-up in India. Itwas incorporated on December 12, 1995. The Industrial Development Bank of India (IDBI) -the largest development bank in India, Unit Trust of India (UTI) - the largest Indian mutualfund and the National Stock Exchange (NSE) - the largest stock exchange in India, sponsoredthe setting up of NSDL and subscribed to the initial capital. NSDL commenced operations onNovember 8, 1996.Ownership NSDL is a public limited company incorporated under the Companies Act, 1956.NSDL had a paidup equity capital of Rs. 105 crore. The paid up capital has been reduced toRs. 80 crore since NSDL has bought back its shares of the face value of Rs. 25 crore in theyear 2000. However, its net worth is above the Rs. 100 crore, as required by SEBIregulations.The following organisations are shareholders of NSDL as on March 31, 2005.1. Industrial Development Bank of India 47
  48. 48. 2. Administrator of the Specified Undertaking of the Unit Trust of India - DRF3. National Stock Exchange4. State Bank of India5. Oriental Bank of Commerce6. Citibank N.A.7. Standard Chartered Bank8. HDFC Bank Limited9. The Hongkong and Shanghai Banking Corporation Limited10. Deutsche Bank A.G.11. Dena Bank12. Canara BankManagement of NSDLNSDL is a public limited company managed by a professional Board of Directors. The day-today operations are conducted by the Chairman & Managing Director (CMD). To assist theCMD in his functions, the Board appoints an Executive Committee (EC) of not more than 15members. The eligibility criteria and period of nomination, etc. are governed by the Bye-Laws of NSDL inthis regard.Bye-Laws of NSDL Bye-Laws of National Securities Depository Limited have been framed under powersconferred under section 26 of the Depositories Act, 1996 and approved by Securities andExchange Board of India. The Bye-Laws contain fourteen chapters and pertain to the areaslisted below :1. Short title and commencement2. Definitions3. Board of Directors4. Executive Committee5. Business Rules6. Participants7. Safeguards to protect interest of clients and participants.8. Securities9. Accounts/transactions by book entry10. Reconciliation, accounts and audit11. Disciplinary action 48
  49. 49. 12. Appeals13. Conciliation14. ArbitrationAmendments to NSDL Bye-Laws require the approval of the Board of Directors of NSDLandSEBI.Business Rules of NSDLAmendments to NSDL Business Rules require the approval of NSDL Executive Committeeandfiling of the same with SEBI at least a day before the effective date for the amendments.Functions.NSDL performs the following functions through depository participants :_ Enables the surrender and withdrawal of securities to and from the depository(dematerialisation and rematerialisation)._ Maintains investor holdings in the electronic form._ Effects settlement of securities traded on the exchanges._ Carries out settlement of trades not done on the stock exchange (off-market trades)._ Transfer of securities._ Pledging/hypothecation of dematerialised securities._ Electronic credit in public offerings of companies or corporate actions._ Receipt of non-cash corporate benefits like bonus rights, etc. in electronic form._ Stock Lending and Borrowing.Services Offered by NSDLNSDL offers a host of services to the investors through its network of DPs:_ Maintenance of beneficiary holdings through DPs_ Dematerialisation_ Off-market Trades_ Settlement in dematerialised securities_ Receipt of allotment in the dematerialised form_ Distribution of corporate benefits_ Rematerialisation_ Pledging and hypothecation facilities_ Freezing/locking of investors account 49
  50. 50. _ Stock lending and borrowing facilitiesFee Structure of NSDL NSDL charges the DPs and not the investors directly. These charges are fixed. TheDPs in turn, are free to charge their clients, i.e., the investors for their services. Thus, there isa twotier fee structure.Inspection, Accounting and Internal AuditNSDL obtains audited financial reports from all its DPs once every year. NSDL also carriesout periodic visits to the offices of its constituents - R&T agents, DPs and clearingcorporations – to review the operating procedures, systems maintenance and compliance withthe Bye-Laws, Business Rules and SEBI Regulations.Additionally, DPs are required to submit to NSDL, internal audit reports every quarter.Internal audit has to be conducted by a chartered accountant or a company secretary inpractice.The Board of Directors appoints a Disciplinary Action Committee (DAC) to deal with anymatter relating to DPs clients, Issuers and R&T agents. The DAC is empowered to suspend orexpel a DP, declare a security as ineligible on the NSDL system, freeze a DP account andconduct inspection or call for records and issue notices.If a DP is aggrieved by the action of the DAC, it has the right to appeal to the EC against theaction of the DAC. This has to be done within 30 days of the action by DAC. The EC has tohear the appeal within two months from the date of filing the appeal. The EC has the powerto stay the operation of the orders passed by the DAC. The information on all such actionshas to be furnished to SEBI.Settlement of DisputesAll disputes, differences and claims arising out of any dealings on the NSDL, irrespective ofwhether NSDL is a party to it or not, have to be settled under the Arbitration and ConciliationAct 1996. 50
