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29039117 working-of-depositary-system
29039117 working-of-depositary-system
29039117 working-of-depositary-system
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29039117 working-of-depositary-system

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  • 1. Working of Depository system A PROJECT REPORT On Working of Depository systemA project Report submitted in partial fulfillment of the requirements for the award of the degree of MASTER OF BUSINESS ADMINISTRATION TO SRI SAI COLLEGE OF ENGINEERING AND TECHNOLOGY PUNJAB TECHNICAL UNIVERSITY JALANDHAR BY SUSHIL KUMAR ROLL NO.80503317057 Under the guidance of Mr. PUNEET SHARMA (H.O.D) 1
  • 2. Working of Depository system TO WHOMSOEVER IT MAY CONCERN This is to certify that the project report titled ³Working of depositort system´ carried outby Mr.sushil kumar, S/o Shri. Rndhir singh (Father¶s Name) has been accomplished under myguidance & supervision as a duly registered MBA student of the Sri sai college of engineeringand technology, Badhani. This project is being submitted by him in the partial fulfillment of therequirements for the award of the Master of Business Administration from Sri sai college ofengineering and technology.His project work represents his original work and is worthy of consideration for the award of thedegree of Master of Business Administration.___________________________________(Name & Signature of the Faculty Advisor)Title: Working of depository systemDate: ______________________________ 2
  • 3. Working of Depository system ACKNOWLEDGEMENT I would like to express my appreciation and gratitude to various people who have sharedtheir valuable time and made possible this project ,through their direct indirect cooperation . My honorable Sir Mr. Puneet Sharma (HOD) and Miss Ripsy mahajan (Project in-charge), for allowing me to work on this project and provide necessary help. I thank my respected faculties, dear friend & colleagues, who help me in every possibleways , support me and encouraged me to explore new dimensions. SUSHIL KUMAR MBA 4nd Semester ROLL NO: 80503317057 3
  • 4. Working of Depository system INDEXS.NO. PARTICULARS PAGE NO. 1. Certificate 05 2. Declaration 06 3. Preface 07 4. Introduction 08 y Depository 09 y Deposiory system 13 y Leagal framework of DS 14 y Functions of DS 19 y Benefits of DS 21 y Safety feature in the DS 22 y Difference b/w Bank and Depository 35 y Some important process in DS 36 5. National securitirs depository system 42-50 y About NSDL 43 y Management of NSDL 45 y Fee structure of NSDL 47 y Technology and connectivity in NSDL 48 y Common software use in NSDL 50 6. Central securitirs depository system 51-55 About CSDL 52 Shareholders of CSDL 53 Board of diectors and management 54 Fee structure of CSDL 55 4
  • 5. Working of Depository system7. Research methodology 56-58 57 y Objectives of the study 57 y Types of research 58 y Methods of data collection y Tools of analysis 58 y Research design 588. Data analysis and interpretation 59-659. Observations 6610. Suggestions 6811. Limitations 6912. Conclusion 7013. Biblography 7114. Orignal synopsis 7215. Questioneerie 74 5
  • 6. Working of Depository system CERTIFICATE This to certify that SUSHIL KUMAR ,M.B.A 4 Semester ,S.S.C.E.T Badhani(Pathankot) under P.T.U Jalandhar has done project on ³Working of depositary system¶¶ and hassuccessfully completed his project on my guideline. It is only for academic purpose and is a bonfires work done by researcher . Project Guide Mr. Puneet Sharma Faculty S.S.C.E.T 6
  • 7. Working of Depository system DECLARATION I am Sushil Kumar do here by declare that the project work entitle on the ³Working ofdepositary system¶¶ is the original work done by me. This project report presented as a partial fulfillment requirement for the degree of Masterof Business administration. Sushil kumar MBA 4nd semester S.S.C.E.T 7
  • 8. Working of Depository system PREFACE The successful completion of this project was a unique experience for me because byvisiting many place and interacting various person, I achieved a better knowledge about thissystem. The experience which I gained by doing this project was essential at this turning point ofmy carrier this project is being submitted which content detailed analysis of the research undertaken by me. The research provides an opportunity to the student to devote his/her skills knowledgeand competencies required during the technical session. The research is on the topic ³Working of Depositary system´ 8
  • 9. Working of Depository systemINTRODUCTION 9
  • 10. Working of Depository system INTODUCTION One of the biggest problem faced by the indian capital market has been the manualand paper based settlement system. Under this system, the clearing and settlement of transactiontake place only with the use of paper work. The system of physical delivery of scrip¶s posesmany problems for the purchaser as well as the seller in the form of delayed settlements, longsettlement periods, high level of failed trade, high cost of transaction, bad deliveries etc. In manycases transfer process takes much longer time then two month as stipulated in section 113 ofcompanies Act, 1956 or section 22 A of the securities Contracts (Regulations) Act, 1956.Moreover, a large number of transactions end up as bad deliveries due to faulty compliance ofpaper work, mismatch of signatures on transfer deeds with specimen record of the issuer or otherprocedural reasons. Besides, theft, forgery, multination of certificates and other irregularitieshave also become rampant. However, as a consequence of implementation of reforms measures, the Indiancapital market has shown rapid growth in the recent past with foreign investors, more stockexchanges and increased market intermediaries. The old manual system of settlement andtransfer has almost failed to handle the growing volume of paper that has loaded the market.Thus, to eliminate paperwork, facilitate scrip less trading and electronic book entry of thetransfer of securities, shorten settlement periods, and to improve liquidity in the stock market, itwas found necessary to replace the old system of transfer and settlement with the new andmodern system of depositories. Accordingly the government of India enacted the depositoriesAct in 1996 for the orderly growth and development of the Indian capital market. It is a system whereby the transfer and settlement of scrip¶s take place not throughthe traditional method of transfer deeds and physical delivery of scrip¶s but through the modernsystem of effecting transfer of ownership of securities by means of book entry on the ledgers orthe depositary without the physical movement of scrip¶s. The new system, thus , eliminates paperwork, facilities automatic and transparent trading in scrip¶s, shortens the settlement period andultimately contributes to the liquidity of investment in securities. The system is also known asµscriples trading system¶. 10
  • 11. Working of Depository systemThere are essentially four player in the depository system: y The Depositary participant y The Beneficial owner/investor y The issuer y The depositary A depositary is a firm wherein the securities of an investor are held in electonicform in the same way a bank holds money. It crries out the transactions of securities by means ofbook entry, without any physical movement of securities. The depositary based settelmentsystem is also called µbook entry transfer settelment¶. The depositary acts as a defecto owner ofthe securities lodged with it forn the limited purpose of transfer of ownership. It functions as acustodian of securities of its clients. The name of the depositary appears in the records. Withincrease in the number of transactions in the stock market, it had become difficult for theinvestors to hold share certificates and debt instruments in bulk. But now, depositary institutionshandle this job. At present there are two depositories in india.Number of Depositories in India y National securities depositary Ltd. (NSDL) y Central depositary services (india) Ltd. (CDSL) NSDL was formed and registered under the companies¶ act 1956 during December 1995 andcommenced operations during november1996. NSDL was promoted by Industrial DevelopmentBank of India (IDBI)-the largest development bank in India, Unit trust of India (UTI)-the largestmutual fund in India and National stock exchange (NSE)-the largest stock exchange in India.Some of the prominent banks in the country also have a stake in NSDL. Central Depository services (India) limited which commenced operations during February1999.CSDL was promoted by stock exchange, Mumbai in association with Bank of Baroda,Bank of India, State Bank of India and HDFC Bank. 11
  • 12. Working of Depository systemDEPOSITARY SYSTEM 12
