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    Dattu.project Dattu.project Document Transcript

    • CHAPTER- I INDUSTRY PROFILE The origin of stock market in India goes back to the later part of the 18th century.The earliest security dealing was transactions in securities of the east India Company, thedominant institution of those days. Corporate shares came to the picture by 1830s andassumed significance with the enactment of the companies’ act 1850. The introduction oflimited liability marked the beginning of the era of modern joint stock enterprises. TheAmerican civil war followed this in 1860-65. However, the bubble burst with the end ofcivil war and disastrous slump followed. It was long and severe. It also resulted incomplete ostracism of the broker community. The tremendous social pressure on thebrokers led to their forming an informal association which later gave birth to "the nativeshare & stock brokers association", on 9th July, 1875, which is now known as BombayStock Exchange Ltd. The main contribution made for the Bombay Stock Exchange Ltd was by thecotton textile industry that was also the prime factor in the development of theAhmedabad as a center for dealing in stocks and shares. As new cotton textile millsfloated and volume of business grew, the "Ahmedabad share and stock brokersassociation" was formed in 1894. This later came to known as the Ahmedabad stockexchange. The next stock exchange was established in Calcutta in 1908. The industries thatcontributed to its birth and subsequent development were jute, coal and mining. Like theBombay stock exchange Ltd, it was born out of a crisis when the boom of 1904-08 brokeand a need was felt for an organized body for mutual protection of brokers and safety ofthe trade. 1
    • With the World War I, all imports into India ceased and the Indian manufactureswere faced with a boom. The three stock exchanges flourished during the period ofProsperity. However, the boom also led to the formation of many rival stock exchanges. TheWorld War II also resulted in a boom and mushroom growth of stock exchanges.However, many of them perished during the slump that followed. Most of the other stock exchanges languished till 1956 when government cameout with a comprehensive legislation called the "Securities contract (regulation) act", toregulate the functioning of stock exchanges. This legislation made it mandatory on thepart of stock exchanges to secure recognition from the central Govt, only the establishedstock exchanges in Mumbai, Ahmedabad, Calcutta, Chennai, Delhi, Hyderabad andIndore were recognized under the act. More stock exchanges were recognizedsubsequently. At present the stock market consists of 23 regional stock exchanges and threeNational stock exchanges known as NSE, BSE and OTCEI (over the counter exchange ofIndia).Stock/Securities Market: Stock markets are markets of financial assets or Negotiable instruments. Businessorganizations, corporate units and the Governments, central or state, issue these. Publicsector undertakings also issue these Securities. These Securities are used to finance theirinvestment and current expenditure. These are thus one of the important sources of fundsto the issuers of the securities. 2
    • Securities are the claims on money and are like promissory note or I.O.U. (I OweYou) securities are source of fund for companies, Govt. etc. the external sources of fundsof the companies are as follows:The Securities market is classified into:1)Primary Market: A primary market is market where Securities are issued to the public for the firsttime. New issues are dealt in this market. The new issues market has three functions toperform organization, underwriting, and distribution. There are three ways by whichcompany may raise capital in primary market.1)Public issue2)Right issue3)Private placement The Merchant Bankers, Collecting Bankers, Registrars and Transfer Agents,Brokers, Underwriters, Advertising agencies, Printers, Sub-Brokers and Solicitors andMailing agents act as Intermediaries in the Primary Market.2)Secondary Market: The markets where securities, which have already issued in the primary market,are traded is called a Secondary Market. This market consists of all stock exchangerecognized by the Govt, of India, are regulated under the Securities contract (regulation)act 1956. The Bombay Stock Exchange (BSE) is the principle stock exchange in India,which sets the tone of the other stock market. 3
    • The Brokers, Jobbers, Dealers, Arbitrators, Investment Advisors, Portfolio Managersand Sub-Brokers act as Intermediaries in Secondary Market. STOCK EXCHANGEstands forSecurity provider for investorTax benefits, planning and exemptionsOptimum return on investmentCautious approachKnowledge of marketEligibility for accrualsX change of Securities transactionsCyclopedia of listed companiesHigh yieldAuthentic informationNew entrepreneursGuidance to investors & companiesEquity cultThe Securities Exchange Regulation act 1956 A bill was introduced in the parliament in December 1954 by the Gorawallacommittee and recommended on the lines of functioning of stock exchanges. 4
    • Securities and Exchange Board of India(SEBI) Securities and Exchanges Board of India (SEBI) was set up in 1988 and givenstatutory status in January 1992 for healthy regulation of capital markets. The controllerof capital issue (CCI) was abolished and companies have to approach market directly,subject to SEBI guidelines relating to disclosures and other measures of investorprotection.Functions of SEBI•To regulate the business in stock exchanges.•To register and regulate intermediaries associated with securities market as well asworking of mutual funds.•Promote and regulate self-regulating organization.•Prohibit fraudulent and unfair trade practices relating to securities transactions.SEBI-footmarks SEBI has taken several steps, since its establishment, to reform the Securitiesmarkets. Some of the important ones are summarized below:•All companies, which access the capital markets, are free to price their issue, subject tocertain conditions.•Restrictions on rights and bonus issues have been removed.•Issuers are required to meet SEBI guidelines for disclosure and investor protection.•The minimum application has been reduced to Rs.2000 from earlier level of Rs.5000.•The use of "Stock Invest" by individuals and mutual funds, to mitigate the locking in offunds.•In case of over subscription, SEBI has directed the following of the system ofproportionate allotment.•SEBI has permitted the substantial firm allotment to institutions in public issue as 24%to foreign institutional investors, 20% to Indian financial institutions.•Number of collection centers has been reduced to a minimum of 30. 5
    • CHAPTER- II PROFILE OF THE HYDERABAD STOCK EXCHANGE LIMITEDHistory:India capital market has witnessing rapid growth in recent past; the key indicators oncapital market have proven this point. However, this growth volume of paper that hasflooded the market checking out existing system, as the market grows there is a need forbetter system to ensure that such restrictions to growth are removed. The foreigninvestors seeking to invest in India are also apprehensive about their liability of the posttrade settlement mechanism used in India.The biggest deterrent or bottleneck in India capital market is largely manual and paperbased settlement system in Indian stock exchange have been under constant review.The main deficiencies have been identified in two broad areas  The clearing and settlement system in stock exchange where by delivery of shares by seller and payment by the purchaser is made and  Procedure for transfer of shares in the name of the purchaser current procedure result in excessive paper work, delays in cleaning and settlement, work duplication, bad delivery, on transference in costs and prices at which customer’s orders are executed have promoted setting up of depositorsObjectives:  Promote, develop and maintain a well-regulated market for dealing in securities.  Safe guard the interest of the members and the investing public.  Establish and promote honourable and fair practices in the securities tranctions. 6
    • Growth: The Hyderabad Stock Exchange Ltd., established in 1943 as a Non-profit makingorganization, catering to the needs of investing population started its operations in a smallway in a rented building in Koti area. It had shifted into Aiyangar Plaza, Bank Street in1987. In September 1989, the then Vice-President of India, Hon’ble Dr. Shankar DayalSharma had inaugurated the own building of the Stock exchange at Himayathnagar,Hyderabad. Later in order to bring all the trading members under one roof, the exchangeacquired still a larger premises situated 6-3-654/A; Somajiguda, Hyderabad – 82, with asix storied building and a constructed area of about 4,86,842 sft (including cellar of70,857 sft). Considerably, there has been a tremendous perceptible growth, which couldbe observed from the statistics. The number of members of the Exchange was 55 in 1943, 117 in 1993 andincreased to 300 with 869 listed companies having paid up capital of Rs.19128.95 croresas on 31/03/2000. The business turnover has also substantially increased to Rs. 1236.51crores in 1999-2000. The Exchange has got a very smooth settlement system. 7
    • Governing board:At present, the Governing Board consists of the following:Members of the ExchangeSmt. Meena H. BhattadSri. Hari Kishan AttalSebi Nominee DirectorsSri. N.S. Ponnunambi Registrar of Companies [Govt. of India.]Public Nominee DirectorsDr. N.R. Sivaswamy (Chairman, HSE) FormarCBDT ChairmanJustice V. Bhaskara Rao Retd. Judge High CourtSri P. Muralimohan Rao Mogili&Co.-Chartered AccountantsDr B. Brahmaiah G.M. JNIDBExecutive directorSri S SARVESHWAR 8
    • HSE FEATURES:1. Computerization: The Stock Exchange business operations are equipped with moderncommunication systems. Online computerization for simultaneously carrying out thetrading transactions, monitoring functions have been introduced at this Exchange since1988 and the Settlement and Delivery System has become simple and easy to theExchange members. The HSE On-line Securities Trading System was built around the mostsophisticated state of the art computers, communication systems, and the provenVECTOR Software from CMC and was one of the most powerful SBT Systems in thecountry, operating in a WAN environment, connected through 9.6 KBPS 2 wire LeasedLines from the offices of the members to the office of the Stock Exchange at Somajiguda,where the Central System CHALLENGE-L DESK SIDE SERVER made of SiliconGraphics (SGI Model No. D-95602-S2) was located and connected all the members whowere provided with COMPAQ DESKPRO 2000/DESKTOP 5120 Computers connectedthrough MOTOROLA 3265 v. 34 MANAGEABLE STAND ALONE MODEMS (28.8kbps) for carrying out business from computer terminals located in the offices of themembers. The HOST System enabled the Exchange to expand its operations later to otherprime trading centers outside the twin cities of Hyderabad and Secunderabad.2. Clearinghouse: The Exchange set-up a Clearinghouse, to collect the securities from all themembers and distribute to each member all the securities due in respect of everysettlement. The whole of the operations of the Clearing House were also computerized.At present through DP all the settlement obligations are met. 9
    • 3. Inter – connected market system (icms): The HSE was the convener of a Committee constituted by the Federation ofIndian Stock Exchanges for implementing an Inter-connected Market System (ICMS) inwhich the Screen Based Trading systems of various Stock Exchanges was inter-connected to create a large National Market. SEBI welcomed the creation of ICMS. The HOST provided the network for HSE to hook itself into the ISE. The ISEprovided the members of HSE and their investors, access to a large national network ofStock Exchanges. The Inter-connected Stock Exchange is a National Exchange and all HSEMembers could have trading terminals with access to the National Market without anyfee, which was a boon to the Members of an Exchange/Exchanges to have the tradingrights on National Exchange (ISE), without any fee or expenditure.4. On-line surveillance: HSE pays special attention to Market Surveillance and monitoring exposures ofthe members, particularly the mark to market losses. By taking prompt steps to collect themargins for mark to market losses, the risk of default by members is avoided. It isheartening that there have been no defaults by members in any settlement since theintroduction of Screen Based Trading.5. Improvement in the volumes: It is heartening that after implementing HOST, HSEs daily turnover has fairlystabilized at a level of Rs. 20.00 crores. This should enable in improving our rankingamong Indian Stock Exchanges for 14th position to 6th position. We shall continuouslystrive to improve upon this to ensure a premier position for our Exchange and itsmembers and to render excellent services to investors in this region. 10