  51. 51. Technology and Connectivity in NSDLSystem View of NSDL Depository SystemAccount holders (investors) open account with the DPs. The account details, entered in acomputer system maintained by Depository Participants called DPM, are electronicallyconveyed to the central system of NSDL called DM. Companies who have agreed to offerdemat facility to their shareholders use a computer system called DPM (SHR) to connect tothe NSDL central system. DPM (SHR) may be installed by the company itself or through itsR&T Agent. This system is used to electronically receive demat requests, confirm suchrequests or to receive beneficial owner data (Benpos) from the depository. Stock exchangesreceive pay-in (receiving securities against sales made by brokers) or to payout (giving 51
  52. 52. securities to brokers against their purchases) using a computer system connected to NSDLcalled DPM (CC).All the computer systems installed by DPs (DPM-DP), companies (DPM-SHRs), and stockexchanges (DPM-CC) are connected to NSDL central system (DM) through V-SAT (verysmall aperture terminal) or leased lines. These are collectively called Business PartnerSystems. Any transaction conducted by any computer system in the NSDL depository systemwhich is targetted to reach any other computer system first gets recorded in DM and then willreach the target. No two business partners systems can communicate to each other withoutpassing through the DM.Maintenance of Accounts at the Central SystemThe NSDL central system known as DM maintains accounts of all account holders in thedepository system. All the transactions entered at any point in the computer system connectedto it are first effected in the central system and subsequently at these computers. Thus, thecentral system of NSDL has the records of all details of every transaction conducted in thedepository system.Distributed DatabaseEach of the computer systems connected to NSDL system has its own database relating to itsclients. This helps in giving prompt and accurate service to the clients. However each of thedatabases is reconciled with the data at the central system everyday in order to ensure that thedata in the distributed database tallies with the central database.Common SoftwareNSDL develops software required by depository participants, companies, R&T Agents andclearing corporations for conducting depository operations. Thus, the computer systems usedby all the entities will have common software given by NSDL. However, depending on thebusiness potential, branch networks and any other specific features, DPs may developsoftware of their own for co-ordination, communication and control and provide service totheir clients. Such exclusive software is called "back office software". DPM system given byNSDL gives "export and import" facility to take out the transaction details to be used by backoffice software and to feed in transaction details generated from the back office software. 52
  53. 53. ConnectivityThe computer system used by DPs, companies, R&T Agents and stock exchanges may beconnected to NSDL central system through V-SAT network or leased line network. NSDLuses NSEs V-SAT network for the connectivity purposes. Thus, V-SATs used by NSEbrokers can connect to NSDL if the software supplied by NSDL is used. V-SAT usessatellites for communication purposes. Some business partners may connect using leasedlines provided by MTNL/ BSNL. V-SAT or leased line connections are called primaryconnectivity. If primary connectivity fails for any reason, BPs must have the ability toconnect through other means. Such other means are PSTN lines, ISDN lines, POPlines(normal telephone lines) through which they can dial in to the NSDL system and conducttheir transactions.NSDL Facts & FiguresAs on May 31, 2011Number of certificates eliminated (Approx.) 962.49 croreNumber of companies in which more than 75% shares are 3090demattedAverage number of accounts opened per day since November 36791996 82% of all pincodes in thePresence of demat account holders in the country country 53
  54. 54. Central Depositary Securities LimitedA Depository facilitates holding of securities in the electronic form and enables securitiestransactions to be processed by book entry by a Depository Participant (DP), who as an agentof the depository, offers depository services to investors. According to SEBI guidelines,financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. Theinvestor who is known as beneficial owner (BO) has to open a demat account through any DPfor dematerialisation of his holdings and transferring securities.The balances in the investors account recorded and maintained with CDSL can be obtainedthrough the DP. The DP is required to provide the investor, at regular intervals, a statement ofaccount which gives the details of the securities holdings and transactions. The depositorysystem has effectively eliminated paper-based certificates which were prone to be fake,forged, counterfeit resulting in bad deliveries. CDSL offers an efficient and instantaneoustransfer of securities.CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading bankssuch as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard CharteredBank, Union Bank of India and Centurion Bank.CDSL was set up with the objective of providing convenient, dependable and securedepository services at affordable cost to all market participants. Some of the importantmilestones of CDSL system are:CDSL received the certificate of commencement of business from SEBI in February, 19991) Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations ofCDSL on july 15,1999.2) Settlement of trades in the demat mode through BOI Shareholding Limited, the clearinghouse of BSE, started in july 1999.3) All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange,Delhi stock Exchange, The Stock Exchange, Ahmedabad, etc have established connectivitywith CDSL. 54
  55. 55. 4) As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities,bonds, debentures, commercial papers), units of mutual funds, certificate of deposits etc. intothe CDSL system.Shareholders of CDSLCDSL was promoted by Bombay Stock Exchange Limited (BSE) in association with Bank ofIndia, Bank of Baroda, State Bank of India and HDFC Bank. BSE has been involved withthis venture right from the inception and has contributed overwhelmingly to the fruition ofthe project. The initial capital of the company is Rs.104.50 crores. The list of shareholderswith effect from 11th December, 2008 is as under. A professional Board of Directors with vast and varied experience in capital marketsand banking is at the helm of affairs at CDSL.Board of Directors Mr. S S Thakur Chairman Mr. V V Raut Managing Director and Chief Executive Officer Mr. P S Reddy Executive Director Mr. M. R. Mayya Independent Director Mr. Madhu Kannan Sponsor Director – Bombay Stock Exchange Limited Mr. L. P. Aggarwal Sponsor Director – Bombay Stock Exchange Limited Mr. Prakash R. Kacholia Sponsor Director – Bombay Stock Exchange Limited Mr. Anjan Barua Sponsor Director - State Bank of India Mr. A. D. M. Chavali Sponsor Director - Bank of Baroda Mr. A. R. Kuppuswamy Sponsor Director - Bank of India 55
  56. 56. Management TeamMr. V V Raut Managing Director and Chief Executive OfficerMr. P S Reddy Executive DirectorMr. Pramod Deshpande Chief Technology OfficerMr. Cyrus Khambata Sr.Vice President. Business Development(Currently on deputation to CDSL Ventures Ltd. as CEO with effect from 7-12-2006)Mr. Jitendra Chad Vice President. Information TechnologyMs. Nayana Ovalekar Vice President. Audit, Inspection & ComplianceMr. Bharat Sheth Vice President. Accounts & AdministrationMr. Sunil Alvares Vice President. Business DevelopmentMr. Ramkumar K. Vice President. OperationsMr. Jignesh Gandhi Vice President. New ProjectsMr. Satish Budhakar Vice President. Legal & Company Secretary 56
  57. 57. FEE STRUCTURE OF CDSLCDSL fees structure to its depository participants is as follows:SR.NO. Details of Charges CDSL 1 Account Opening Charges NIL 2 Account Maintenance Charges NIL for individuals Rs.500/- p.a. to Corporates 3 Transaction Charges Rs.6/- ** Market & Off-Market 4 Transaction Charges Clearing Flat charge of Rs.500/- per month on CM accounts Member Accounts for pay-in and pay-outs received from CH 5 Custody Charges NIL 6 Demat Charges NIL 7 Remat Charges Rs.10/- per 100 securities or part quantity or Rs. 10/- per cert. whichever is higher. 8 Pledge/Hypothecation Charges Pledge acceptance - Rs.12/- per request. Unpledge acceptance - Rs.12/- per request. Pledge Invocation Acceptance -Nil 9 Internet Facility easi Rs.20,000/- one time for registration 10 Internet Facility easiest Rs.30,000/- one time for registration Rs.1,150/-p.a. for renewal of digital signatureMonthly charges for DPs or its branches w.e.f. 1st May, 2006For Main DPs: Rs.3,000/- per month or the amount of the actual bill for a given monthwhichever is higher.For DP-Branches: Rs.2,000/- per month or the amount of the actual bill for a given monthwhichever is higher. 57
  58. 58. Fees for Clearing MembersCDSL collects only Rs. 500/ - per month from its DPs for a CM except for CM InvestorsSecurities Account.The following tariff structure will be effective from Wednesday, April 01, 2009. Monthly Transaction bill amount Rate per (@Rs.6/-per transaction) Debit Transaction (in Rs.) (in Rs.) More than Rs.15 lakhs 4.75 More than Rs.4 lakhs and upto Rs.15 lakhs 5.00 More than Rs.1 lakh and upto Rs.4 lakhs 5.50 Upto Rs.1 lakh 6.00 58
  59. 59. CHAPTER-6DEPOSITORY ACCOUNT AND ITS TYPES 59
  60. 60. TYPES OF ACCOUNTSType of depository account depends on the operations to be performed. There are three typesOf demat accounts which can be opened with a depository participant viz.(a) Beneficiary Account(b) Clearing Member Account(c) Intermediary Account.1. Beneficiary Account:This is an account opened by investors to hold their securities in dematerialised form with adepository and to carry out the transactions of sale and purchase of such securities in bookentry form through the depository system. A beneficiary account holder is legally entitled forall rights and liabilities attached to the securities (i.e. equity shares, debentures, governmentsecurities, etc.) held in that account. Therefore, the account is called beneficial owneraccount". 60

×