Report on depository system


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Report on depository system

  1. 1. SUMMER TRAINING REPORT ON “DEPOSITORY SYSTEM IN INDIA” AT LUDHIANA STOCK EXCHANGE Submitted to Punjab University, Chandigarh in the partial fulfillment of the requirements for the award of the degree of MASTERS OF COMMERECE SESSION – 2012-14 Internal Guide: Submitted by: Prof. A.K Singla Bharti Verma (HOD Department of commerce) Uni. Roll no. 2804 College Roll no. 2220 ARYA COLLEGE, LUDHIANA
  2. 2. DECLARATION I here by declare that the project report entitled ―DEPOSITORY SYSTEM IN INDIA‖ submitted to Punjab University, Chandigarh in partial fulfillment of the requirement for the award of degree of M.Com is a record of bonafide project work carried out by me under the guidance of Mr. Sadhu Ram. I further declare that all the particulars given herein are true to best of my knowledge and belief. The assistance and help during the execution of the project has been fully acknowledged. Bharti Verma
  3. 3. PREFACE The successful completion of this project was a unique experience for me because by visiting many place and interacting various person, I achieved a better knowledge about this system. The experience which I gained by doing this project was essential at this turning point of my carrier this project is being submitted which content detailed analysis of the research under taken by me. The research is on the topic ―Depositary system‖
  4. 4. ACKNOWLEDGEMENT Behind this successful undertaking is the blessing and guidance of many. This formal piece of acknowledgement may not be sufficient to express my feeIings of gratitude and deep respect that have experienced during my learning process at Ludhiana stock exchange. I am extremely thankful to Mrs .Pooja M. Kohli, executive director (officiating),Ludhiana stock exchange, for assigning me the project ―Depository―, and also taking a keen interest and rendering valuable help that ultimately proved to be very helpful in the successful completion of my project. I am also very thankful to Mr.Sadhu Ram, coordinator of the training programme, for the knowledge and experience that I have gained from him during the course of training which I can easily look at my most rewarding phase the course of my study. He in spite of his busy schedule, provided me valuable guidance and has shown utmost interest in imparting this training.
  5. 5. CONTENTS Sr No. Topics Page No. 1. Chapter-1 About Ludhiana Stock Exchange  Governance & management  Strengths of LSE group  Subsidary of LSE  Listing companies at LSE  Investor related services  Educational Initiatives of Exchange 1 3 5 6 7 8 9 2. Chapter-2 Introduction to Depository 12 3. Chapter-3 Review of literature 15 4. Chapter-4 Depository system  Depository Players  Legal Framework  Depository  Depository Participant  Functions 18 22 22 24 28 31 5. Chapter-5 Depositories in India  NSDL  CDSL 41 41 42 6. Chapter-6 Role of Depository in capital 45
  6. 6. market  Comparison between Physical Shares and Demat shares 54 7. Chapter-7 Objectives of the study  Research Methodology 60 61 8. Chapter-8 Analysis and Interpretation  Findings  Limitations of the study  Suggestions and Recommendations  Conclusion 69 78 79 80 81 9. Chapter-9 Bibliography 83 10. Annexure 84
  7. 7. CHAPTER-1
  8. 8. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 1 ABOUT LUDHIANA STOCK EXCHANGE The Ludhiana Stock Exchange Limited was established in 1981, by Sh. S.P. Oswal of Vardhman Group and Sh. B.M. Lal Munjal of Hero Group, leading industrial luminaries, to fulfill a vital need of having a Stock Exchange in the region of Punjab, Himachal Pradesh, Jammu & Kashmir and Union Territory of Chandigarh. Since its inception, the Stock Exchange has grown phenomenally. The Stock Exchange has played an important role in channelizing savings into capital for the various industrial and commercial units of the State of Punjab and other parts of the country. The Exchange has facilitated the mobilization of funds by entrepreneurs from the public and thereby contributed in the overall, economic, industrial and social development of the States under its jurisdiction. Ludhiana Stock Exchange is one of the leading Regional Stock Exchange and has been in the forefront of other Stock Exchange in every spheres, whether it is formation of subsidiary for providing the platform of trading to investors, for brokers etc. in the era of Screen based trading introduced by National Stock