  • 13. Working of Depository system WHAT IS DEPOSITORY Electronic revolution has brought about a number of changes in the functioning of Indiancapital market. The most revolutionary change that was brought in the entire history of the Indianmarket is the introduction of depository. The century old Indian market has been vibrant all along but its paper- based settlementof trades caused problems like bad delivery, delayed transfers etc., until the enhancement ofdepository act in 1996. The depository model in India is a competitive multi depository system inIndia the system of dematerialization is followed, wherein the securities will be cancelled asagainst the system of immobilization in which the securities are kept in custody.A depository isan organization where the securities of an investor are held in electronic form and carries out thesecurities transaction by book entry. A depository is a file or set of files in which data is stored for the purpose of safekeepingor identity authentication. A common example is the set of personal data files at a creditreporting agency such as Equifax. Another example is the data contained at a state motor vehicledepartment. In a biometric security system, a depository contains data about peoples physicalcharacteristics such as iris prints and finger images. Additional information may be added, including facial characteristics, voice prints, andhand prints. When a persons identity must be verified, one or more biometric samples is taken inreal time, and this data is compared with the data in the depository. In general informationstorage applications, a depository is a physical site where data is kept in the form of hard copies,magnetic disks, magnetic tapes, compact disks (CDs), and similar media. A good example is thesafe deposit vault in a financial institution. An ideal depository is secure, in the sense that onlyauthorized persons or institutions can gain access to the data it contains. However, experiencehas shown that many depositories, no matter how secure they claim to be, can be compromisedby a determined hacker or thief. 13
  • 14. Working of Depository system WHAT IS DEPOSTORY SYSTEM The erstwhile settlement system on Indian stock exchanges was also inefficient andincreased risk, due to the time that elapsed before trades were settled. The transfer was byphysical movement of papers. There had to be a physical delivery of securities -a process fraughtwith delays and resultant risks. The second aspect of the settlement relates to transfer of shares infavour of the purchaser by the company. The system of transfer of ownership was grosslyinefficient as every transfer involves physical movement of paper securities to the issuer forregistration, with the change of ownership being evidenced by an endorsement on the securitycertificate. In many cases the process of transfer would take much longer than the two monthsstipulated in the Companies Act, and a significant proportion of transactions would end up as baddelivery due to faulty compliance of paper work. Theft, forgery, mutilation of certificates andother irregularities were rampant. In addition, the issuer has the right to refuse the transfer of asecurity. All this added to costs and delays in settlement, restricted liquidity and made investorgrievance redressal time consuming and, at times, intractable. To obviate these problems, the Depositories Act, 1996 was passed. It provides for theestablishment of depositories in securities with the objective of ensuring free transferability ofsecurities with speed, accuracy and security. It does so by (a) making securities of public limitedcompanies freely transferable, subject to certain exceptions; (b) dematerialising the securities inthe depository mode; and (c) providing for maintenance of ownership records in a book entryform. In order to streamline both the stages of settlement process, the Act envisages transferownership of securities electronically by book entry without making the securities move fromperson to person. The Act has made the securities of all public limited companies freelytransferable, restricting the companys right to use discretion in effecting the transfer ofsecurities, and the transfer deed and other procedural requirements under the Companies Acthave been dispensed with. Two depositories, viz., NSDL and CDSL, have come up to provideinstantaneous electronic transfer of securities. In any stock exchange, trades or transactions have to be settled by either squaring up thecarrying forward positions or settling by payment of net cash or net delivery of securities. Thisaccount settlement period, if it is long leads to several price distortions and allows for market 14
  • 15. Working of Depository systemmanipulation. It increases the chances of speculation resulting in volatility, which hurts the smallinvestors. With the application of IT in the securities market - screen-based trading and tradingthrough the Internet - it has been possible to reduce this settlement period.Legal Framework of depositary system The operations of the depositories are primarily governed by the Depositories Act, 1996,Securities and Exchange Board of India (Depositories & Participants) Regulations, 1996, Bye-Laws approved by SEBI, and Business Rules framed in accordance with the Regulations andBye-Laws. The Depositories Act passed by Parliament received the Presidents assent on August 10,1996. It was notified in a Gazette on August 12 of the same year. The Act enables the setting upof multiple depositories in the country. This was to see that there is competition in the serviceand there is more than one depository in operation. At present, two depositories are registeredwith SEBI - The National Securities Depository Limited (NSDL) and Central DepositoryServices (India) Limited (CDSL). Only a company registered under the Companies Act, 1956 and sponsored by thespecified category of institutions can set up a depository in India. Before commencingoperations, depositories should obtain a certificate of registration and a certificate ofcommencement of business from SEBI. The rights and obligations of depositories, depository participants, issuers and beneficialowners are spelt out clearly in the Depositories Act 1996.As per the Act :‡ Section 4: DP is an agent of the Depository: A DP is an agent of the depository, who providesvarious services of the depository to investors. The DP has to enter into an agreement with thedepository to this effect. Any investor who would like to avail the services of a depository has toenter into an agreement with any DP of his choice. The DP will then make the depositoryservices available to the investor.‡ Section 7: Free Transferability : The securities held by an investor in the depository are freelytransferable from one beneficial owner to another. 15
  • 16. Working of Depository system‡ Section 8: Option to hold securities in demat form : In the depository system, every investorsubscribing to securities offered by an issuer has an option to receive the same in physical formor dematerialised form. If an investor opts for receiving the securities in dematerialised form, theissuer intimates the depository the details of allotment of security. On receipt of this information,the depository enters the name of the allottee as the beneficial owner of that security in its record.‡ Section 9: Securities held in a depository are fungible : All securities held by the depository arein dematerialised and fungible form.‡ Section 10: Registered Owner and Beneficial Owner : The depository is deemed to be theregistered owner for the purpose of effecting transfer of ownership of security on behalf of abeneficial owner. But as a registered owner, it does not have any voting rights or any other rightsin respect of those securities. The beneficial owner is entitled to all rights and benefits as well assubject to all liabilities in respect of his securities held in the depository.‡ Section 14: Option to opt out of depository : A beneficial owner may opt out of a depository inrespect of any security by requisite intimation to the depository.‡ Section 16: Depository to indemnify losses : A depository shall indemnify a beneficial owner,any loss caused due to negligence of the depository or its participant.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 the equity isheld 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 companymust have a minimum net worth of Rs. 100 crore. The sponsor(s) of the depository have to holdat least 51% of the equity capital of the depository company. Participants of that depository, if 16
  • 17. Working of Depository systemany, can hold the balance of the equity capital. However, no single participant can hold, at anypoint of time, more than 5% of the equity capital. No foreign entity, individually or collectivelyeither as a sponsor or as a DP, or as a sponsor and DP together, can hold more than 20% of theequity capital of the depository.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 proposed depositoryshould apply to SEBI for a certificate of registration in the prescribed form. On being satisfiedwith the eligibility parameters of a company to act as a depository, SEBI may grant a certificateof registration subject to certain conditions.Commencement of Business ± A depository that has obtained registration as stated above, canfunction only if it obtains a certificate of commencement of business from SEBI. A depositorymust apply for and obtain a certificate of commencement of business from SEBI within one yearfrom the date of receiving the certificate of registration from SEBI. SEBI grants a certificate of commencement of business if it is satisfied that thedepository has adequate systems and safeguards to prevent manipulation of records andtransactions. SEBI takes into account all matters relevant to the efficient and orderly functioningof the depository. 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 againstunauthorised access, alteration, destruction, disclosure or dissemination of records and data;4. The network, through which continuous electronic means of communication are establishedbetween the depository, participants, issuers and issuers agents, is secure against unauthorisedentry or access.5. The depository has established standard transmission and encryption formats for electroniccommunication of data between the depository, participants, issuers and issuers agents;6. The physical or electronic access to the premises, facilities, automatic data processingsystems, data storage sites and facilities including back-up sites, and to the electronic data 17