    • The number of transactions, turnovers of the Exchange, number of listd companies andthe paid up capital listed have grown up substainally as may be seen from the followingfigures. NUMBER OF MARKET TURNOVERS LISTEDYEAR TRANSACTIONS CAPIT Rs.IN Crores COMPANIES IN Thousands Rs.IN Crores1991-92 515.949 587.75 236 2740.561992-93 421.985 676.00 274 10228.481993-94 603.635 984.46 372 13156.151994-95 860.642 1160.48 668 18588.711995-96 720.521 1107.30 727 20159.311996-97 240.64 479.98 851 22050.691997-98 427.83 1860.86 852 18705.101998-99 513.168 1269.90 856 18753.931999-00 513.440 1236.51 869 19128.952000-01 427.205 977.83 934 14717.082001-02 34.326 41.26 . .2002-03 4.203 4.58 . .2003-04 2.277 2.73 856 22126.652004-05 4.401 14.13 820 14456.956. Settlement guarantee fund: The Exchange has introduced Trade Guarantee Fund on 25/01/2000. This willinsulate the trading member from the counter-party risks while trading with anothermember. In other words, the trading member and his investors will be assured of thetimely completion of the pay-out of funds and securities notwithstanding the default, ifany, of any trading member of the Exchange. The shortfalls, if any, arising from the thedefault of any member will be met out of the Trade Guarantee Fund. several pay-insworth of crores of rupees in all the settlements have been successfully completed afterthe introduction of Trade Guarantee Fund ,without utilizing any amount from the TradeGuarantee Fund. The Trade Guarantee Fund will be a major step in re-building this confidence ofthe members and the investors in HSE. HSEs Trade Guarantee Fund has a corpus of Rs. 11
    • 2.00 crores initially which will later be raised to Rs. 5.00 crores. At present Rs. 3.20Crores is stood in the credit of SGF.The Trade Guarantee Fund had strict rules and regulations to be complied with by themembers to avail the guarantee facility. The HOST system facilitated monitoring thecompliance of members in respect of such rules and regulations.Current diversifications:1. Depository participant: The Exchange has also become a Depository Participant with National SecuritiesDepository Limited (NSDL) and Central Depository Services Limited (CDSL). Our ownDP is fully operational and the execution time will come down substantially. TheExchange undertakes the depository functions by opening the accounts at Hyderabad ofinvestors, members of the Exchange and other Exchanges. The trades of all theExchanges having On-line trading which get into National depository can also be settledat Hyderabad by this exchange itself. In short all the trades of all the investors andmembers of any Exchange at Hyderabad in dematerialised securities can be settled by theExchange itself as a participant of NSDL and CDSL. The exchange has about 15,000B.O. accounts.2. Floating of a subsidiary company for the membership of major stock exchangesof the country:The Exchange had floated a Subsidiary Company in the name and style of M/s HSESecurities Limited for obtaining the Membership of NSE and BSE. The Subsidiary hadobtained membership of both NSE and BSE. About 113 Sub-brokers may register withHSES, of which about 75 sub-brokers are active. Turnover details are furnished hereunder. 12
    • BSE NSE CASH NSE F&OYEAR CASH Rs.In Lakhs Rs.IN Lakhs Rs.IN Lakhs2001-02 338236.81 -- --2002-03 426143.50 16657.08 --2003-04 617808.46 312203.56 17558.592004-05 484189.11 354370.71 39519.963. Facility To Trade At Nse, Derivatives Trading, Net Trading Etc. The Exchange has incorporated a subsidiary "HSE securities Limited” with a paidup capital of Rs. 2.50 crores initially to take NSE Membership, so that the members ofthe exchange will have access to the NSEs Trading Screen as Sub-brokers, DerivativesTrading and Net Trading etc. The Members of this Exchange will also have equalopportunity of participating in such trading like any other NSE member. 13
    • CHAPTER- III DESIGN OF STUDYObjectives of the study:  To know the mechanism in Demateralisation of shares  To study the activities in Primary market and the Secondary market in the context of Demateralisation.  To study the activities of Depository Participants(DP)  To study the process of Settlement Procedure  To know the advantages of the Demateralisation of shares  To know the services provided by the Depository Participant.(DP) 14
    • METHODOLOGY OF STUDY The data collection methods include both the primary and secondary collectionmethods.  Primary sources: This method includes the data collection from the personal discussion with the authorized members of the THE HYDERABAD STOCK EXCHANGE.  Secondary sources: The secondary collection methods includes the lecture of the superintend of the department of market operation etc. and also the data collected for the news, magazines of THE HYDERABAD STOCK EXCHANGE and different books, issues of this study.Limitations of the study The study confines to the past 2-3 years and present system of the dematerialization process adopted by THE HYDERABAD STOCK EXCHANGE and is confined to the coverage of all the related areas like the study of Depository Participants. 15
    • CHAPTER- IV INTRODUCTIONIndia capital market has witnessing rapid growth in recent past; the key indicators oncapital market have proven this point. However, this growth volume of paper that hasflooded the market checking out existing system, as the market grows there is a need forbetter system to ensure that such restrictions to growth are removed. The foreigninvestors seeking to invest in India are also apprehensive about their liability of the posttrade settlement mechanism used in India.The biggest deterrent or bottleneck in India capital market is largely manual and paperbased settlement system in Indian stock exchange have been under constant review.The main deficiencies have been identified in two broad areas  The clearing and settlement system in stock exchange where by delivery of shares by seller and payment by the purchaser is made and  Procedure for transfer of shares in the name of the purchaser current procedure result in excessive paper work, delays in cleaning and settlement, work duplication, bad delivery, on transference in costs and prices at which customers orders are executed have promoted setting up of depositorsDefinition: Dematerialisation of shares: Conversion of securities from physical (paper) formto electronic form and credited in the investors (Beneficial Owners) account with hisdepository participant. (DP) 16
    • Basics of Dematerialisation:Demat is a process by which physical shares of investors are converted into an equivalentnumber of securities in electronic form and are credited in the investors account with hisdepository participant (DP).Demat trading is now compulsory for all investors. Beginning of first week of January1999, investor can trade in specific scripts in the demat form. They can provide andreceive delivery only in a dematerialized form and share certificates will not be changedfor these scrip’s.A depository is an organization where securities of shareholder and held in the electronicform at the request shareholder through depository participants, the system comparable tothat in a bank. If an investor wants services offered by a depository, he would have toopen an account with it through a DDP – similar to opening an account with any otherbranches of the bank in order to avail of its services. Dematerialization is a process bywhich physical certificates of an investor or taken back by the co. / register and actuallydestroyed and equivalent numbers of securities are credited in the depository account ofthat investor. A depository participant is investor’s agent in this system he maintainsinvestor’s securities account and intimates the status of holdings from time to time to theinvestors.Process of DematerializationIn order to dematerialise his certificates, an investor will have to first open an accountwith a depository participant. And then request for the dematerialization of thesecertificates by filling up ‘DEMATERIALIZATION REQUEST FORM’ which will beavailable with any DP. The ISIN name and number should be mentioned. This is toensure that the security mentioned in the demat request form is it has the one clientintended to dematerialised. 17
    • Steps:  An investor has to submit the request form along with the share certificate, which is to be dematerialised to depository participant.  The depository participant gives the denial order to NSDL through the system.  The depository participants submit the share certificates DRF, DRN to the issuer/ RTA.  NSDL sends the denial request to the issuer/RTA.  The issuer/RTA sends conformation/rejection statement after checking the validity.  NSDL in turn sends the status intimation to the DP.  The issuer/RTA sends the objection memo to DP.  DP gives the statement of holding to the client.This takes about 15 days from the date of request. Electronic holdings can be convertedback into certificated, if so desires, in a similar fashion as that for demat.These companies are compulsory traded in dematerialised form from January 4th 1999.1. BANK OF INDIA2. BPCL3. BSES4. HDFC5. IDBI 18
    • 6. ICICI7. L & T8. SBI9. VSNL10. WIPRO11. INFOSYSFrom February 15th 19991. ACC2. M&M3. HPCL4. ABB5. NET6. SAIL7. Madras refineries8. Tata Tea9. Asian Paints10. Castro India11. Cochin refineries12. Ranbaxy13. Gujrat Ambuja cement14. Hero Honda15. DR.Reddys lab.16. Bajaj Auto17. Birla Global Fin.18. TVS Suzuki19. Thermax 19
    • From April 15th 19991. BHEL2. HLL3. IFCL4. IPCN5. ITC6. MTNL7. P&G8. Arvind mills9. Cipla10. Colgate11. Eih ltd.12. GE shipping13. Glasco India14. Grasim India15. HDFC BANK16. Hindal co.,17. Indian hotels18. Indian rayon19. Nestle20. Oriental bank21. Reliance capital22. Reliance petrol23. Reliance India24. Smith line consumers25. Tata chemicals26. Tata power27. Telco28. Tisco29. Novartis 20
    • Pre – requisities for dematerialisation:1. Client to have an account with DP.2. Securities should be one from the eligible list of demat securities issued by thedepository.3. Securities must be in the name of the account holder and owned by him.4. Separate demat requisition form (DRF) is required of each ISIN (issuer).5. Separate DRN is required for lock in and lock free securities.6. All the joint holders should sign DRF form.Operational Procedure for Dematerialisation:The entire process of dematerialization of shares begins with the opening of an accountwith a depository participant by an investor. He requests the depository participant by aninvestor. He requests the depository participant for dematerialization of shares certificatesby submitting the same along with a demat request form to the depository participant.The certificates are forwarded to the company/register and share transfer agent whoprocesses them and who gives an equivalent credit in the investor’s beneficiary account. 21
    • Steps involved:1.Investor surrenders certificates for dematerialization to depository participant.2.Depository participant intimated NSDL of the request through the system.3.Depository participant submits the certificates to the register.4.Register confirms the dematerialization request for NSDL.5.After dematerialization, certificate, register updates accounts and informs NSDL of thecompletion of demat.6.NSDL updates its accounts and informs the DP.7.DP updates its account and informs investor.ADVANTAGES OF DEMAT:Transacting the depository way has several advantages over the traditional system ofshare certificates:Trading in demat segment completely eliminates the risk of bad deliveries which in turnall cost and wastage of time associated with follow up for rectification. This reduction; inrisk associated with bad delivery has lead to reduction in clearing member age to theextent of 0.5% can be saved in stamp duty.In case of transfer of electronic shares, 0.5% can be saved in stamp duty.Cost of delay/courier/neutralization/the need for further follow up with the clearingmember for shares returned for company/s objection, which happens only in case ofphysical securities scan, be avoided. 22