  9. 9. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 2 Exchange and Bombay Stock Exchange, entering into the field of Commodities trading or imparting education to the Public at large by way of starting Certification Programmes in Capital Market. The vision and mission of Stock Exchange is: "Reaching small investors by providing services relating to Capital Market including Trading, Depository Operations etc. and creating Mass Awareness by way of education and training in the field of Capital Market. To create educated investors and fulfilling the gap of skilled work force in the domain in Capital Market." Further, the Exchange has 295 members out of which 171 are registered with National Stock Exchange as Sub-brokers and 124 with Bombay Stock Exchange as sub-brokers through its subsidiary. LIST OF BOARD OF DIRECTORS OF THE EXCHANGE AS ON 05.03.2012 Name of member Designation Sh. V.P. Gaur Chairperson, Dr. R. L. Behl Public Interest Director Sh. Jasminder Singh Public Interest Director
  10. 10. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 3 Sh. Ashwani Kumar Public Interest Director Dr. Raj Singh, ROC Public Interest Director Sh. Anup Kumar Jain Shareholder Director Sh. Ashok Kumar Shareholder Director Sh. Rajinder Mohan Singla Shareholder Director Sh. Padam Parkash Kansal Shareholder Director Sh. Vikas Batra Shareholder Director Governance and management LSE has a strong governance and administration, which encompasses a right balance of Industry Experts with highest level educational background, practicing professionals and independent experts in various fields of Financial Sector. The administration is presently headed by Sr. General Manager CUM Company Secretary and team of persons having in-depth knowledge of Secretarial, Legal and Education & Training. The Governing Board of the Exchange comprises of eleven members, out of which two are Public Interest Directors, who are eminent persons in the fields of Finance and Accounts, Education, Law, Capital Markets and other related fields, Six are Shareholder Directors, and Three are Broker Member Director and the Exchange
  11. 11. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 4 has four Statutory Committees namely Disciplinary Committee, Arbitration Committee, Defaults Committee and Investor Services Committee. In addition, it has advisory and standing committees to assist the administration. LSE has a Code of Conduct in place that governs the elected Board Members and the Senior Management Team. The same is monitored through periodic disclosure procedures. The Exchange has an Ethics Committee, which looks into any issue of conflict of interest and has in place general code of conduct for the Senior Officials. Composition of the Governing Board Sr. No. Name of Director Category 1 Prof. Padam Parkash Kansal Chairman (Shareholder Director) 2 Sh. Joginder Kumar Vice Chairman (Shareholder Director) 3 Sh. Rajinder Mohan Singla Shareholder Director 4 Sh. Satish Nagpal Shareholder Director 5 Sh. Vikas Batra Shareholder Director 6 Sh. Varun Chhabra Shareholder Director 7 Dr. Raj Singh Registrar of Companies (Public
  12. 12. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 5 Interest Director) 8 Sh. Ashwani Kumar Public Interest Director 9 Sh. V.P. Gaur Public Interest Director 10 Sh. Jaspal Singh Trading member Director 11 Sh. Sunil Gupta Trading Member Director 12 Sh. Sanjay Anand Trading member Director Strengths of LSE group 1. ―LSE‖ brand is popular among masses. The brand image of LSE can be capitalized. 2. It has requisite infrastructure for the Capital Market activities which includes a multi-storeyed, centrally air conditioned building situated in the financial hub of the city i.e. Feroze Gandhi Market. 3. LSE have well experienced staff handling operations of Stock Exchange. 4. LSE have competent Board and professional management. 5. LSE have much needed networking of sub brokers in the entire