  • 18. Working of Depository systemcommunication network connecting the DPs, issuers and issuers agents is controlled, monitoredand 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;8. The depository has established adequate procedures and facilities to ensure that its records areprotected against loss or destruction and arrangements have been made for maintaining back-upfacilities at a location different from that of the depository;9. The depository has made adequate arrangements including insurance for indemnifying thebeneficial 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 orparticipant;10. The granting of certificate of commencement of business is in the interest of investors insecurities 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 enters intoan 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 depositoryenters into a tripartite agreement with the Issuer and Registrar & Transfer (R&T) Agent, as thecase may 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 obligations conferredupon them under the Depositories Act, the regulations made under the Depositories Act, Bye-Laws approved by SEBI, and the agreements made with the participants, issuers and their R&Tagents. 18
  • 19. Working of Depository system Every depository must have adequate mechanisms for reviewing, monitoring andevaluating the depositorys controls, systems, procedures and safeguards. It should conduct anannual inspection 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 processing systems ismaintained at all times and take all precautions necessary to ensure that the records are not lost,destroyed or tampered with. In the event of loss or destruction, sufficient back up of recordsshould 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, asis necessary 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 tothem due to the negligence of the DP. However, where the loss is caused due to the negligence ofa DP, 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 made thereunder,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. 19
  • 20. Working of Depository system8. 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 a depository.Services of Depository ± A depository established under the Depositories Act can provide anyservice connected with recording of allotment of securities or transfer of ownership of securitiesin the record of a depository. Any person willing to avail the services of the depository can do soby entering into an agreement with the depository through any of its participants. A depositorycan provide depository services only through a DP. A depository cannot directly open accountsand provide services to clients. Every depository in its Bye-Laws must state which securities areeligible for demat holding. Generally, the following securities are eligible for dematerialisation:(a) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of alike nature in or of any incorporated company or other body corporate.(b) Units of mutual funds, rights under collective investment schemes and venture capital funds,commercial paper, certificates of deposit, securitised debt, money market instruments,government securities, national saving certificates, kisan vikas patra and unlisted securities.(c) Securities admitted to NSDL depository are notified to all DPs through circulars sent byemail. Investors are informed about these securities through NSDLs Website - www.nsdl.co.inand NEST Update - a monthly newsletter of NSDL.Functions of Depository Dematerialisation: One of the primary functions of depository is to eliminate or minimisethe movement of physical securities in the market. This is achieved through dematerialisation ofsecurities. Dematerialisation is the process of converting securities held in physical form intoholdings in book entry form. Account Transfer: The depository gives effects to all transfers resulting from thesettlement of trades and other transactions between various beneficial owners by recordingentries in the accounts of such beneficial owners. Transfer and Registration: A transfer is the legal change of ownership of a security in therecords of the issuer. For effecting a transfer, certain legal steps have to be taken likeendorsement, execution of a transfer instrument and payment of stamp duty. The depository 20
  • 21. Working of Depository systemaccelerates the transfer process by registering the ownership of shares in the name of thedepository. Under a depository system, transfer of security occurs merely by passing bookentries in the records of the depositories, on the instructions of the beneficial owners. Corporate Actions: A depository may handle corporate actions in two ways. In the firstcase, it merely provides information to the issuer about the persons entitled to receive corporatebenefits. In the other case, depository itself takes the responsibility of distribution of corporatebenefits. Pledge and Hypothecation: The securities held with NSDL may be used as collateral tosecure loans and other credits by the clients. In a manual environment, borrowers are required todeliver pledged securities in physical form to the lender or its custodian. These securities areverified for authenticity and often need to be transferred in the name of lender. This has a timeand money cost by way of transfer fees or stamp duty. If the borrower wants to substitute thepledged securities, these steps have to be repeated. Use of depository services for pledging/hypothecating the securities makes the process very simple and cost effective. The securitiespledged/hypothecated are transferred to a segregated or collateral account through book entriesin the records of the depository. Linkages with Clearing System: Whether it is a separate clearing corporation attached toa stock exchange or a clearing house (department) of a stock exchange, the clearing systemperforms the functions of ascertaining the pay-in (sell) or pay-out (buy) of brokers who havetraded on the stock exchange. Actual delivery of securities to the clearing system from the sellingbrokers and delivery of securities from the clearing system to the buying broker is done by thedepository. To achieve this, depositories and the clearing system should be electronically linked.Having understood the depository system, let us now look at the organisation and functions ofNational Securities Depository Limited (NSDL). 21
  • 22. Working of Depository system BENEFITS OF DEPOSITORY SYSYEM y No risks associated with physical certificates such as loss of share certificate, Fake securities, Etc. y No bad delivery. y Faster settlement cycles. y Low transaction cost for purchase and sale of securities compared to physical mode. y Increase liquidity of securities y Reduction of paper work y Allotment of IPO, Bonus, Rights shares etc. in electronic form y Wavier of stamp duty on transfer of securities y Intimation like change of address, bank mandate, nomination, request of transmission, required to be given only to Depository Participant (DP) Irrespective of the number of companies in which shares held.Facilities offered by depository system y Dematerialisation y Rematerialisation y Electronic settlement of trades in stock exchanges connected to depositories. y Pledging/hypothecation of dematerialized securities. y Electronic credit of securities allotted in public, rights, bonus issue. y Nomination facility. y Freezing of De-mat accounts, so that the debits from the dematerialization are not permitted. y Services related to change of address, nomination, mandate, transmission, etc. y Other services viz.holding debt instruments in the same demat account. y Availing stock lending/borrowing facility, etc. 22
  • 23. Working of Depository systemSafety features in the depository systemTo ensure safety to the investors the following measures exist- y Strict norms for becoming depository participant- Net worth criteria, SEBI approval etc. is mandatory. y DP cannot effect ant debit or credit in the demat account of the investor without the valid authorization of the investor. y Regulation reconciliation between DP and the depositories. y Periodic inspection by Depositories of the office of the DP and Registrar. y All investors have a right to receive their statements of accounts periodically from the DP. y In the depository system, the depository holds the investor accounts on trust. Therefore if the DP goes bankrupt the creditors of the DP will have no access to the holdings in the name of the clients of the DP. y Compulsory internal audit of operations of DP by practicing company secretary of the chartered accountant every quarter. y Various procedures for backup and safe keeping of data at all the levels. SEBI has made compulsory trading of shares of all the companies listed in Stock Exchangein demat form w.e.f 2 January 2002. Hence, if the investor wants to trade in respect of thecompanies, which have established connectivity with NSDL & CDSL, he may have to open abeneficiary account.Beneficiary accountA beneficiary account is an account opened by the investor or a broker with a DP of his choice,to hold shares in dematerialized form and undertake scrip less trading.Investor contacting the depositoryThe investor must open a demat account with a Depository Participant. Opening a demat accountwith a DP is similar to opening an account with bank. The selection of DP is to be done by theinvestor based on fee payable, proximity, service levels, etc. 23