    • The investor can also avoid the expense of applying for duplicate certificates in case ofloss/mutilation of certificates.The investor can also receive your bonuses and rights into your depository account as adirect credit, thus eliminating risk of loss in transit.One can also expect a lower interest charge for loans taken against demat shares ascompared to the interest for loan against physical shares. This could result in a saving ofabout 0.25% to 1.5%.RBI has increased the limit of loans against dematerialized securities as collateral toRs.20lakh per borrower as against Rs.10lakh per borrower in case of loans againstphysical securities.RBI also reduced the minimum margin to 25% for loans against dematerialized securitiesas against 50% for loans against physical securities.1. Facilitation of cash corporate actions such as dividends:NSDL provides details of beneficial owners as on a given day (the record date) to theissuer company/registrar so as to enable the company’s registrar and transfer agentsforward the cash benefits to the investor directly.2. Lending and borrowing of securities:A client (lender/borrower) having a beneficiary account with the DP can lend or borrowsecurities in electronic form through an approved intermediary, who has opened a specialintermediary account with a DP. The creation of lend/borrow instruction will be initiatedby lender/borrower respectively through his DP. The intermediary will instruct its DP toconfirm the instruction. Recall/repay/lend/borrow order can be initiated by thelender/borrower or by the intermediary and is to be confirmed by the counter party.3. Off market trades:Off market trades are those, which are not cleared through CC/CH accordingly, this arenot routed through the CM pool account. 23
    • The buyer & seller negotiate the trade with each other. The seller the instruction slip to;this DP instructing him to debit his account by giving the details of buyer & the buyergives his DP to credit his account by giving the details of selling client but the instructionslip must have execution date.4. Trading, clearing & settlement of demateralised securities:Trading of demat securities is currently available at National Stock Exchange (NSE), TheMumbai Stock Exchange (BSE) and Calcutta Stock Exchange (CSE).At NSE, Demat securities are traded into separate segments called “AE segment” & “BEsegment” which are in addition to the segment for trading in securities in the physicalform called “LQ segment”.Incase of AE segment, demat securities are traded only in market lot where as in BEsegment these can be traded in multiples of one share.At BSE&CSE, dematerialized securities are traded in a separate segment called dematsegment & Physical securities are traded in unified segment.For trading in physical securities, the sub-brokers collect the trade orders from thereclients and place these orders with the main brokers for execution in the market. Themain broker enters the details of each trade against each sub-brokers in a separate keptforeach sub-broker. After execution of the trade, the main broker issues the contractor notein the name of sub-broker who in true issues separate purchase/sale note to his clients.There are only few cases in which the main broker issues the contract note in the name ofthe clients directly.Trading in demat securities is very similar to trading in physical securities except thatphysical segment follows account period settlements & demat segments follow rollingsettlement. In rolling settlement, all trades executed on the particular day will be settledon next Monday. Trades in demat segment are to be settled separately with securities heldin demat form which can’t be substituted with physical securities. In case electronicrolling settlement, short deliveries, if any, are auctioned on the 6th working day. 24
    • 5. Opening, Clearing Accounts For Settlement of Trades:All the trades executed at time exchanges are settled by the Clearing Member (CM), as inthe case of securities in the physical form to settle trades in demat segment each CMshould open one clearing account with any of the DP.The procedures for owning clearing accounts are:Approach a DP.Fill an account opening form.Sign on agreement with the DP.DP forwards application to NSDL.DP opens account & a/c is provided along with CM-BP-ID to the member.The clearing account consists of 3 parts:Pool a/cDelivery a/cReceipt a/cPool account:It has tow roles to play in clearing of securities.Before pay in the selling client of the CM transfers securities from his client account tothe CM pool account.The CM transfers the securities from his pool account of the butting client.Delivery account:The CM transfers the securities in, from the pool account to the delivery account beforepay in at that time of pay-in NSDL flushes out the securities in the delivery account andtransfer the same to the CC/CH. 25
    • Receipt account:On payout day, the CCYCH transfers securities to the pool a/c through the receiptaccount. CM had to ensure that before book closure or record date of any co. thesecurities move from CM pool a/c to a beneficiary AIC as holding in pool a/c for longerperiod is not allowed.Settlement:In the depository system, any trade that is cleared and settled through the clearingcorporation (CCICH) is called market trade.Procedure for pay-in of securities:Give receipt instruction to the DP for transfer securities from client account to the pool a/c of give a standing instruction for the same.Delivery to CCICH, instruction for the transfer of securities from pool a/c to delivery a/cfor pay-in.Procedure For Payout Of SecuritiesTransfer of securities from CCICH to pool a/c through receipt in account on payout.Delivery instruction to transfer from pool a/c to client a/c on payout. 26
    • Clearing flow chart to effect and settlement of market: SEND RECEIPT INSTURCTION FOR TRANSFERFROM CLIENT A/C TO POOL A/C GIVE DELIVERY INSTRUCTION TO YOUR DP ANYTIME BEFORE FOR TRANSFER FROM POOL A/C TO CC ANY TIME BEFORE ON PAY OUT YOU WILL RECEIVE SECURITIES OR AFTER FROM CC TO YOUR POOL A/C GIVE DELIVERY INSTRUCTION FOR TR. OF SECURITIES FROM POOL A/C TO CLIENTS A/C6. Inter-Depository TransfersTransfer of securities from one account in one depository to an account in otherdepository is termed as an inter-depository transfer. This facility is quite, similar to theaccount transefers within NSDL. It can be done only for securities that are available fordematerialization on both the depositories.The account in NSDL can be either a clearing account or a beneficiary account. Fordebating the clearing account or the beneficial account with NSDL, the form for “inter-depository delivery instructions” is required to be submitted by the clearingmember/beneficial owner to its DP.For creating the clearing account or the beneficial account, the standing instructionsgiven for automatically crediting the account is applicable. In case the standing 27
    • instructions are not given, then the form for inter-depository Receipt instruction” isrequired to be submitted by the clearing member/beneficial owner to its DP.As both the depositories are connected to each other, they matched to effect inter-depository transfers are presently exchanged twice on each working day. Both thedepositories inform the issuer/registrar & Transfer Agent about the transfer and it amendsits records accordingly. Government securities cannot be transfered from one depositoryto another using this facility.Comparative structureCompulsory demat trading applies to only stockexchanges linked to NSDL since onlythen can offer trading and settlement in shares. The fundamental difference betweensettlement of trading in physical shares and in demat shares, is the shares and the timetaken to acquire it. When physical shares were bought from a broker, the payments had tobe made first then on the settlement day the broker gives the share certificates attachedwith transfer deeds. At this juncture the shares don’t legally belong to the buyer eventhough he had paid towards the share for transfer deeds.the share certificates are sent toR&T agent/issuer by registered post or courier. It normally takes any where between oneto three months and sometimes more than six months where after long wait there is agood chance that the shares come back rejected, not transferred due to the reasons such asseller’s signature difference. If they are fake or forged, the broker has to lodge a policecompliant and follow up the issue. The buyer is entitled to receive another lot of sharesfrom the broker in 21 days, the system stands abused.In dealing with demat shares one doesn’t need to worry about the legal title at the time ofbuying since the depositories carries out account transfers electronically. The buyer alsogets the good title in his name on the same day the exchange effects the settlement. Onmost exchanges 1-2 days. In demat if the signature, on the “Delivery InstructionSlip”(DIS) that is to be submitted at time of sale, varies from the DP’S records then theDp will inform promptly about the mismatch to the buyer. The instruction will not 28
    • proceed before the mismatch is rectified. Trading in demat shares doesn’t increase thenumber of entities the buyer has to deal as in physical shares.7. Rematerialisation of shares Rematerialization is the term used for converting electronic holding backinto physical certified. The D.P will forward the investors request to NSDL afterverifying that the investors have the necessary balance. NSDL in turn will intimate theregister that will print the certified who will print the certified and dispatch the sale toinvestors. In this process NSDL does not directly handle certificates.STEPS INVOLED IN REMATERIALIZATION:1.Beneficial owner requests for rematerialization2.DP intimate NSDL of the request through system3.NSDL confirms rematerialization request to the registers4.Registers up date accounts and downloaded details to D.P5.Register dispatches certificates to investor.The investor has the potion of rematerialization his total holding or part of it. In additionto this he has the option to get the certificates in market lot or jumbo lot. In view of thebeneficially owner can rematerialize their securities even if it is an odd lot. 29
    • Drawbacks of DematerialisationMost of the investors are apprehensive and cautious about Depository system. Inspite ofhaving several benefits it has some drawbacks.  Most of the DP’S do not have the necessary infrastructure to handle the high workload of tranctions.  Banks do not provide over draft facilities for physical shares, for scrips it has been brought under demat shares.  Small investors really trade the scrips and the custody fee if very probhiting the investors thus feel demat form uneconomical.  Volume of paper works, even though small, but it is very complicated.  Asof now liquidity is one of the major problems faced and also the investors are apprehensive of the accountability.  If the personnel are inefficient in the system there may arise insurmountable problems  The accounts of small investors remain in category of dormant accounts, which they feel are likely to be misused by DP’S. 30