  13. 13. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 6 region, who are having rich experience in Stock Market operations for the last 25 years. 6. LSE have more than 40,000 clients spread across Punjab, Himachal Pardesh, Jammu & Kashmir and adjoining areas of Haryana and Rajasthan. 7. The turnover of ITS subsidiary is the highest amongst all subsidiaries of Regional Stock Exchanges in India. Status of subsidiary – LSE Securities Limited Due to Nation-wide reach of bigger Stock Exchanges, the trading volumes at Ludhiana Stock Exchange declined and ultimately, the trading stopped in February, 2002, but the Stock Exchange converted the threat of bigger Exchanges into opportunities and acquired the corporate membership of these exchanges through its subsidiary company i.e. LSE Securities Limited. Stock exchange have now been providing Trading Platforms of Bigger Stock Exchanges to the Investors of the region. The vast network of Brokers of the Exchange is servicing millions of Investors. The subsidiary company is also providing depository services in the State of Punjab and Himachal Pradesh. The allied services like PAN Service Centre, Investor Service Centres are also being provided at major locations of the region. The turnover of subsidiary is highest amongst all the subsidiaries of Regional
  14. 14. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 7 Stock Exchanges. The growth of subsidiary is swift and it has been providing a range of services to the public at large such as Trading, Depository, and IPO bidding collection Centre. The Company in its continuous endevour to provide qualitative services to its valued clients, has started e-broking trading services for its clients, thereby increasing the geographical reach of the company. Listing of securities of companies at ludhiana stock exchange At present, Ludhiana Stock Exchange has 330 listed companies, out of which 214 are regional and 116 are Non-regional. The total listed capital of aforesaid companies is Rs. 3168.91 Crores approx. The market capitalization of the said companies is more than Rs. 3372.34 crores. The Stock Exchange is covering the vast investor base through the listing of above said companies, which are situated in the region comprising of Punjab, Himachal Pardesh, Jammu & Kashmir, and Chandigarh. Despite the fact, the implementation of SEBI (Delisting of Securities) guidelines, 2003 has resulted into the Delisting of good companies listed at Exchange, however still there are leading Companies listed with our Exchange, notable among them are United Breweries Limited, Vardhman Acrylics Limited, SMC global securities limited, Himachal Futuristic Communications Limited etc. Ludhiana Stock Exchange has facilitated the capital generation for agro based industries as Punjab is an agricultural led economy. It will continue to do so, once it gets approval for a tie up with bigger Exchanges for commencing trading
  15. 15. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 8 operations. Investor related services The Exchange has been providing a variety of services for the benefit of investing public. The services include Investor Service Centres, Investor Protection fund and Investor Educational Seminars. (i) Investor Service Centres The Exchange has set-up Investor Service Centres at various DP branches of its subsidiary for providing information relating to Capital Market to the general public. The Centres subscribe to leading economic, financial dailies and periodicals. They also store the Annual Reports of the companies listed at the Stock Exchange. The Investor Service Centres are also equipped with a Terminal for providing ―live‖ rates of trading at NSE and BSE. A large number of the investors visit the centres to utilize the services being provided by the Exchange. (ii) Investor Awareness Seminars The Exchange has been organizing Investor Awareness Seminars for the benefit of Investors of the region comprising State of Punjab, Himachal Pradesh, Jammu & Kashmir, Chandigarh and adjoining areas of Haryana and Rajasthan. This massive exercise of organizing Investor Awareness Seminars has been launched as a part of Securities Market Awareness Campaign launched by SEBI in January, 2003. The Exchange apprises the investors about Do‘s and Don‘ts to be observed while dealing in Securities Market. Till date, Exchange has organized more than 200 workshops in the region mentioned above.