  • 24. Working of Depository systemDocuments required for opening demat account For demat account opening the following documents are required to be given- y Demat account opening form duly filled. y Address proof. y Photograph y Identity proofOther formalities in Demat account opening Once a demat account is opened, the investor must sign an agreement with the DP. Theinvestor will be allotted an account no. known as client identity. The client identity number alongwith the DP identity number forms a unique combination. Both these numbers should be quotedin all the future dealing with Depositories /DP /RTA /Company. However in case of CDSL thereis no DP identity and the 16-digit Client identity itself is a unique number. The investor mustcollect forms like dematerialization request form (DRF), Delivery instruction slips etc.Certain points to be considered while opening Demat account Demat account cannot be opened in the name of the partnership firms, as a partnershipfirm is not a legal entity. However, a demat account can be opened in the name of the partners.Demat account cannot be opened in the name of the HUF. It has to be opened in the name of theKarta of the HUF. In the case of a minor, the depository account should be opened in the name of the minorand the guardian¶s name should be mentioned. The guardian will sign as signatory on behalf ofthe minor. Investor can open any number of DP accounts with any number of DP¶s. However, investorhas to incur cost for each of such account.Investor must open different Demat accounts for sharesheld in different combination of names. Alternatively investor can submit the certificate forDemat along with transposition form. 24
  • 25. Working of Depository systemMinimum balance of securitiesn required to be maintained in Demat account There is no minimum balance required to be maintained in a Demat account and aninvestor can even maintain nil balance.Other steps the investor should take The investor should inform his DP of any change in his address, bank account,nomination, etc. immediately upon change thereof.Charges for Demat account opening and other depository trading The depository does not charge any fee directly from the investors. The depositorycharges only the DP¶s. However, the DP is free to charge its clients for the services offered. Thecharges of DP¶s also vary.Stock exchanges connected to the Depositories for Demat tradingAt present the following 10 stock exchanges are connected to the Depositories- y National Stock Exchange y The Stock Exchange Mumbai y Calcutta Stock Exchange y Delhi Stock Exchange y Ludhiana Stock Exchange y Bang lore Stock Exchange y Over the counter stock exchange of India y Madras Stock Exchange y Inter connected Stock Exchange y Ahmedabad Stock Exchange. 25
  • 26. Working of Depository systemMarket trade and off market trade Trade done and settled through a stock exchange and clearing corporation is market trade.Trade done privately without the involvement of the Stock Broker of Stock Exchange is offmarket trade.Buying and selling of shares by the investor The investor can buy and sell shares only through a stockbroker and not through a DP.DP helps in delivering the shares against a sale transaction or receiving the shares for a purchasetransaction.Corporate benefits Corporate benefit is a corporate event. It can be cash corporate benefit like dividend,interest, etc.or non-cash corporate benefits like rights, bonus etc. When any corporate event such as right or bonus or dividend is announced for aparticular security, depository will give the details of all clients having electronic holdings in thatsecurity as of the record date to the RTA/Company will then calculate the corporate benefits dueto all the shareholders. The disbursements of cash benefits such as dividend/interests will bedone by the RTA/Company directly to the shareholders. Non-cash benefits will be distributedthrough depository by crediting the entitled quantity of shares into shareholders demat account.Direct credit of shares in electronic form: In the public/Right issue application form of depository eligible companies, there will bea provision for the investor to indicate the manner in which he wants the securities allotted tohim. Even in the case of bonus issue the investor is given an option for getting the shares allottedin physical or electric form. The investor must mention his client ID. Number and DP ID No. 26
  • 27. Working of Depository systemAdvantage of getting allotment in electronic form: y SEBI has announced that the shares of all the companies going in for public issue will have to be compulsorily settled in demat form by all investors. It is, therefore, advantageous for an investor to prefer the allotment in demat form, so that the shares have higher liquidity. y In case of Discrepancies in corporate benefits the investor can approach his DP who in turn will contact the RTA/Company for clarifications regarding allotment of securities. y Clearing members, Clearing corporations and other intermediaries cannot have voting rights in respects of the shares held in pool account. Further the clearing member or cleaning corporation is also responsible for distribution of bonus, right and other corporate benefits lying in his account to the investor.Menaing of Transfer, Transmission and TranspositionTransfer Depository is electronically linked to depository participants, issuer company or Registrar &transfer agent and the clearing corporation/ clearing house of the stock exchange. This is done inorder to facilitate settlement of trades and to perform a daily, reconciliation of all the accountbalances held with depository. Thus, an integrated system is set up for maintenance of investoraccounts.Transmission In the case of transmission, the claimant will have to fill a transmission request form,supported by documents like death certificates, etc. The DP, after ensuring that the application isgenuine, will transfer securities to the demat account of the claimant. For this purpose claimantmust have a depository account. The major advantage in transmission of dematerialized holdingsis the transmission formalities for all securities held with the DP can be completed in one go,unlike in the case of share certificate, where the claimant will have to interact with eachRTA/Company. 27
  • 28. Working of Depository systemTransposition In case of transportation-cum-dematerialization, the investor can get the securities dematerialized in the same account if the names appearing on the certificate match with the names in which the demat account has been opened but are in a different order, by submitting the security certificate along with the transportation form and the Dematerialisation request form´(DRF) to the DP.Pledging y Pledging of dematerialized securities: y Pledging dematerialized securities is easier and more advantageous as compared to pledging physical securities. The procedure as follows y Both borrower (pledger) as well as the lender (pledgee) must have depository account. y The pledger must initiate the pledge by submitting to his DP the details of the securities to be pledged in a standard format. y The pledge should confirm the request through his DP.Once this is done the securities are pledged. All financial transactions between the pledger andthe pledgee are handled outside the depository system.Procedure for the closure of pledgeAfter the borrower has repaid the loan, the borrower can request for a closure of pledge byinstructing his DP in a prescribed format. The lender on receiving the repayment will instruct hisDP confirmed the closure of the pledge. 28
  • 29. Working of Depository systemChange of securities offered in a pledgeIf the pledger (lender) agrees, the investor may change the securities offered in a pledge.Nomination Shares held in physical as well as electronic form can be nominated. Nomination can bemade only by individuals holding beneficiary accounts on their own behalf either singly orjointly. On individuals, society, trust, body corporate ,partnership firm, Karta or Hindu undividedFamily, holder of power of attorney cannot nominate. Nomination is permitted for accounts with joint holder, but in case of death of any of thejoint holder, the securities will be transmitted to the surviving holder(s) only in the event of deathof all the joint holders, the securities will be transmitted to the nominee. Only an individual can be a nominee. A nominee shall not be a society, trust, bodycorporate, partnership firm, karta of Hindu undivided Family or a power of attorney holder.A minor cannot nominate either directly or through its guardian. A minor can be a nominee. In such a case, the guardian will sign on behalf of thenominee and in addition to the name and photograph of the nominee, the name, address and thephotograph of the guardian must be given.Separate nomination cannot be made for each security.Nomination can be made Demat account wise and not security wise. The investor must fill in and submit to his DP the nomination form. The account holder,Nominee and two witnesses must sign this form and the name; address and photograph of thenominee must be submitted. The nomination can be changed anytime by the account holder by filling up the revisednomination form and submitting it to the DP. The account holder, Nominee and two witnessesmust sign this form and the name; address and photograph of the nominee must be submitted. Incase of joint holders, all joint holders must sign.Demat of debt instrument Debt instrument can also be held in demat form. Instruments like bond, debentures,commercial papers, certificates of deposit, etc. irrespective whether these instruments arelisted/unlisted/privately placed or even issued to a single holder can be dematerialized. 29