    • CHAPTER V FUNCTIONS OF DEPOSITORY PARTICIPANTSIn the NSDL systems the depository services investors through market intermediariescalled as depository participants (DP) who as per SEBI regulations could beorganizations involved in the business of providing financial services like bank, brokers,custodians and financial institutions. This system of using the existing distributionchannel helps the depository to reach a wide cross section of investor spread across alarge geographical area at minimum cost.The admissions of DP’s involve a detailed evaluation by NSDL of their capability tomeet with the strict service standards of NSDL and a further evaluation and approval bySEBI.Realizing the potential in this market, all the custodial in India and a number of banks,Financial institutions and major brokers have already joined as DP’s and they areproviding service in a number of cities. Many more organizations are in various ages ofestablishing connectivity into 1. Initial capital cost. 2. Annual revenue costInitial capital cost: To be incurred by a DP can be sub-divided intoa) Infrastructure cost:  Office space required for conducting depository operations. The space should be enough to allow for server, one router and two nodes and provide easy movement to at least one operator. Additional space required will vary amongst participants and will depend on the volume of trades. Most categories of participants being large institutions already having a network of offices/branches, the space cost will be notional. 31
    •  Hardware, software and telecommunications cost is more or less mandatory. They are required to use DPM application software.b) Security deposit and initial fee:The following security deposits and fee should be paid by demand draft or a banker’scheque. Participants payable areApplication fee to SEBI Rs.5000, registration fee to SEBI Rs.100000 Entry fee toRs.25000Security deposit (refundable) to NSDL Rs.1000000 Total is 1130000.Thus the total cash outlay to be incurred by a participant is Rs.24.25 lakhs (approx)Annual revenue cost: The annual revenue cost can be subdivided intoa) Fee and deposits payable to SEBIAnnual fee: Each DP must pay an annual fee Rs.1000 to SEBI as per the details given inthe second schedule of the SEBI regulations.b) Fee payable to NSDL:Annual fee: Each participant must pay fee on yearly basis from October 1 to September30 and is payable before October 31 of the following year.Transction fee: Each DP must pay the following transaction related fee.1) Nature of transction fee markets trade 0.05% of the market values for net receipt toclearing member. 32
    • 2) In respect of debt instruments and government securities, no settlement fee is chargedtill March 31 1999.  Custodial fee: A custody fee at the rate of 0.02 %( 2 basis points per annum on the average value of securities held by the participant in the dematerialized form is charged and collected quarterly on the basis of average during the quarter. In the case of debt instruments and govt.securities held by the participants in demat form is charged.  Fee for dematerialisation and rematerialisation NSDL does not charge any fee for dematerialization requests. However, in case of rematerialisation, a fee of Rs.10 per certificate or 0.10% of the value of securities, which ever is higher will be charged.Opening a Demat account:Opening a demat account is as simple as opening a bank account. You can open a demataccount with any DP convenient to you.To open an account:Fill up the account opening form, which is available with the DP.Sign the DP-client agreement, which defines the rights and duties of the DP and theperson willing to open the account.Receive client account numberThis client id along with DP id gives a unique identification in the depository system. 33
    • There is no restriction on the number of demat accounts any one can open. However, ifany physical shares are in joint names, then they should open the demat account in thesame order of names before submitting their share certificates for dematerialisation.To dematerialise share certificate:Fill up a dematerialization request form, which is available, the DPSubmit share certificates along with the form (be sure to write “surrendered for demat”on the face of the certificate before submitting)Receive credit for the dematerialized shares in 15 daysEligibility for DP’s:As per SEBI (depositories and participants) regulations, 1996.the following categories iseligible to become DP’s  Public financial institutions as defined in section 4A of the Companies Act, 1956.  Bank included in the second schedule of the RBI Act,1934.  RBI approved foreign banks in India.  State financial corporations established under section 3 of SFC Act, 1951.  Institutions engaged in providing financial services, promoted by any of the institutions mentioned above either jointly or severally.  Custodian of securities who has been granted certificate of registration u/s of SEBI Act, 1992  Clearing corporation or clearing house of stock exchanges.  Stock brokers who has been granted certificate of registration u/s 12(1) of the SEBI Act, provided that: a) They have a minimum net worth of Rs. 50 lakhs. 34
    • b) The aggregate value of the portfolio of securities held in demateralised form in a depository through each stock broker should not be more than 25 times his net worth.  Non-banking finance company provided that: a) They have a minimum net worth of Rs. 50 lakhs, if they wish to act as DP only on behalf of themselves and not on behalf of any other person. b) They have a minimum net worth of Rs. 50 crore in addition to the net worth specified by any other authority, if they wish to act as DP on behalf of any other person.The regulations empower NSDL to set its own selection criteria in the bye-laws. Thus,the applications must also comply with the following admission criteria stated in the bye-laws.  The applicant should have a minimum net worth of Rs.1 crore.  The applicant should not have been convicted in the five years immediately preceding the filling of the application in any manner involving misappropriation of funds and securities, theft, embezzlement of funds, fraudulent conversion of forgery.  The applicant should not have been expelled, barred or suspended by SEBI, self – regulatory organization or any stock exchange.Legality for DPsThe Depositories Act, SEBI (depositories and participants) regulations, byelaws andbusiness rules of NSDL, form the regulatory framework for the functioning of NSDL. As per the legal framework, the investor has the option to hold the securitieseither in physical or dematerialized securities and shift the market from physical todematerialized form. 35
    • In the first such initiative, SEBI announced a regulation that required institutionalinvestors to compulsorily deliver only in dematerialized form, with respect to a select listof securities, (which is being expanded in a phased manner). In addition to the SEBI announced that from January 4, 1999, all categories ofinvestors can deliver only in demat form with respect to a select list of securities (whichis being expanded in a phased manner). As an addition all measure to enhance the liquidity of the demat segment, SEBIdeclared that, with effect from 6th April 1998, demat share could he delivered againstdelivery obligations in the physical segments of the stock exchanges that facilitate tradingin demat securities. However, physical securities cannot be delivered against deliveryobligations to the demat segments of the stock exchanges. Thus demat shares are moreliquid than the physical shares. 36
    • Dps ServicesNSDL provides the following services through its network of DPs.DematerializationDematerialization is a process by which a client can get physical certificates converted into electronic balances maintained in its account with the DP.Settlement of Off Market TradesTrades, which are settled through the CC/CH of an exchange, are classified as "MarketTrades".Settlement of Off Market TradesTrades, which are not settled through the CCCH of an exchange, are classified as "OffMarket Trades".Pledging / Hypothecation of Dematerialised Securities NSDL provides beneficial owners with the facility to pledge / hypothecatesecurities held in electronic form. Receipt of allotment in the electronic form in publicofferings of companies. Incase an investor prefers the electronic mode; he has to mention his accountnumber and name of his participant so that the allotted securities are credited into hisaccount. Receipt of non-cash corporate benefits such as bonus, rights in electronic form.If the investor chooses to receive bonus, rights in the electronic form, he can get a directcredit DP his account, thereby avoiding the risk of loss of certificates in transit. 37
    • Modus of holding and dealing in shares and securities in depository system: The depository Act, 1996 enables holding, trading and transfer of securitiesthrough book entries. As on date, the transfer of securities takes place in the followingmanner:•The seller and buyer of securities place order with the brokers for sale / purchase ofsecurities at a particular price.•The brokers in the screen based trading system (e.g. the Bombay stock exchange- onlinetrading) enter the sale and purchase bids. As and when bids match, the transaction takesplace.•Before the pay-in day the seller of the securities is required to lodge the certificates inrespect of securities sold by him along with a transfer deed duly signed by him astransferor, with his broker and the buyer is required to pay the relevant amount in respectof securities purchased by him to his broker.•The brokers have to lodge the relevant securities / amounts with the clearinghouse / bankof the stock exchange for the purpose of clearing. After the clearing, on the pay-out day,the selling broker will get the relevant securities, which they would in turn deliver to theirrespective clients.•The company receiving such transfer requests would check the transfer forms and sharecertificates and thereafter transfer the securities and return the certificates to thetransferee duly endorsed. 38
    • The Difficulties Faced by Transferees in the Aforesaid System Include The securities are normally not transferred and delivered in time by thecompanies. As per the listing agreement with the stock exchanges, the certificates inrespect of securities sent to the company for transfer ought to be transferred anddispatched within 30 days of receipt by the company. The securities purchased can be stolen property, in which event the transfereecould be subjected to police esquires.•The transferee may lose the bank transfer forms along with the certificates, in whichcase it very difficult for him to get a duplicates certificate issued in the favor of theoriginal transferor and transferred in his favor. He would, in such case required to lodge aFIR, procure an injunction order form the court and execute a host of other documents.•The transfer could be rejected on various technical grounds like mismatch of signatures,transfer form being mutilated, transfer from not being duly executed, stamp duty notbeing adequately affixed etc.•The transfers which are for technical reasons are to be returned by the transferee to hisbroker from whom he had purchased the securities, within a stipulated time, in whicheven the relevant buying broker would replace the securities along with the transferforms. This process could lake as along as two months. In case, the rejected transferdeeds are not returned to the buying broker in the stipulated time, the replacement ofsecurities could take substantial time, which would extend up to any year.•During the course of securities being replaced by the buying broker in respect of rejectedtransfer deeds, the company may declare some benefits to its registers shareholders likedividend, bonus shares, rights shares etc., and the transferee may either lose such benefitsor would have to take substantial pains and to get the benefits from the actualowner/buying broker. 39
    • The following are the steps that explain the flow of securities to effect settlement ofmarket trade.Step 1: Seller gives the delivery instruction to DPI to debit his account and transfersecurities to "Clearing Member 1 Pool a/c" with DPI. (Clearing Member 1 givescorresponding receipt instruction to DPI to accept in his clearing account securitiestransferred by seller through DP 1 if he has not already given standing receipt instructionfor all credits into his clearing a/c.)Step 2: Securities are transferred from "Selling Client a/c" to "Clearing Member 1 Poola/c " with DPI.Step 3: Clearing Member gives delivery to CC instruction to debit his “ClearingMember Pool a / c” and credit his “Clearing Member delivery a / c”. The transferee willtake place on the "execution date" mentioned in the instruction. Delivery instructionshould be given as per final or net delivery obligation. Delivery to CC instruction can bereversible or irreversible. Reversible instructions can be cancelled at the discretion of theCM.Step 4: Securities lie in the “Clearing Member Delivery a / c” till settlement day. Onsettlement day (5th working day from trade day), securities lying in “Clearing MemberDelivery a / c” are automatically flushed to the CC/CH. No debit instruction is needed forthis transfer. The deadline time for paying of securities for CC/CH may vary fromexchange to another.Note: If excess securities are transferred to "Delivery a / c", the oldInstruction can be cancelled and replaced buy a new one before NSDL. 40