  16. 16. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 9 (iii) Website of the Exchange: The Exchange has its own website with the domain name The website provides valuable information about the latest market commentary, research reports about companies, daily status of International markets, a separate module for Internet trading, information about listed companies and brokers and sub-brokers of the Exchange and its subsidiary. The website also contains many useful links on portfolio management, investor education, frequently asked questions about various topics relating to Primary and Secondary Market, information about Mutual Funds, Financials of the Company including Quarterly Results, Share Prices, Profit and Loss Accounts, Balance Sheet and Many More. The website also contains daily Technical Charts of various scripts being traded in BSE and NSE. Educational initiatives of exchange LSE has carved out its unique position among the Stock Exchanges of the country for the Knowledge Management. It has set up an Education and Training Cell and the same has emerged as a leading facility in various Financial Services in India. The Exchange has been conducting a unique certification programme in Capital Market in association with Centre for Industry Institute Partnership Programme Punjab University, Chandigarh for the last three year. This programme has widened the horizons of participants vis-à-vis Capital Market Operations as practical skill based knowledge is provided by Stock Brokers, Stock Exchange Officials, Professors of Finance and Business Management and above all Professionals working in different areas of Capital Market. We have completed series of batches of this programme and we now want to scale up this programme
  17. 17. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 10 and are planning to launch various other programmes on areas relating to Securities Market. Stock exchange have edge over others as far as Education and Training in Financial Services is concerned due to following factors: a. Directly connected with the Industry as Regional Stock Exchange. b. Connected with large base of Investors as they use the Stock Exchange as a Trading Platform for their liquidity needs c. Presence in the region of Punjab, Himachal Pradesh, Jammu & Kashmir and Chandigarh through our branches Network and the area being under the jurisdiction of our Exchange. d. Already running Certification programmes in Capital Market successfully. e. Continuously holding Investor Awareness Programmes for Investors & Investor Groups through association with Brokers, Sub-brokers, Colleges, Universities and Consumer Groups.
  19. 19. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 12 INTRODUCTION TO DEPOSITORY The advent of online automated trading in India brought with it several associated benefits such as transparency in trading and equal opportunity for market players all over the country but the problems related to settlement of trades such as high instances of bad deliveries and long settlement cycles continued. The earlier settlement system on Indian stock exchanges was very inefficient as it was unable to take care of the transfer of securities in a quick/speedy manner. Since, the securities were in the form of physical certificates; their quick movement was again difficult. This led to settlement delays, theft, forgery, mutilation and bad deliveries and also to added costs. To wipeout these problems, the Depositories Act 1996 was passed. It was formed with the purpose of ensuring free transferability of securities with speed, accuracy & security. SEBI notified Regulations in order to provide the regulatory framework for the depositories. Depositories gave a new dimension and a new scope for conducting transactions in capital market- primary as well as secondary, in a more efficient and effective manner, in a paperless form on an electronic book entry basis. It provided electronic solution to the aforementioned problems of bad deliveries and long settlement cycle. A Depository is an organization where the securities of share holders are held in the electronic format the request of the share holder through the medium of a depository participant. In September, 1995 the Government have accepted in principle the proposed law for settling up of depositories and of a central depository for immobilization of physical certificates. The central depository is to be set up as trust to hold the physical custody of shared and effect transfers by
  20. 20. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 13 book entries without the need to deal and transfer the physical certificates between parties. This is to be sponsored by public financial institutions and banks and will have a minimum net worth of Rs. 50-100 crores as proposed by the SEBI. This central depository can be connected to a number of share depositories for effecting transfer in book entries. The guidelines and regulations in aspect of the operations of depository participants will help smooth operations among participants and their operations with the central depository. A national securities depository corporation was set up in November, 1996. History The first depository was set up way back in 1947 in Germany. In India it is a relatively new concept introduced in 1996 with the enactment of Depositories Act 1996. Their operations are carried out in accordance with regulations made by SEBI, bye-laws and rules of Depositories Act and SEBI (Depositories and Participants) Regulations Act 1996 .