  • 30. Working of Depository systemCommercial paper can also be kept in demat form. As per RBI Monetary and credit policy ±banks, Financial Institutions, primary Dealers and satellite dealers are directed to convert theiroutstanding investment in commercial papers in script form, into Demat form. The above entitieshave also been directed to make fresh investment in commercial paper only in demat form. Bonds and debentures can also kept in demat form. In its midterm review of the monetaryand credit policy RBI has mentioned that banks and financial institutions shall make investmentin debentures and bonds only in demat form. Any new instrument can be issued directly indematerialized form without recourse to printing of either letter of allotment or certificates.Securities will be directly credit into the demat accounts of the investor by the depositories onreceipt of allotment details from RTA/Company.The investor need not open separate demat account for demat of debt instrument. The procedure of dematerialization of debt instrument is same as that carried out forequity shares. In order to dematerialized his/her certificates; an investor will have to first open ademat account with a DP and the a request for the dematerialization of certificates by filling up adematerialization request form (DRF), which is available with DP and submitting the same alongwith the physical certificates. The investor has to ensure that before the certificates are handedover to the DP for demat, he marks ³Surrendered for Dematerialization´ on the face of thecertificates. y Account opening y Demat/Remat y Account Maintenance y Custody y Transaction, etc.Knowing of securities balance in demat accountThe investor is provided with a transaction statement by his DP at regular intervals. Based onthat the investor will know his security balances. 30
  • 31. Working of Depository systemReceiving Transaction statement by investorThe DP will send a transaction statement once in a quarter if there is no transaction during thequarter. If there are any transactions DP will send the statements within fifteen days of thetransaction.Freezing of demat accountThe depository system provides the facility to freeze the demat account for any debits or for bothdebits and credits. In an account, which is ³free zed of debits´, no debits will be permitted fromthe account, till the time it is defreeze. This is in additional security feature of the investors.Standing instruction to DPThe investor can give one time standing instruction to his DP to receive all the credits coming tohis depository account automatically. However, the investor cannot give standing instruction forany debits in his account.Access of investor accounts by all DP¶sA DP cannot access the investors account of any other DP.The DP can access only thoseinvestors accounts serviced by them.Furnishing of bank account particulars in DPDetails of bank account of the client, including the 9-digit code number of the bank and branchappearing on the MICR cheque issued by the bank have to be given to the DP at the time ofaccount opening. Companies use this information for printing them on dividend/interest warrantsetc., to prevent its misuse. In case the client wishes to change this bank account details, he can doso by submitting the change in writing to the DP. 31
  • 32. Working of Depository systemProcedure of closure of demat account An investor can close a demat account by giving an application in prescribed form. Incase there is any balance in the demat account sought to be closed, the following steps arenecessary-1. Rematerialisation of all securities standing to the credit of the demat account at the timeof making the application for the closure.2. Transferring the balance to the credit of another demat account , with the sameparticipant or with a different participant.DematerializationDematerialization is the process of conversion of shares or other securities held in physical forminto electronic form.Whom to approachThe investor must approach hid DP for DematerializationThe shares that an investor can dematerializeThe investor can demat the shares of any company that has established connectivity with NSDLor CDSLSteps involved in dematerialization1. Investor must submit request form and share certificate to DP.2. DP will check whether security is available for Demat. Investor must deface the sharecertificate by stamping ³surrendered for dematerialization´ and DP will punch two holes onthe name of the company and will draw two parallel lines across the face of the certificate.3. DP enters the Demat request in their system to be sent to the depository. DP dispatches the physical certificates along with the DRF to the RTA/ Company. 32
  • 33. Working of Depository system4. Depository records the details of the system and forwards the request to Registrar andtransfer agent or issuer i.e. the company whose shares are sought to be dematerialized.5. RTA Company on receiving the physical documents verifies request and check them.Once the RTA/Company finds that shares are in order, dematerialization of the concernedsecurities is electronically confirmed to the depository6. Depository credits the dematerialized securities to the beneficiary account of the investor and intimates the DP electronically. The DP issues a statement of transaction to the client.Signing of the demat request form in case of joint holdersAll joint holders should sign the DRF.Company identification number for demat purposesOnce the company is admitted in the depository system, the depository allots an ISIN. Thisnumber is unique for each security of the company that is admitted in the depository.Mentioning of the ISIN in the DRFThe ISIN should be mentioned in the DRF.This to certain extent ensures that the securitymentioned in the DRF is the one which the investor intends to dematerialize.Distinguishing between partly paid-up share and fully paid up shares in the depositoryParties paid up shares and fully paid up shares are identified by separate ISIN¶s (Internationalsecurity identification number). These are also traded separately at the stock exchanges. Thecompany issues call notices to the beneficial holders of partly paid up securities in the electronicform. The details of such beneficial holders will be provided to the RTA/company willautomatically convert the partly paid up shares to fully paid shares. 33
  • 34. Working of Depository systemRematerialisationRematerialisation is conversion of electronic holdings into physical certificate form.Steps involved for RematerialisationThe investor must fill up a remat form (RRF) and give it to the DP. The DP will forward therequest depository after verifying that the shareholder has necessary balances. Depository in turnwill intimate the RTA/Company will print the certificate and dispatch the same to the investor.Electronic settlement of the TradesProcedure for selling dematerialization securities in the stock exchanges is similar to theprocedure for selling physical securities Instead of delivering physical securities to the broker,the investor must instruct his/her DP to debit his/her demat account with the number of securitiessold by him/her and credit broker¶s clearing account.Procedure for selling securities is given below:y Investor sells securities in any of the stock exchange linked to depository through abroker.y Investor gives instruction to DP to debit his account and credit the brokers (clearingaccount pool) account.y Before the pay-in-day. Investor¶s broker transfers the securities to clearing corporation.y The broker receives payment from the stock exchange (Clearing Corporation).y The investor receives payment from the broker for the sale in the same manner payment is received for a sale in the physical mode. 34
  • 35. Working of Depository systemProcedure for purchase of dematerialized sharesy The procedure or buying dematerialized securities in stock exchanges is similar to the procedure for buying physical securities. Investor may give a one time standinginstruction to receive credits into his /her account or may give separate instruction each timein he prescribed format.y The transaction relating to purchase of securities are summarized below.y Investor purchases securities in any of the stock exchanges connected to depositorythrough a broker.y Broker receives payment from investor¶s.y Broker arranges payment to clearing corporation.y Broker receives credit of securities in clearing account on the payout day.y Broker gives instruction to DP to debit clearing account and credit client¶s account.y Investor receives shares in his account.y The investor should ensure that the broker transfer the securities purchased to his account, before the book closure. If the securities remain in the clearing account of thebroker, the company may give corporate benefits to the broker. Therefore, the investor has tocollect benefits from the broker. 35