    • Deadline, provided the instruction was marked as reversible. If excess delivery is made toCC/CH, the excess will automatically get credited to "Clearing Member Pool a/c" on pay-out.Step 5: On settlement day 95th working day from trade day), securities are transferredfrom CC/CH to "Clearing Member 2 Receipt a / c" with DP2. No credit instruction isneeded because this transfer is automatic.Step 6: Securities are transferred from "Clearing Member /Receipt a / c" to "ClearingMember 2 Pool a / c" receipt amount of clearing member is purely a transit accounts formaintaining audit trial.Step 7: Clearing Member 2 gives a delivery instruction to DP2 debit his "ClearingMember 2 Pool a / c" and credit "Buying Client a / c" with DP2 (Buyer givescorresponding receipt instruction to DP2 to accept that in his account securitiestransferred from "Clearing Member to Pool a / c" through DP2 unless he has not given astandard instruction to receive credits to his account.).Note: Funds are not handled by NSDL. Clearing Member 2 obtains one cheque frombuyer and gives it to the CC/CH. Only after the clearing banks clear the cheque, theCC/CH allows credit of securities to Clearing Member 2 and thereafter, communicatesthe match to NSDL.Step 8: securities are transferred to "Buying Client a / c" from "Clearing Member2 Poola / c" with DP2.Note: Until delivery instruction is given by the clearing Member the securities willremain in his "Pool a / c". However, if they are not transferred to a "Beneficial Owner a /c" the securities will not be eligible to any corporate benefits like bonus, dividends etc.Procedure in case of Market Transfers for institutional trades:Institutional trades can be settled the same a manner in which other trades is settled in themarket. However as per the market practices these are settled in the two modes explainedbelow. 41
    • Direct Custodial Settlement (DCS) In this case, the trading member (broker) at the time of entering, the trade, willnotify through the trading terminal that his trade would be settled by the custodian if theinstitution on whose behalf he has effected the trade. For this purpose all the custodiansare the members of the clearing custodian (CC) or clearing house (CH). Once thecustodian confirms this, the CC/CH would download the trade obligation statements tothe clearing custodian. Based on would have no role to play in this. In a DCS trade, since the custodian of the trading institution acts as a clearingmember to settle the trade, the custodian will open a clearing account with its own DPoutfit. The custodian of the institution also acts as its DP (all custodian providing servicesto local and foreign institutional investors have joined NSDL as DPs). In this case, clearing membera1 and clearing member2 have accounts with theirown DP outfit i.e., DP1 and DP2 respectively (who are also their custodians)Step 1: DP1 (who is also the custodian and clearing member of the institutional seller)debits the institutional sellers account and credits his "own Clearing Member Pool a / c".Step 2: DPI debits "own Clearing Member Pool a / c" and credits "own ClearingMemberl Delivery a / c".Step 3: Securities lie in the "own Clearing Member1 Delivery a / c" till settlement day.On settlement day 9 5th working day from trade day), securities lying in "own ClearingMember1 Delivery a / c are automatically flushed to the CC/CH. The deadline time forpay-in of securities to the CC/CH may vary from one exchange to another. 42
    • Step 4: On settlement day (5th working day from trade day) securities are transferredfrom the CC/CH to "own Clearing Member 2 Receipt a / c" with DP2 is also the clearingmember and custodian of institutional buyer.Step 5: Securities are transferred from "own Clearing Member2 receipt a/c to "ownClearing Member2 Pool a / c". Receipt account of clearing members is purely a transitaccount for maintaining audit trail. Thereafter, DP2 debits "own Clearing Member2 poola /c" and credits the institutional buyers account.(Note: Founds is not handled by NSDL. Clearing Member2 (who is also the custodian forinstitutional buyer) gives cheque directly to CC/CH. only after the cheque is beingcleared by the bank, the CC/CH.I allows credit of securities to clearing member2 andthereafter, communication of the match to NSDL.)Delivery Vs Payment (Dvp)In this case the trading member 9broker) settles the trade with CC/CH as the clearingmember and settles the same with the custodian of the DVP mode. This means for a•Sale transaction the trading member would effect the payment of funds to the custodianof the selling institution and take delivery of securities before the pay-in and uses thesame to settle with the CC/CH.•Buy transaction, the trading member would deliver his own funds to the CC/CH 1 at thetime of pay-in and takes delivery of securities from the CC/CH at the time of pay-out.These securities are in turn delivered to the custodian of the buying and then are receivedfrom them. This means, due to the online transfer possible in NSDL environment, theduration of funding by trading member would be much lower for dematerializedsecurities. In a DVP trade, the trading member (broker) settles the trade with the CC/CH as atrading member and s settles the same with the custodian of the institution in DVP mode.The custodian of the institution, in context of NSDL is also the DP as all custodiansproviding services to local and foreign institutional 43
    • investors have joined NSDL as DP. In this case, the selling institution and clearingmember 1 (who is also the trading member of the selling institution) have their respectiveaccount with DPI. The buying institution and clearing member (who is also the tradingmember of the buying institution) have their respective account with DP2, DPI, DP2 andthe CC/CH have online electronic consecutively with NSDL.The Following Explains the Flow of Securities to Effect Settlement of a Dvp Trade.Step 1: Securities are transferred from "selling institution i/e" to "Clearing Member 1Pool a / c" with DPI, on clearing memberl giving receipt instruction to DPI. If theclearing memberl has already given standing receipt instruction to receive all credits tohis clearing a/c, he need not give a separate receipt instruction. The custodian of sellinginstitution gives a corresponding delivery instruction to its own DP outfit to i.e. DPI inthe diagram. Note: Custodian of the selling institution releases securities to "ClearingMember1 Pool a / c" only after receipt of pay order from clearing member1.Step 2: Clearing Member1 gives delivery to CC/CH instruction to DPI to debit his "ownClearing Member1 Pool a/c" and credit his "Clearing Member1 delivery a / c". Thetransfer will take place on the "Execution Date" mentioned in the instruction. Deliveryto CC instruction can be reversible or irreversible.Step 3: Securities lie in the "own Clearing Member Delivery a / c" till settlement day. Onsettlement day (5th working day from trade day), securities lying in "Clearing Member1Delivery a / c" are automatically flushed to the CC/CH. No debit instruction is needed forthis transfer. The deadline time for pay-in of securities to CC/CH may vary from oneexchange to another.Note: If excess securities are transferred to "Delivery a / c", the old instruction can becancelled and replaced by a new one before NSDL, deadline, provided the instructionwas marked as reversible. If excess delivery is made to the CC/CH, excess willautomatically get credited to "Clearing Member Pool a / c" on pay-out. 44
    • Step 4: On settlement day (5 working day from trade day) securities are transferred fromCC/CH to "Clearing Member2 Receipt a / c" with DP2. No credit instruction is neededbecause this transfer is automatic.Step 5: Securities are transferred from "Clearing Member2 Receipt a / c" to "ClearingMember Pool A / c" Receipt a / c of clearing member is purely a transit account formaintaining audit trial.Step 6: Clearing Member 2 gives a delivery instruction to DP2 to debit his "Pool a / c"and credit "Buying Instruction a / c" with DP2. Custodian of buying institution givescorresponding receipt instruction to its own DP outfit i.e. DP2 in diagram to accept inbuying institutions account securities transferred from "Clearing Member 2 Pool a / c"through DP2.Step 7: Securities are transferred to "Buying Client a / c" from "Clearing Member 2 Poola / c" with DP2.(Note: Funds are not handled by NSDL. Clearing Member2 gives a cheque directly to theCC/CH. Only after the cheque is cleared by clearing bank, the CC/CH allows credit ofsecurities to clearing member 2 and thereafter, communicates the match to NSDL)Precautions:•For a transfer of securities to be effected from one account to another, details mentionedin the "delivery" and "receipt" instruction need to be especially careful with respect to the"Execution date" mentioned in two forms. The transfer would be rejected if there were amismatch in this regard even if all other details in the two forms match.•Investors need to be careful with respect to pay-in deadline. They need to take care ofnot only the NSDL deadline but also the deadline put forth by their DP. 45
    • Off Market Transfers:Trading in dematerialized securities is quite similar to trading in physical securities. Themajor difference is that at the time of settlement, instead of delivery / receipt of securitiesin the physical form, the same is affected through account transfers.Features: Trades, which are not settled through the CC/CH of an exchange, are classified as"Off Market Trades". Negotiated trades and trade-for-trades, which are not cleared andsettled through the CC/CH, by this definition, are off-market trades. The selling clientwill have to give a delivery instruction to his DP to transfer securities from his depositoryaccount to the buying clients depository account. To receive securities from the selling clients depository account, the buying clientmust give a receipt instruction if he has not already given standing receipt instruction tohis DP. The details in the "delivery" and "receipt" instructions must match else thetransfer will not take place. The transfer will take place on the "execution date" indicatedin the instructions. If the buying client has given a standing receipt instruction, this maybe ignored. The payment aspect is handled outside the NSDL environment between theselling and buying clients. The procedure in this case is similar to an off-market transferinvolving two clients. However, the procedure involves the three distinct off-; market transfers. Offmarket transfer number, delivering party, receiving part. 1. Selling institution depository account negotiating selling broker beneficial account. 2. Negotiating selling broker beneficial a/c negotiating buying broker beneficiary a/c 3. Negotiating buying broker beneficial account buying institution depository account.Precautions: For transfer of securities to be effected from one account to another, detailsmentioned in the "delivery" and "receipt" instructions need to match. Investors need to beespecially carefully with respect to the "Execution date" mentioned in the two forms. Thetransfer would be rejected if there is a mismatch in this regard even if all other details in 46
    • the two forms match. Incase buyer has already given a standing receipt instruction to DP,this may be ignored. 47