  22. 22. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 15 REVIEW OF LITERATURE M.T. Raja and Varsha marathe conducted study on Transaction cost for equity shares in India .The main objectives of the study was to analyse the cost of equity shares transaction in physical mode and demat mode. He found that the average cost for the FII in India is lower than stock market like Singapore, china, and Thailand. Due to dematerialization the transaction cost of FII have comedown by 60 % and for mutual funds by 75%. Malabika deo conducted a study on depository ordinance: a new dimension of capital market reform. The objective of the study deals with operations, functions and benefits of depository system. She concluded that introduction of depository system would take away of the ailments facing the present style, making the trading in scrip‘s fool proof, would serve as a panacea and will ultimately pave the way for emergence of highly efficient capital market. However improved banking system, adequate infrastructure and fast information technology are all going to play a crucial role in the success of depository system in India. Chikodikar studies undertaking dematerialization and the objectives framed was demat process and have detailed discussion on demat system-its meaning advantages, demat charges (price) depository
  23. 23. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 16 and depository participants. He found that the electronic trading and trading of securities is a step in the right direction, paperless trading will prove to be boon to the stock market in the years to come. C.R. Ramana conducted study on join in band of electronic trading in securities .He puts vision at the electronic system of security demat and remat its features and protocol. He explained the procedure to sell and buy technique of securities in the demat form.
  25. 25. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 18 DEPOSITORY SYSTEM The rapid growth in number, volume of value of securities in the Indian capital market exposed the limitation of handling securities in the physical / paper mode. The shortcomings of the market became manifest is terms of bad deliveries, delays in the transfer and irregular settlement etc. The result is, a in line with the developments in the securities industry worldwide and is the wake of the increasing trading volume as the local bourse, there emerged the need to replace the existing settlement and clearing system with depository system or a scrip less trading system. Technology is revolutionizing every field of human endeavor and activity. Electronic medium of trading, it was introduced by NSE followed by BSE in 1995, which inducted efficiency in trading system but physical mode of delivery also continue to be a drag. Depositary system providing for dematerialization of securities, custody and trading in electronic book entry form became the unavailable answer to the capital market played by aforesaid ills. Bank for international settlements define depositary, as ―A depositary is a facility for holding securities, enables; Securities transaction to be processed by book entry. Physical securities may be immobilized by the depository or securities may be dematerialized (to that they exist only as electronic records)‖. Depositary means a company formed and registered under companies act, 1956 and which has been granted to certificate of registration under section 12 (1 n) of the Security Exchange Board of India Act 1992. To obviate these problems, the Depositories Act, 1996 was passed. It provides for the establishment of depositories in securities with the objective of ensuring free
  26. 26. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 19 transferability of securities with speed, accuracy and security. It does so by:- a) making securities of public limited companies freely transferable, subject to certain exceptions; (b) dematerialising the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form. In any stock exchange, trades or transactions have to be settled by either squaring up the carrying forward positions or settling by payment of net cash or net delivery of securities. This account settlement period, if it is long leads to several price distortions and allows for market manipulation. It increases the chances of speculation resulting in volatility, which hurts the small investors. With the application of IT in the securities market - screen-based trading and trading through the Internet - it has been possible to reduce this settlement period. Concept of a depository system Depository system essentially aims at eliminating voluminous and cumbersome paper work involved in the script-based system and offers scope for ‗paperless‘ trading through state of-the-art technology. Depository system enables conversion of physical securities in the electronic form through a process of ‗dematerialization‘ (also known as ‗demat‘) of share certificates and facilitates share transactions and transfers electronically without involving any share certificate or transfer deed. Depository system offers option for converting the shares from electronic form to physical or paper from through a process of ‗dematerialization‘ (also known as ‗remat‘). Need for depository system At present, the Indian stock exchanges are following screen based trading and electronic settlement system. The market width are also enlarged, quantity of investors scattered to various distance places from trading and settlement
  27. 27. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 20 place. There are some problems arising in the settlement and transfer system, in stock and share trading. In this circumstance there are a limited number of studies in this area. There is a need for evaluation o f depository system with in the area of investors prospers. The present study is in this direction of research analysis and testing by Parasuraman, (1988) have condensed these into five dimensions of service quality and applied in Depository Participants as follows. 1.Tangibility: Physical facilities, equipment, appearance of personal. 2. Reliability : Ability to perform the promised service dependably and accurately. 3.Responsiveness : Willingness to help customers and provide prompt service. 4.Assurance : Knowledge and Courtesy of employees and their ability to convey trust and confidence. 5.Empathy : Caring individualized attention the company provides to its customers. The first depository set up in India is National Securities Depository Limited (NSDL) and is promoted by IDBI, UTI and NSE. How depository system is beneficial? 1. This system will eliminate paper work as the book entry system does not need physical movement of certificates for transfer process. 2. The risk of bad deliveries, fraud and misplaced, mutilated and lost share certificates will not exist. 3. The electronic media will shorten settlement time and hence the investor can save time and increase the velocity of security movement. 4. Investors will be able to change portfolio more frequently.