  • 36. Working of Depository systemDIFFERENCE BETWEEN BANK AND DEPOSITORYBANK DEPOSITORY y Allocates account number. y Allocates client ID number. y Holds funds in accounts y Holds securities in accounts. y Minimum balance required. y Normally no minimum balance y Functions through branches. required. y Functions through depository y Issues account statement & pass participants. book. y Issues account statement i.e. statement of holding and statement y Charges commission/ service of transactions. charges. y Depository Participant charges: o Account opening and closing fee o Demat and Remat fee o Transaction fee (buy, sell, off market) y Provides interest to the account o Custody charges holders. y In future, through stock lending, it will be possible to earn income on Depository Account. 36
  • 37. Working of Depository system Some important Processes in depositary system y Dematerialization y Rematerialization y Initial public offers y Trading & settlements. On Market transactions Off market transactions Inter Depository transactionsDematerialization ProcessPhysical Securities Electronic Form.Pre-requisites:‡ Demat Account with any DP of the Depository.‡ ISIN for the securities available with the Depository.‡ Investor should be registered holder for the securities in the books of the company. 37
  • 38. Working of Depository system RematerializationRematerialization or remat is a compiler optimization which saves time by recomputing a valueinstead of loading it from memory. It is typically tightly integrated with register allocation,where it is used as an alternative to spilling registers to memory. It was conceived by PrestonBriggs, Keith D. Cooper, and Linda Torczon in 1992.Rematerialization works by keeping trackof the expression used to compute each variable, using the concept of available expressions.Sometimes the variables used to compute a value are modified, and so can no longer be used torematerialize that value. The expression is then said to no longer be available. Other criteria mustalso be fulfilled, for example a maximum complexity on the expression used to rematerialize thevalue; it would do no good to rematerialize a value using a complex computation that takes moretime than a load. Usally the expression must also have no effects.Rematerialization process Electronic Form Physical Securities 38
  • 39. Working of Depository system Initial public offers An initial public stock offering (IPO) referred to simply as an offering or flotation, iswhen a company (called the issuer) issues common stock or shares to the public for the first time.They are often issued by smaller, younger companies seeking capital to expand, but can also bedone by large privately-owned companies looking to become publicly traded. In an IPO the issuer may obtain the assistance of an underwriting firm, which helps itdetermine what type of security to issue (common or preferred), best offering price and time tobring it to market.An IPO can be a risky investment. For the individual investor, it is tough to predict what thestock or shares will do on its initial day of trading and in the near future since there is often littlehistorical data with which to analyze the company. Also, most IPOs are of companies goingthrough a transitory growth period, and they are therefore subject to additional uncertaintyregarding their future value. The first sale of stock by a private company to the public. IPOs are often issued bysmaller, younger companies seeking the capital to expand, but can also be done by largeprivately owned companies looking to become publicly traded. In an IPO, the issuer obtains theassistance of an underwriting firm, which helps it determine what type of security to issue(common or preferred), the best offering price and the time to bring it to market.Also referred toas a public offering. IPOs can be a risky investment. For the individual investor, it is tough to predict what thestock will do on its initial day of trading and in the near future because there is often littlehistorical data with which to analyze the company. Also, most IPOs are of companies goingthrough a transitory growth period, which are subject to additional uncertainty regarding theirfuture values. 39
  • 40. Working of Depository systemInitial public offers process 40
  • 41. Working of Depository system Trading settlementsTransfer of securities in/ out of the Demat A/c can arise in the following instances: y For execution of Off Market Transactions. y For settling On Market Transactions. y For Inter depository transactions.Off Market TransactionsTransaction done on person to person basis without going through stock exchange mechanism.Pre-requisites: y Transfer of securities from one BO A/c to another BO A/c. y Both A/c¶s are with same Depository though with different DPs. y Neither buyer¶s A/c nor seller¶s A/c is with clearing house/clearing corporation.Off market transaction process 41
  • 42. Working of Depository system On Market TransactionTrades done by investors through stock exchange mechanism and settled using same stockexchange mechanism. y seller as well as buyer account is with CH/CCInter Depository Transactions. y SEBI (Depository and participants) Regulations, 1996 requires depositories to be inter connected. y Securities available for dematerialization on both depositories. y Debit/ credit instructions have to given on inter-depository delivery or receipts forms to the DP¶s of seller and the buyer. y These instructions are exchanged online for each day between the depositories. 42
  • 43. Working of Depository system43
  • 44. Working of Depository system National Securities Depository Limited In a span of about nine years, investors have switched over to electronic [demat]settlement and National Securities Depository Limited (NSDL) stands at the centre of thischange. In order to provide quality service to the users of depository, NSDL launched acertification programme in depository operations in May 1999. This certification is conductedusing NCFM infrastructure created by NSE and is called NSDL - Depository OperationsModule. The programme is aimed at certifying whether an individual has adequate knowledgeof depository 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. This handbook has been divided into four volumes for readers convenience. The firstvolumegives an overview of the Indian capital market and NSDL depository system. The secondvolume deals with admission procedure for different business partners of NSDL, theirobligations, practices, systems and procedures to be followed by them and benefits and safety ofdepository system. The third volume helps in acquiring a working level understanding of certainbasic services offered by NSDL like account opening, dematerialisation, and transfer ofsecurities and related operations. The last volume deals with special services offered by NSDLlike Pledge, Stock Lending and Borrowings, Corporate Actions, National Savings Certificates /Kisan Vikas Patra (NSC/KVP) in demat form, Warehouse Receipts, Market Participants andInvestor Database (MAPIN) and Tax Information Network (TIN). The procedures explained in the handbook are based on the Depositories Act, Securitiesand Exchange 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 of thefourth volume to help the candidates appearing for NCFM test form an assessment of theirpreparedness. A thorough understanding of this handbook will form a good base for qualifyingthe certification test. 44
  • 45. Working of Depository system 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 form isgiven at the end of the fourth volume. Readers may give their feedback, which will be of greathelp in enhancing the value of this Handbook in its subsequent editions.National Securities Depository Limited National Securities Depository Limited is the first depository to be set-up in India. It wasincorporated on December 12, 1995. The Industrial Development Bank of India (IDBI) - thelargest development bank in India, Unit Trust of India (UTI) - the largest Indian mutual fund andthe National Stock Exchange (NSE) - the largest stock exchange in India, sponsored the settingup of NSDL and subscribed to the initial capital. NSDL commenced operations on November 8,1996.Ownership NSDL is a public limited company incorporated under the Companies Act, 1956. NSDLhad a paidup equity capital of Rs. 105 crore. The paid up capital has been reduced to Rs. 80 croresince NSDL has bought back its shares of the face value of Rs. 25 crore in the year 2000.However, its net worth is above the Rs. 100 crore, as required by SEBI regulations.The following organisations are shareholders of NSDL as on March 31, 2005.1. Industrial Development Bank of India2. 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 Bank 45
  • 46. Working of Depository systemManagement of NSDLNSDL is a public limited company managed by a professional Board of Directors. The day-todayoperations are conducted by the Chairman Managing Director (CMD). To assist the CMD inhis functions, the Board appoints an Executive Committee (EC) of not more than 15 members.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 areas listedbelow :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 action12. Appeals13. Conciliation14. ArbitrationAmendments to NSDL Bye-Laws require the approval of the Board of Directors of NSDL andSEBI. 46