    • CHAPTER VI NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL) The automated trading brought with it several associated benefits such astransparency in trading and equal opportunity for the market players all over the country,the problems related to settlement of trades such as high instances of bad delivery anddelay in transfer of ownership have continued. As answer to the myriad settlementproblem NSDL was inaugurated in November 1996, as the first depository in the country.In depository system, securities are held in securities (depository) accounts, which ismore or less similar to holding funds in bank accounts. Transfer of ownership is donethrough simple account transfer. This method does away with the entire risks anddepository environment is considerably lower as compared to transaction in physicalcertificates. Trading in dematerialized securities is quite similar to trading in physicalsecurities. The major difference is that at the time of settlement, instead of delivery /receipt of securities in the physical form, the same is effected through account transfer.Currently dematerialized trading is available at NSE, BSE, and CSE. Consequently therewill be separate price quotes available for each script in both segments. The trades ineach of these segments cannot be netted off with each other. Exclusive demats segment follows rolling settlement (T+5) cycle andthe unified (erstwhile-physical) segment follows account period settlement cycle. Allinvestors, other than the institutional investors, can deliver securities either in thephysical or dematerialized form in the market. However, initially this was applicable onlyat those exchanges, which have joined the depositor, but SEBI has also specified that thislist is to be expanded in a phased manner. The settlement of trades in the stock exchangesis undertaken by the clearing corporation (CC)/ clearing House (CH) of thecorresponding stock exchanges. While settlement of dematerialized securities are effectedthrough NSDL; the funds settlement is effected through the clearing banks. Thephysical securities are settled by the clearing members directly with the CC / CH. 48
    • Promoters/ShareholdersNSDL is promoted by Industrial Development Bank of India (IDBI) – the largestdevelopment bank of India, Unit Trust of India (UTI) - the largest mutual fund in Indiaand National Stock Exchange (NSE) - the largest stock exchange in India. Some of theprominent banks in the country have taken a stake in NSDL.Promoters:Industrial Development Bank of IndiaUnit Trust of India National Stock ExchangeOther shareholders:State Bank of IndiaGlobal Trust Bank LimitedCitibank NAStandard Bank LimitedThe Honking and Shanghai Banking Corporation LimitedDeutsche Bank Dena BankCanara Bank 49
    • MILESTONES OF DEPOSITORY SYSTEM:Sep-1995 Drafting of the depository ordinanceDec-1995 NSDL incorporationMay-1996 SEBI RegulationsAug-1996 Enactment of the Depositories ActNov-1996 Inauguration of NSDL; commencement of DematerializationDec-1996 Commencement of trading in dematerialized shares on NSEJun-1997 Total value of demat securities at NSDL crosses US $ 1bnDec-1997 Commencement of trading in dematerialized shares on BSEJan-1998 Compulsory demat trading for institutional investors commencesMar-1998 Total value of demat securities at NSDL crosses US $ 5bnApr-1998 Demat shares treated as good delivery in physical segments of NSE andJun-1998 Commencement of trading in dematerialized shares on CSESep-1998 Commencement of trading in dematerialized shares on DSENov-1998 Investor account cross 100,00Dec-1998 Commencement of dematerialization of Government Securities.Jan-1999 Compulsory demat trading for retail investors commencesMay-1999 NSDL launches the NSDL - Depository operations moduleOct-1999 Investor accounts cross one million markFeb-2000 NSDL launches internet based service - SPEED for clearing Members.May-2000 Investor accounts cross 2.5 millionJun-2000 Commencement of dematerialization of Debt instruments.Jun-2000 98% settlement in demat formJul-2001 Introduction of T+5 Rolling Settlement & Uniform Settlement CycleApr-2002 Introduction of T+3 Rolling SettlementNov-2002 Launch of STEADY - an STP initiative by NSDLDec-2002 Investor accounts cross 5 millionApr-2003 Introduction of T+2 Rolling SettlementLegal Framework 50
    • As a part of its on-going market reforms, the Government of India (SEBI) notifiedits September 1995. Based on this ordinance, securities and Exchange Board of India(SEBI) notified its Depositories and Participants Regulations in May 1996 in order toprovide the regulatory framework for depositories. The enactment of the depositories Actthe following August paved the way for the launch of National Securities Depository Ltd.(NSDL) in November 1996. In exercise of the rights conferred by the Depositories Act, NSDL framed itsByeLaws and Business Rules. The bylaws are approved by SEBI. While the bylawsdefine the scope of the functioning of NSDL and its business partners; the Business Rulesoutline the operational procedures to be followed by NSDL its business partners.Depository System - Business Partners NSDL carries out its activities through various functionaries called businesspartners who include Depository Participants (DPs), issuing companies and theirRegistrars and Shares Transfer Agents, Clearing Corporations / Clearing House of StockExchanges. NSDL is electronically linked to each of these business partners via a satellite linkthrough very Small Aperture Terminals (VASTs) or through leased landlines. The entireintegrated system (included the electronic links and the software at NSDL and eachbusiness partners end) is called the "NEST" (National Electronic Settlement & Transfer)system. Depository Participant (DP): the investor obtains Depository Services through adepository participant of NSDL. A DP can be a bank, financial institution, a custodian, abroker, or any entity eligible as per SEBI (Depository 51
    • Participants) Regulations, 1996. The SEBI regulations and NSDL bye laws also lay downthe criteria for any of these categories to become a DP. Just as one opens a bank account in order to avail of the services of. a bank, aninvestor opens a depository account with a depository participant in order to avail ofdepository facilities. Though NSDL commenced operations with just three DPI,Depositors Participants services are now available in most of the major cities and townsacross the country. Issuing companies / their Registrar & Transfer Agents: Securities issuers whohave entered into an agreement with NSDL are admitted into the NSDL depository. Asper this agreement, issuer agrees to verify the certificates submitted for dematerializationbefore they are dematerialized and to maintain electronic connectivity with NSDL.Electronic connectivity facilitates dematerialisation, rematerialisation, dailyreconciliation and corporate actions. NSDL is electronically linked to each issuer company or its R&T agent. Thisfacilitates dematerialization, rematerialisation and corporate actions. Clearing corporation / House: the clearing corporations / Houses of stockExchanges also have to be electronically linked to the depository in order to facilitate thesettlement of the trades done on the stock exchanges for dematerialized shares. Atpresent, all the major clearing corporations/ houses of stock exchanges are electronicallyconnected to NSDL.Joining NSDL as DPJoining NSDL as IssuerJoining NSDL as Registrar and Share Transfer AgentJoining NSDLasCC/CH 52
    • Charges NSDL provides depository services to investors and clearing members throughmarket intermediaries called Depository Participants (DPs). NSDL does not charge theinvestors and clearing members directly but charges its DPs, who are free to have theirown charge structure for their clients. NSDL charges to DPs are standard across DPs.NSDL charges to its DPs are as follows:Annual Fees:Average market value of dematerialized securities held withParticipant Annual Fee (Rs.) up to 200 crores 1,00,000.Between200 crores and 500 crores 2,50,00.More that 500 crores 5,00,000Fees for Account Opening: nilTransaction Related fees:Nature of Transaction Fee Market trade 0.02% of the market value of the securities (other Than debtinstruments and commercial papers) debited to the Accounts(s) of its Client(s). 0.002% of the market value of the securities received from the ClearingCorporation into the Receipt-in Account of each Clearing Member maintained with theparticipant subject to a minimum of Rs.1000/- and a maximum of Rs.20, 000/- perquarter per CM account. Off- market trade 0.02% of the market value of the securities(other than debt instruments and commercial papers) Debited to the account(s) of itsClient(s). Inter-settlement 0.02% of the market value of the securities for transfer from onesettlement to another in CM pool account. No settlement fee will be payable for inter-settlement transfer of securities effected in the additional CM Accounts maintained forthe purpose of Vyaj Badla or ALBM transactions. Pool To Pool 0.02% of the market value of the securities to the participant of thedelivering Clearing Member. Pledge On creation or closure of pledge, a fee at the rate of 53
    • 0.01% of the value of the securities pledged/ hypothecated shall be charged to theparticipant of the pledges. On invocation of pledge, a fee at the rate of 0.02% of the valueof the securities credited to the account(s) of its Client(s) shall he charged to theparticipant of the pledge. Lending & Borrowing: Securities lent by intermediary to borrower 0.02% of market value For credit toborrowers account for transaction up to 3 months: Additional 0.02% for transactionsbeyond 3 months.Transaction related Fees for Debt Instruments:Commercial paper: NilOther Debt Instruments: 0.01% on the value of debt securities debited and creditedsubject to maximum of Rs. 100 for each different security.No settlement fee shall be charged in the following cases:a) In the case of transfers necessitated by transmission.b) in the case of transfers of the account of the Client from one participant to another as aconsequence of the expulsion or suspension of such participant;c) When the client closes its account with a participant and transfers the entire balance inits account to its account maintained with another participant.Custody fees: Each participant shall pay custody fee at the rate of 0.01% (1 basis points) perannum on the average value of securities held by the participant in dematerialized form.This fee wills I is collected quarterly on the basis of average holding during the quarter.Provided however that, the custody fee payable by a Participant will be subject to anannual Overall ceiling as given below: Average market value of dematerialized securities with the participant during thequarter annual overall ceiling (to be recovered quarterly) 54
    • Up to Rs.200crore Rs.25, 000More than Rs.200crore and upto Rs.2000 crore Rs.1, 25,000More than Rs.2000crore Rs.4, 00,000While calculating the custody value paid a one-time custody fee not be included. In case of debt instruments and Government Securities, each Participant shall paycustody fee at the rate of 0.005% (0.5 basis point) per annum on the average value of thesecurities held by the participant in dematerialized form subject to the overall ceiling asgiven above. Fees For Dematerialization and Rematerialization: NSDL does not charge any fees for Dematerialization requests. However, in caseof Rematerialization, a fee of Rs.107-per certificate or 0.02% of the value of securities,whichever is higher will be charged.Related Links The Indian capital market has witnessed and unprecedented growth in the past fewyears, facilitated by modernization of the trading systems. Automation of the tradinginfrastructure in 1994 has given us a trading system comparable with the best in theworld. The establishment of a settlement guarantees scheme has removed counterpart riskin trading. Though the advent of automated trading brought with it several associatedbenefits such as transference in trading and equal opportunity for market players all overthe country, the problems related to settlement of trades such as high instances of baddeliveries and delay in transfer of ownership have continued. As an answer to the myriadsettlement problems National Securities Depository Ltd. (NSDL) was inaugurated inNovember 1996 as the first depository in the country. In a depository system, securities are held in securities (depository) accounts,which is more or less similar to holding funds in ban accounts. Transfer of ownership ofsecurities is done through simple account transfers. 55