  28. 28. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 21 5. The capital market will be more transparent as the trading, clearing and settlement mechanism have to be highly automated and interlinked with the depository among themselves. 6. The market will be highly automated and efficient due to the usage of computing and telecommunication technology for the back office activities for all the capital market players. Safety features in the depository system To ensure safety to the investors the following measures exist- Strict norms for becoming depository participant- Net worth criteria, SEBI approval etc. is mandatory. DP cannot effect ant debit or credit in the demat account of the investor without the valid authorization of the investor. Regulation reconciliation between DP and the depositories. Periodic inspection by Depositories of the office of the DP and Registrar. All investors have a right to receive their statements of accounts periodically from the DP. In the depository system, the depository holds the investor accounts on trust. Therefore if the DP goes bankrupt the creditors of the DP will have no access to the holdings in the name of the clients of the DP. Compulsory internal audit of operations of DP by practicing company secretary of the chartered accountant every quarter. Various procedures for backup and safe keeping of data at all the levels. SEBI has made compulsory trading of shares of all the companies listed in Stock Exchange in demat form w.e.f 2 January 2002. Hence, if the investor wants
  29. 29. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 22 to trade in respect of the companies, which have established connectivity with NSDL & CDSL, he may have to open a beneficiary account. The main depository players are a) Depository (new NSDL and CDSL) b) Issuer companies/Registrars of transfer agent (RTA) c) Depository participant d) Investors e) Brokers (clearing members (CM) LEGAL FRAMEWORK Depositories Act, 1996 and is regulated by SEBI. The depository business in India is regulated by- The depositories Act, 1996 The SEBI (Depositories and Participants) Regulations, 1996 Bye-laws of Depository Business rules of Depository Apart from the above, Depositories are also governed by certain provisions of:- The Companies Act, 1956 The Indian Stamp Act, 1899 Securities and Exchange Board of India Act, 1992 Securities Contracts (Regulation) Act, 1956 Income Tax Act, 1961 Banker‘s Books Evidence Act, 1891
  31. 31. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 24 DEPOSITORY A depository is a centralized warehouse of securities (like shares, debentures, bonds, government securities, mutual fund units etc.) in dematerialized form. The eligible securities are warehoused in the depository in computerized form to enable securities trading and other transactions in electronic mode. Thus, the recordings are done in the form of a book-entry and securities are not issued or exchanged in physical form. The depository system offers an efficient transfer mechanism by interfacing with the stock market related clearing operations. ―Depository means a company formed and registered under Companies Act, 1996 and which has been granted a certificate of registration under section 12(1A) of the Securities and Exchange Board of India Act, 1992‖. It is system whereby it transfer and settlement of scrip‘s take place not through the traditional method of transfer deeds and physical delivery of scrip‘s through the modern system of effective transfer takes of ownership of securities by means of book entry on the ledgers of the depository without physical movement of scrip‘s. Depositories Act, 1996 The Depositories Act, 1996 provides for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by: (a) making securities freely transferable subject to certain exceptions; (b) dematerialization of the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form.