  • 47. Working of Depository systemBusiness Rules of NSDLAmendments to NSDL Business Rules require the approval of NSDL Executive Committee andfiling 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_ Stock lending and borrowing facilities 47
  • 48. Working of Depository systemFee Structure of NSDL NSDL charges the DPs and not the investors directly. These charges are fixed. The DPsin turn, are free to charge their clients, i.e., the investors for their services. Thus, there is atwotier fee structure.Inspection, Accounting and Internal Audit NSDL obtains audited financial reports from all its DPs once every year. NSDL alsocarries out periodic visits to the offices of its constituents - RT agents, DPs and clearingcorporations ± to review the operating procedures, systems maintenance and compliance with theBye-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 in practice.The Board of Directors appoints a Disciplinary Action Committee (DAC) to deal with any matterrelating to DPs clients, Issuers and RT agents. The DAC is empowered to suspend or expel aDP, declare a security as ineligible on the NSDL system, freeze a DP account and conductinspection 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 againstthe action 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 power tostay the operation of the orders passed by the DAC. The information on all such actions has to befurnished to SEBI.Settlement of Disputes All disputes, differences and claims arising out of any dealings on the NSDL, irrespectiveof whether NSDL is a party to it or not, have to be settled under the Arbitration and ConciliationAct 1996. 48
  • 49. Working of Depository system Technology and Connectivity in NSDLSystem View of NSDL Depository System 49
  • 50. Working of Depository system Account holders (investors) open account with the DPs. The account details, entered in acomputer system maintained by Depository Participants called DPM, are electronically conveyedto the central system of NSDL called DM. Companies who have agreed to offer demat facility totheir shareholders use a computer system called DPM (SHR) to connect to the NSDL centralsystem. DPM (SHR) may be installed by the company itself or through its RT Agent. Thissystem is used to electronically receive demat requests, confirm such requests or to receivebeneficial owner data (Benpos) from the depository. Stock exchanges receive pay-in (receivingsecurities against sales made by brokers) or to payout (giving securities to brokers against theirpurchases) using a computer system connected to NSDL called DPM (CC). All the computer systems installed by DPs (DPM-DP), companies (DPM-SHRs), andstock exchanges (DPM-CC) are connected to NSDL central system (DM) through V-SAT (verysmall aperture terminal) or leased lines. These are collectively called Business Partner Systems.Any transaction conducted by any computer system in the NSDL depository system which istargetted to reach any other computer system first gets recorded in DM and then will reach thetarget. No two business partners systems can communicate to each other without passingthrough the DM.Maintenance of Accounts at the Central System The 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 connected toit are first effected in the central system and subsequently at these computers. Thus, the centralsystem of NSDL has the records of all details of every transaction conducted in the depositorysystem.Distributed Database Each of the computer systems connected to NSDL system has its own database relating toits clients. 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. 50
  • 51. Working of Depository systemCommon Software NSDL develops software required by depository participants, companies, RT Agentsand clearing 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 develop softwareof their own for co-ordination, communication and control and provide service to their clients.Such exclusive software is called back office software. DPM system given by NSDL givesexport and import facility to take out the transaction details to be used by back office softwareand to feed in transaction details generated from the back office software.Connectivity The computer system used by DPs, companies, RT Agents and stock exchanges may beconnected to NSDL central system through V-SAT network or leased line network. NSDL usesNSEs V-SAT network for the connectivity purposes. Thus, V-SATs used by NSE brokers canconnect to NSDL if the software supplied by NSDL is used. V-SAT uses satellites forcommunication purposes. Some business partners may connect using leased lines provided byMTNL/ BSNL. V-SAT or leased line connections are called primary connectivity. If primaryconnectivity fails for any reason, BPs must have the ability to connect through other means. Suchother means are PSTN lines, ISDN lines, POP lines(normal telephone lines) through which theycan dial in to the NSDL system and conduct their transactions. 51
  • 52. Working of Depository systemCentral Depository Services (India) Limited 52
  • 53. Working of Depository system Central Depositary Securities Limited A 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 agent ofthe depository, offers depository services to investors. According to SEBI guidelines, financialinstitutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who isknown as beneficial owner (BO) has to open a demat account through any DP fordematerialisation of his holdings and transferring securities. The balances in the investors account recorded and maintained with CDSL can beobtained through the DP. The DP is required to provide the investor, at regular intervals, astatement of account which gives the details of the securities holdings and transactions. Thedepository system has effectively eliminated paper-based certificates which were prone to befake, 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 leadingbanks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, StandardChartered Bank, Union Bank of India and Centurion Bank.CDSL was set up with the objective of providing convenient, dependable and secure depositoryservices at affordable cost to all market participants. Some of the important milestones of CDSLsystem are:CDSL received the certificate of commencement of business from SEBI in February, 1999 1) Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of CDSL on july 15,1999. 2) Settlement of trades in the demat mode through BOI Shareholding Limited, the clearing house 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 connectivity with CDSL. 4) As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities, 53
  • 54. Working of Depository system bonds, debentures, commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL system. Shareholders of CDSL CDSL was promoted by Bombay Stock Exchange Limited (BSE) in association withBank of India, Bank of Baroda, State Bank of India and HDFC Bank. BSE has been involvedwith this 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 shareholders witheffect from 11th December, 2008 is as under.Sr. Name of shareholders Value of % terms to total equityNo. holding (in Rupees Lacs) 1 Bombay Stock Exchange Limited 3,825.46 36.61 2 Bank of India 1,000.00 9.57 3 Bank of Baroda 1,000.00 9.57 4 State Bank of India 1,000.00 9.57 5 HDFC Bank Limited 1,500.00 14.36 6 Standard Chartered Bank 750.00 7.18 7 Canara Bank 674.46 6.45 8 Union Bank of India 200.00 1.91 9 Bank of Maharashtra 200.00 1.91 10 The Jammu and Kashmir Bank Limited 200.00 1.91 11 The Calcutta Stock Exchange 100.00 0.96 Association Limited 12 Others 0.08 -- TOTAL 10,450.00 100.00 54
  • 55. Working of Depository system A professional Board of Directors with vast and varied experience in capital markets andbanking is at the helm of affairs at CDSL.Board of DirectorsMr. S S Thakur ChairmanMr. V V Raut Managing Director and Chief Executive OfficerMr. P S Reddy Executive DirectorMr. M. R. Mayya Independent DirectorMr. Madhu Kannan Sponsor Director ± Bombay Stock Exchange LimitedMr. L. P. Aggarwal Sponsor Director ± Bombay Stock Exchange LimitedMr. Prakash R. Kacholia Sponsor Director ± Bombay Stock Exchange LimitedMr. Anjan Barua Sponsor Director - State Bank of IndiaMr. A. D. M. Chavali Sponsor Director - Bank of BarodaMr. A. R. Kuppuswamy Sponsor Director - Bank of IndiaManagement 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 55
  • 56. Working of Depository system 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 for Member Accounts 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.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 56
  • 57. Working of Depository system RESEARCHMETHODOLOGY 57