    • This method does away with all the risks and hassles normally associatedwith paperwork. Consequently, the cost of transacting in a depository environment isconsiderably lower,as compared to transacting in certificates.Basic Services Under the provisions of the Depositories Act, NSDL provides various services toinvestors and oilier participants in the capital market like, Clearing members, stockexchange, banks and issuers of securities. These include basis facilities like accountmaintains, dematerialization materialization, settlement, of trades through markettransfers, off market transfers & inter-depository transfers, distribution of non-cashcorporate actions and nomination transmission. The depository system, which links the issuers, depository participants (DPs),NSDL and Clearing Corporation / clearing house of stock exchanges, facilitatesholding of securities in dematerialized form and effects transfers by means ofaccount transfers. This system which facilitates scrip less trading offers various directand benefits to the market participants.Accounts Maintenance To avail of the various services offered by NSDL an investor / a broker/ an approved,intermediary (for lending & borrowing) has to open a NSDL Depository accountDepository accounts are of three types Beneficiary Account. An investor or a broker whowants to hold shares in Dematerialized (demat) form and undertake scrip less tradingmust have a depository account called beneficiary account with a DP of his choice. Clearing member account Member brokers of those stock exchanges which haveestablished electronic consecutively with NSDL need to open a clearing member account,with a DP of his choice, to clear and settle trades in the demat form.This account is meant only to transfer shares to and receive shares from the clearingcorporation / house and hence, the member broker does not have any ownership(beneficiary) rights over the shares held in such an account. Further, clearing members ofstock exchanges permitting Vyaj Bandla and ALBM transaction can request for a 56
    • "clearing member Vyaj Badia" Account to participate in Vyaj Badia transactions and"clearing member ALBM" account to participate in ALBM transactions. These additionalCM accounts maintained for the purpose of Vyaj Badia or ALBM transactions will haveto be necessarily opened with the clearinghouse of the concerned stock exchange e.g. aBSE clearing members "normal Clearing member account" could be with a DP XYZ, buthis "clearing Member Vyaj Badia" account will have to necessarily be with the clearingHouse of the concerned stock exchange. Intermediary account: Any person desiring to act as approved . intermediary" forstock lending and borrowing needs to open an intermediary account with any DP of hischoice. An intermediary account may be opened with the DP only after the intermediaryhas obtained registration form the securities & Exchange Board of India and with theprior approval of NSDL. This account is meant only to deposit the securities receivedfrom the lender and lend intermediary does not have any ownership (beneficiary) rightsover the shares held in such an account. Various services offered by DPs with respect to these accounts are as follows:Freezing of Accounts: Account freezing means suspending any further transaction fromthe depository account till the account is de-Frozen. A depository account maintainedwith a DP can be frozen if the DP receive a written instruction in prescribe form from theclient. A Frozen account can be de-frozen or re-activated if the client submits writtenInstruction in prescribed form to the DP.Nomination:A client can make a nomination of his account in favor of any person by filling thenomination form with his DP. Such nomination is considered to be conclusive evidenceof the account holder(s) disposition in respect of all the securities in the account forwhich the nomination is made. 57
    • Change in Address: the client can change his address by submitting the changes inwriting to the DP. The changes conveyed to the DP would be automatically communicateto the companies in which he is holding Shares in dematerialized form. Bank Account Details: Details of bank account of the client, including the 9-digitcode by the bank and branch appearing on the MICR checks issued by the bank have togiven to the DP at time of account opening. Companies use this information for printingthem on Divided/interest warrants etc. to prevent its misuse. In case the client wish tochange this bank account details, ha can do by submitting the Changes in writing to theDP. Standing Instruction Facility: DP registers the transfer of securities to or from abeneficial owners account only on receipt of instructions from the client. The clientsneed to give delivery instruction to transfer securities from their account & receiptinstruction to get credit into their account. However, for ease of operation, a facility ofstanding instruction is provided to the clients for receiving securities to the credit of theiraccounts without any further instruction from them. Consolidation of Accounts: some clients could have opened multiple accounts todematerialize their shares held in multiple combinations & sequence of names. However,they may not need so many accounts after they have dematerialized their shares and maywant to bring all their shareholding into one or fewer accounts. Using off-market accounttransfer instruction such consolidation can be done. Closure of Account: A client can close a depository account by giving anapplication in the prescribed form. In case there is any balance in the account sought tobe closed, the following steps are necessary.(a) Re- materialization of all securities standing to the credit of the account at the time of making the application for closure; or (b) Transferring the balance to the credit of another account opened by the same account holder(s) either with the same participant or with a different participant. 58
    • Features: Corporate action is benefit given by a company to its investors. These may be eithermonetary benefits like dividend, interest or non-monetary benefits like bonus, rights, etc.with the same participant or with benefits. Monetary benefits (dividends etc): NSDL will give the beneficiary ownership details tothe Issuer/R&T Agent. The issuer /R&T Agent will carry out the necessary processingand the distribution of such benefits will be outside the system.Non-monetary benefits (right bonus etc): NSDL will give the beneficiary ownershipdetails to the Issuer / R&T Agent. The Issuer /R&T Agent will details to NSDL. NSDLwill then credit the beneficiary owners accounts by downloading the data to the DPs.Procedure In Case of Cash Corporate Actions: NSDL will inform the DPs about the record date /book closure as Announced bythe Issuer for the corporate action. NSDL will also inform the DPs about the no-deliveryperiod as announced by the Clearing Corporation / Clearing House and the procedure tobe followed theyre of through a circular.On receipt of information about the book closure / record date, the DP will take care: To update the changes in tax status, bank details, change of address etc. in the beneficialowners accounts well in advance of the book closure/record date. To clear positions in allthe clearing accounts by transferring the relevant securities to relevant beneficiaryaccounts well in advance of the book closure/record date. The balance lying in the Clearing Accounts are reported to Issue/R&T agent as transitaccount position. NSDL will provide the details of the beneficial owners and theirholdings as on the EOD of the record date or the BOD on thebusiness clay prior to commencement of book closure to the Issuer /R&Tagent. The Issuer / R&T agent will distribute dividend, interest and other monetarybenefits directly to the beneficial owners on the basis of list provided by NSDL. 59
    • Procedure in case of Non-Cash Corporate Actions: NSDL will inform the DPs about the record date / book closure as Announced by theIssuers (or the corporate action. NSDL will also inform the no-delivery period asannounced by the Clearing Corporation / Clearing I house and the procedure to befollowed thereof by issuing a circular.On receipt of information about the book closure / record date, the DP will takeCare: To update the changes in tax status, bank details, change of address etc. In thebeneficial owners accounts well in advance of the book closure / record date. To clear positions in all the clearing accounts by transferring the relevantsecurities to relevant beneficiary accounts well in advance of the book closure / recorddate. The balances lying in the Clearing Accounts will be reported to Issuer / R&T agentas transit account position. NSDL will provide the details of the beneficial owners and their holdings as onthe EOD of the records date or the OD on the business clay prior to commencement ofbook closure to the Issuer / R&T agent. The Issuer R&T agent will provide an option to the shareholders to be allottedsecurities either in physical or electronic form. The investors who opt for electronicsecurities will indicate the UP Id and the beneficial Owner account number in the formand send it to the Issuer / R&T Agent. If investor does not make any, choose of form in which these corporate benefitsare to be received, then the Issuer / R&T agent will issue securities in the form in whichthe investor holds original securities. Even the investorswho hold original shares in physical form can opt for corporate benefits in denial form. 60
    • The Issuer / R&T agent will provide allotment details and the date on which thenecessary credit entries are to be made in the accounts of the beneficial owners (referredto as execution date) to NSDL. NSDL will perform the necessary bookings and the relevant credit entries arebooked in the DPM on the execution date. The DP will give the statement of holdings and transaction statement to thebeneficial owners, giving the updated positions after the corporate action.Precautions: Investor must ensure that securities purchased by form or transferred to hisaccount form his brokers pool account before the record date or book closure date. Thisfacilitates receipt of corporate actions directly without any problem. The investor who holds securities in physical form of requires securities in adifferent account or who acquires rights from original holder and opts for noncashcorporate benefits (bonus, rights issue etc) in demat form must correctly indicate benefitsor electronically credited into his accounts. This investor must also ensure that the namein which the depository account has been opened matches with the name appearing in therecords of the issuer / registrar. 61
    • Transmission One of the lesser-known but widely experienced problems with respect to dealingin share certificates is transmission of shares. The companies Act distinguishtransmission of shares from transfer of shares. While Transfer of shares relates to avoluntary act of the shareholder, transmission is brought about by operation of law. Theword "transmission" means that devolution of title to shares otherwise than by transfer,for example, devolution by death, succession, inheritance, bankruptcy, marriage, etc.While transfer of shares is brought about by delivery of a proper instrument of transfer(viz., transfer deed) duly stamped and executed, transmission of shares is done byforwarding the necessary documents (such as a notarized copy of death certificate) to thecompany. On registration of the transmission of shares, the person entitled to transmission ofshares becomes the shareholder of the company and is entitled to all rights and subject toall liabilities as such shareholder. In case the deceased shareholder had holdings in different companies, then inorder to effect transmission of shares for these shares, the relevant documents must besent to each of the companies, along with the share certificates. This results in a heavyreliance on the postal system. Follow-up May have to be made with each of the companies in order gets the transmissionaffected before the book closure, if the survivor(s) wishes to avail of the benefitsoccurred through these shares. 62