  • 58. Working of Depository system RESEARCH METHODOLOGY Research Methodology refers to search of knowledge .one can also define reseachmethodology as a scientific and systematic search for required information on aspecific topic. The word research methodology comes from the word ³advance learner µs dictionarymeaning of research as a careful investigation or inquiry especially through research for newfacts in my branch of knowledge for example some author have define research methodology assystemstized effort to gain new knowledge. OBJECTIVES OF THE STUDY y To understand the basic term and process in depositary system. y Get specific knowledge about NSDL and CSDL and its investor pattners. y Provide aducate and desirable information for the readers. y To find out that factors or speculations those are responsible for creating a negative image of DS in the mind of investor. y Getiting the information about the awareness of depository system. y Find out the satisfactory level of the investors regarding this system. TYPES OF RESEARCHANALYTICAL RESEARCH: It has to used facts or information already available and analyzethese to make a critical evaluation of material.SAMPLE SIZE: Considering the constraints it was decided to conduct the study based onsample size of 50 people in specific age groups. 58
  • 59. Working of Depository system METHODS OF DATA COLLECTIONIn the project work Primary data secondary data (both) sources of data has been used: .PRIMARY SOURCE: I have gathered information about our project from the interaction withthe customers of our company i.e. Reliance Money. The sampling method used was basicallyconvenience sampling and most of the calls made were cold calls made on the generateddatabase of recipients of other companies.SECONDARY DATA: The secondary data, I have collected from the various websites ofreliance money, various journals, magazines etc. TOOL OF ANALYSISIn the project work quantitative technique percentage method has been used. RESEARCH DESIGN For the proper analysis of data simple quantitative technique such as percentage wereused. It help in marketing more accurate generalization From the data available .The data whichwas collected from a sample of population was assumed to be representing entire population wasinterested . 59
  • 60. Working of Depository systemDATA ANALYSIS ANDINTERPRETATION 60
  • 61. Working of Depository systemQues. 1) Are you know about Depository system? A) Yes 47 B) No 03 Respondents 6% Yes No 94% 61
  • 62. Working of Depository systemQues. 2) Have you sufficient knowledge and awareness about NSDL or CSDL? A) Yes B) No C) To Some extend A) Yes 12 B) NO 15 C) To some extent 23 Respondents 24% Yes 46% No To some extend 30% 62
  • 63. Working of Depository systemQues. 3) Are you satisfy with fee structure of depository system? A) Yes B) No C) To Some extent A) Yes 17 B) No 27 C) To some extends 06 30 25 20 15 27 10 17 5 6 0 Yes No To some extend Respondents 63
  • 64. Working of Depository systemQues. 4) By which depository company you make trading? A) Sharekhan B) Indiabulls C) Reliance D) ICICI direct.com E) Other A) Sharekhan 07 B) Indiabulls 11 C) Reliance 14 D) ICICI direct.com 08 E) Other 10 14 12 10 8 14 6 11 10 8 4 7 2 0 Sharekhan Indiabulls Reliance ICICI direct.com Other Respondents 64
  • 65. Working of Depository systemQues. 5) If your selected trading company increase there annual charges will yougo with it? A) Yes B) No C) If charges are reasonable A) Yes 02 B) No 29 C) If charges are 19 reasonable Respondents Yes 4% If charges are resonable 38% No 58% 65
  • 66. Working of Depository systemQues.6) According to you which one is the most important factor for a tradingcompany to enhance the loyalty and customers ? A) Provide maximum profit B) Provide tips time to time C) No hidden charges D) Other factors A) Provide maximum profit 17 B) Provide tips time to time 08 C) No hidden charges 18 D) Other factors 07 Respondents Provide max profit Provide tips No hidden charges Other factors 14% 34% 36% 16% 66
  • 67. Working of Depository system OBSERVATION To st udy t he above Doughnut , Graph and pie chart s I obser ve t hat t hemo st o f t he people o f pat hankot have knowledge about deposit or y s yst em butt hey have not a proper and basic knowledge about t his vast concept only limit edin fo r mat io n is t her e. According t o dat a analysis result represent below. y After analysis of first one question it clear that only 03 (6%) respondents are not introduce with term depository system but majority is goes with yes option 47 (94%) . y Data of second question is shows that only 12 respondents have a sufficient knowledge about CSDL and NSDL it means most of respondent have a no or only little bit knowledge about these two terms data says that 15 respondents go with no and 23 go with to some extent. y With observation of third question we find out that the most of the public of pathankot are not satisfy with present fee structure of depository system.Data represents that 27 respondents are not satisfy whereas 17 are satisfy and 06 are satisfy only some extents. y The observation of this question explain that the sharekhan trading company is not popular in pathankot area because only o7 respondents are make trading with it, After that ICICI direct.com comes and get 08 votes, reliance get maximum votes 14 and 10 respondents making trading with other companies. In this question its clear that Reliance is popular trading company in pathankot area. y Fifth one question is basically include in this questioner for knowing the loyalty of public, regarding its trading company. According to data 29 respondents are not switchover to other company while its present trading company increase its annual fee. It means peoples are satisfy with its trading company and loyal about it. 67
  • 68. Working of Depository systemy Last question of my questioner is very essential for find the factor which are directly influence the amount and loyalty of the customer. Data shows that most of peoples (18) realized that hidden charges are very default factor in decreasing the number of customers and its loyalty. Whereas 17 respondents are says that Maximum profits are the main factor, 08 go with time to time tips and only 07 respondents select other factors option. 68
  • 69. Working of Depository system SUGGESTION RECOMMENDATIONS SUGGESTIONSy Regular statements of holdings should be made available at regular intervals.y The statement of holdings should be provided with the sale and purchase of the shares.y Awareness of functioning of this system should be spread to the public through advertisement.y Clear picture of the deductions made by depository participant or the charges levied on the customers should be provided in black and white.y Proper feedback should be taken into consideration. For e.g. calls should be made when the account is opened.y Bank should expand its network by opening its more branches and franchise and there should be easy accessibility of services rendered by a this system.y The processing of the demat account opening should be made fast.y Aggressive efforts should be made by sales team to tap the potential customers and to increase the customer base.y The bank should launch more welfare schemes from time to time.y The e-broking service should be introduced.y Customers should be made aware about the services like phone banking, net banking, bill pay, dematerialization etc. an instruction manual telling about how to use their services can also be given to the customer to make these advanced services more popular. 69
  • 70. Working of Depository system LIMITATIONy Whole area is not covered in this project so only 50 respondents are representative for complete area its not ideal data.y The study is limited to the different schemes available under the Demat account selected.y The lack of information sources for the analysis part is also a limitation of this study.y Less awreness about this system in public is very critical block in this study.y In this sytem vast financial terms are comes in this system but peoples are not introduce with it so peoples are only limited knoweldge about this system and not get sufficent profit from this system. 70
  • 71. Working of Depository system CONCLUSION To conclude, it can be said that the research findings clearly reveal the goodwill andreputation of depository system among the customers. But there is a need to strengthen thisdepository system by spreading awareness about the services offered by NSDL, CSDL and itstrading companies through advertisement and by expanding the more branches of this system allover the country and also by tapping the potential customers through innovative means. 71
  • 72. Working of Depository system BIBLIOGRAPHYWebsiteswww.reliamcemoney.comwww.icicidirect.comwww.sharekhan.comwww.indiabulls.comwww.moneycontrol.comwww.rediff.comReferred books 1. Financial institutions and markets-L.M.Bhale 2. Investment management-V.K.Bhalla 3. Research methodology-Mohit gupta,Navdeep Aggarwal 4. Financial services- Shashi k. gupta, Nisha aggarwal 72
  • 73. Working of Depository systemORIGNAL SYNOPSIS 73
  • 74. Working of Depository system74
  • 75. Working of Depository system QUESTIONEERIEQues. 1) Do you know about Depository system? A) Yes B) NoQues. 2) Have you sufficient knowledge and awareness about NSDL or CSDL? A) Yes B) No C) To Some extentQues. 3) Are you satisfied with fee structure of depository system? D) Yes E) No F) To Some extentQues. 4) By which depository company do you make trading? F) Sharekhan G) Indiabull H) Reliance I) ICICI direct.com J) OtherQues. 5) If your selected trading company increases their annual charges will yougo with it? D) Yes E) No F) If charges are reasonableQues.6) According to you which one is the most important factor for a tradingcompany to enhance the loyalty and customers? A) Provide maximum profit B) Provide tips time to time C) No hidden charges D) Other factors 75

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