    • Transmission of Securities in the Depository System: In the depository system, all these problems are mitigated, as the shares areaccount balances in the electronic form. The process of transmission through thedepository is not only simple but it is also quicker. This is because the successor to thetitle interacts only with entity-his DP. Transmission of Securities held jointly. In case the deceased was one of the jointholders, then the surviving holders have to request the DP vide a form called thetransmission form along with a copy of notarized death certificate to transmit thesecurities lying in the account of the deceased to the account of the surviving holders. Forthis purpose the surviving clients must have a depositor account, which can be with thesame DP or with a different DP. Transmission of Securities held singly. In case of death of the sole holder, thelegal heir(s) or legal representatives(s) of the deceased must request the DP to transmitthe balance lying in the Client account of the deceased to the account of the legal heir(s)or legal representative(s). For this, the legal heir(s) or the legal representative(s) of such securities mustsubmit an instruction called the transmission form to the DP along with the followingdocuments.a. A copy of the death certificate duly notarized.b. A copy of the succession certificate duly notarized or an order of a court of components jurisdiction where the deceased has not left a will, orc. A copy of the Probate of Letter of Administration duly notarized. However, if the legal heir(s) or the legal representative(s) express inability toproduce either of the documents mentioned under (b) and (c) above, and the market valueof the securities held in each account of the deceased as on the date of application fortransmission does no exceed Rs. one lakh, then the DP will process the transmissionrequest on the basis of the following documents. 63
    • NSDL - A Description of Operations: India set up its first depository (NSDL) under the Depository Act passed by theparliament in August 1996. NSDL, owned by IDBI, UTI, NSE and SBI, startedoperations on November 8lh 1996. NSDL was set up with an initial capital of INR onebillion (USD 28 million), promoted by Industrial Development Bank of India (IDBI),Unit Trust of India (UTI) and National Stock Exchange of India (NSEIL). Subsequently,State Bank of India (SBI) became a shareholder by contributing to the capital to theextent of INR 50 million. Started in simple terms, the depository system comprise of DepositoryParticipants (DPs), through whom the investors and brokers use Depository facilitates,the companies or their share registrar and transfer Agents (R&T Agents), who agree tohave their shares and securities admitted into the system, and the clearing corporations /houses of the Stock exchange, who sign up with the depository to facilitate trading andsettlements of demat securities. To order to clear and settle the trades that have been done for dematerializedsecurities, clearing members have to open Clearing Member Accounts with the DPs.Similarly, investors have to open Depository Accounts with DPs in order to use thefacilitate of the depository system. These investors offer there Share certificates and scripts to the latter of dematerialization i.e., credit to theirelectronically maintained accounts. For transfer or transmission of this share or forfurther purchases, the investors operate these accounts almost like any other runningaccounts in bank. NSDL itself functions as a central accounting and record keeping office andclearing house in respect of these shares and securities through electronic operations. Asall these are electronically linked, speed, accuracy and safety are assured. Risks attendantto handling physical scripts are eliminated. 64
    • NSDL provides an efficient solution to these ills associated with paper and offersnumerous benefits to various market participants and reduces transaction costs.Advantages specific to the issuing company / registrar and transfer agents are•The electronic holding reduces the paperwork and thereby reduces direct cost of recordkeeping, physical handling, moment and safe keeping of certificates.•Corporate actions such as public offers, rights, conversions, bonus, merges /amalgamations, subdivisions and consolidations will be carried out without the momentof paper, saving both and time.•Information of beneficiary owners is readily available. The issuer get the information onchanges in shareholding pattern on a regular basis, which would enables the issuer toefficiency monitor the changes in shareholdings.•Instances of loss / theft / mutilation / forgery etc., of certificates will be completelyeliminated.The company acquires a progressive, investor friendly image.• Company can save a substantial time of the secretarial department spent on transfer o shares, follow up with registrars, etc. An issuer of securities can join NSDL directly by establishing electronicconnectivity with NSDL (TYPE-1) or by utilizing the services of the registrar andtransfer agent who is connected to NSDL (TYPE-II). In the later case, the company mayhire a registrar to obtain electronic connectivity to handle denial shares, while keeping theshare registry work with itself or it may outsource the share transfer work as well.NSDL does not charge for making’ the securities available in the dematerialized form. 65
    • TYPE-1Steps involved in joining NSDL when the issuer Company decides to go in for an in-house route are• Issuer sends a letter of intent (LOT) to join NSDL.•The issuer enters into an agreement with NSDL. The agreement has a standard format(part of NSDL bye laws and hence, SEBI approved) and is the same for all issuers.•After singing the agreement, the issuer has to get the VAST installed.•The issuer has to install the required IT hardware. The hardware shall be strictly inaccordance with the specifications given. The hardware to be used exclusively forNSDL operations•The application software for depository operations (DPMSHR) wills he provided byNSDL.•The issuer / R & T agent has to nominate a system administrator.•NSDL conducts training program for representatives of the issuer / R&T agent. This isdone to familiarize the staff with the depository system.TYPE-IIThe steps involved in joining the depository through the registrar are• Issuer sends a letter of intent (LOI) to join NSDL• A tripartite agreement has to be entered into between NSDL, the issuer and the registrar.• If the registrar is already electronically connected to NSDL, then dematerialization of securities can start immediately.•If the registrar has yet to attain connectivity, then it may take about 8 to 10 to commencedematerialization. The registrar will take all the steps started in TYPE-1.•NSDL conducts a training program at Mumbai for representatives of the issuer. 66
    • Besides demat and trading, the services offered by NSDL are•Pledging / hypothecation of dematerialized securities.•Electronic credit in public offerings of companies.•Receipt of non-cash corporate benefits such as bonus, rights, in electronic form.•Lending and borrowing of securities. NSDL does not fix the charges of a DP vis-a-vis his clients. NSDL charges to DPsare fixed and a DP is free to have any mark-up over these charges for the purpose ofbilling his clients. The detail of NSDL charges to DPs is as under opening a depository account is assimple as opening a bank account. Investor can open a depository accounts with any DPconvenient to them.To open an account an investor will have to•Fill up the account opening form, which is available with the DP.•Sign the DP-client agreement, which defines the rights and duties of the DPs and theperson wishing to open the account.•Receive their client account number.•Then they can convert their existing physical shares into electronic shares bydematerializing them.•They can also purchase shares directly in the electronic form. There is no restriction of the number of depository accounts that the investors canopen. However, if their existing physical shares are in joint Names, they must be sure toopen the account in the same order of names before submitting shares certificates fordemat.To get the shares dematerialized the investor will have to•Give instructions to the custodian to dematerialize existing stock.•The securities a account will then be credited in about 15 days time 67
    • • They will also receive a statement of holding from DP giving the details of holdings in account. Only those shares, which are depository eligible and are already registered in theirname, can be dematerialized. However, NSDL has announced a scheme that facilitatesthe dematerialization of shares sent for transfer. Briefly the process is as follows. On completion of the process of registration of shares sent transfer, the companyor its R&T agent will intimate the investor, providing an option to dematerialised such ashares. The investor intending to exercise this option will have to send a demat requestform along with the option letter sent by the company to his DP. The company or itsR&T agent would confirm the demat request on its receipt from the DP. This will avoidto and for moment of share certificates and also reduce the risk of loss in transit. Thisscheme is applicable for only those companies, which have agreed to institutes andadditional procedures. Presently, it has been made mandatory for all the companies tojoin the scheme. 68
    • CONCLUSION The study and research of the topics "HSE" and "DEMATERIALIZATION OFSECURITIES" at Hyderabad Stock Exchange provided us with an opportunity to makean in-depth analysis of the topics. The study revealed to us that "Dematerialization of shares" has brought aboutrevolutionary changes in the capital market of India. Though there are certainshortcomings in the process, it can be taken for sure that these shortcomings will beovercome in the next few years and these process will contribute towards the making ofmore efficient and investor friendly market. 69
    • BIBLIOGRAPHY>WWW . BSEINDIA.COM>WWW.HSEINDIA.ORG>WWW. CDSLINDIA.COM>WWW. NSDL.CO.IN•:• Magazines•:• Economic times RESEARCH METHODOLOGYINTRODUCTIONResearch Methodology refers to search of knowledge .one can also define researchmethodology as a scientific and systematic search for required information on a specifictopic.The word research methodology comes from the word ³advance learner µs dictionarymeaning of research as a careful investigation or inquiry especially through research fornew facts in my branch of knowledge for example some author have define research methodology assystematized effort to gain new knowledge.TYPES OF RESEARCH ANALYTICAL RESEARCHIt has to used facts or information already available and analyse these to make a criticalevaluation of material.SAMPLE SIZE:Considering the constraints it was decided to conduct the study based on sample sizeof 100 people in specific age groups.METHODS OF DATA COLLECTION 70
    • In the project work Primary data secondary data (both) sources of data has been used.1. Primary data collection:In dealing with real life problem it is often found that data at hand are inadequate, andhence, it becomes necessary to collect data that is appropriate. There are several ways ofcollecting the appropriate data which differ considerably in context of money costs, timeand other resources at the disposal of the researcher.Primary data can be collected either through experiment or through survey.The data collection for this study was done in the following manner: Through Personal interviews:-A rigid procedure was followed and we were seeking answers to many pre-conceivedquestions through personal interviews.Through Questionnaire:-Information to find out the investment potential and goal was found out throughquestionnaires.Through Tele-Calling:-Information was also taken through telephone calls.2. Secondary sources of data:In the secondary sources of data is used. (Internet, magazine, books, journals)TOOLS OF ANALYSISIn the project work quantitative technique & percentage method are has been used.RESEARCH DESIGNFor the proper analysis of data simple quantitative technique such as percentage wereused. It help in marketing more accurate generalization From the data available .The datawhich was collected from a sample of population was assumed to be representing entirepopulation was interested .Demographic factor like age, income and educationalbackground was used for the classification purpose 71
    • 72