  32. 32. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 25 Role of depository Depository is an organization where the securities of an investor are held in electronic form through the medium of Depository Participants (DPs). It enables surrender and withdrawal of securities to and from the depository through the process of demats and remats. Maintains investor‘s holdings in electronic form. Effect settlement of securities traded in depository made on the stock exchanges. Carries out settlement of traders not done on the stoc k exchanges (off-market trades) Difference between depository and custodian Custodian is a person who keeps custody of securities and carry out certain other custodial activities. Both depository and custodian are different. Following differences can be enumerated between the two:- Depository Custodian Function It a part from keeping the shares in e-form , manages the shares on behalf of investor It function is merely ‗safe keeping‘ of shares. It handle Huge – paper work. Position It is a institution or can be called as an organization itself. It is an in term diary. ACT There is a separate Act i.e. Depositories Act – 1956, a part from SEBI (depositories There is no separate Act and it is regulated by SEBI (Custodian of Securities)
  33. 33. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 26 and participant ) Reg . 1996 Reg. 1996 Models of Depository : 1. Dematerialization: It is a process of conversion of physical share – certificate into electronic – form. So, when a shareholder uses the dematerialization facility, company takes back the shares, through depository – system and equal numbers of shares are credited in his account in e-form. 2. Immobilisation : It is a process of storing of physical share certificates, with depository for safe custody. In this model the original share certificates, can be withdrawn, as it is lodged in depository method. Comparison between Bank account and Demat account S. No. BASIS OF SIMILARITY PARTICULARS 1. Security and Convenience Both are very safe and convenient means of holding deposits/securities 2. Number of accounts No legal barrier on the number of bank or demat accounts that can be opened 3. Transfer of deposits (funds or securities) Funds/securities are transferred only at the instruction of the account holder 4. Physical transfer of money/securities Physical transfer of money/securities is not involved
  34. 34. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 27 5. Nomination Facility Available Bank Account Vs Demat Account S. No. Basis Of Differentiation Bank Account Demat Account 1. Form of Holdings/Deposits Funds Securities 2. Used for Safekeeping of money Safekeeping of shares 3. Facilitates Transfer of money (without actually handling money) Transfer of shares (without actually handling shares) 4. Where to open A bank of choice A DP of choice (can be a bank) 5. Requirement of PAN Number Not Mandatory Mandatory (effective from April 01, 2006) 6. Interest accrual on holdings Interest income is subject to the applicable rate of interest No interest accruals on securities held in demat account 7. Minimum balance requirement AQB* maintainance is specified for certain bank accounts No such requirement 8. Either or Survivor facility Available Not available
  35. 35. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 28 Depository Participant Depository Participant just as a brokers act an agent of the investor at the stock exchange; a Depository Participant (DP) is the representative (agent) of the investor in the depository system providing the link between the company and investor through the Depository. The depository participant maintains securities account balances and intimate the status of holding to the account holder from time to time. According to the SEBI guidelines, financial institutions like banks, custodians, stockbrokers etc. can become participants in the Depository. A DP is one with whom an investor needs to open an account to deal in shares in electronic form. While the depository can compare to bank with which an account can be opened. The main characteristics and role of depository participant are as under:  Acts as an Agent of Depository  Customer interface of Depository  Functions like Securities Bank  Account opening  Facilities dematerialization  Instant transfer on pay-out  Credits to investor in IPO, rights, bonus  Settles trades in electronic segment  Facilitates pledge or hypothecation of securities held in demat account
  36. 36. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 29 Criteria of eligibility of depository participants SEBI regulations have selected various categories of market participants who are eligible to become depository participants. These categories already have a well- established customer interface network and are, therefore, the ideal choice to become the agents of depository. These categories are: Public Financial Institutions Scheduled Banks RBI approved foreign banks operating in India State Financial Corporations Certified custodian of securities Clearing corporations of stock exchanges Registered stock brokers Non-Banking Financial Companies Registrars and transfer agents The regulations specify certain net worth requirements for certain categories. Also NBFCs are allowed to hold securities on their own behalf only and not clients. STEPS INVOLVED IN JOINING DEPOSITORY SYSTEM There are 3 steps in which an investor can covert his physical certificate into electronic form. 1. Open an account with one of the participants of NSDL (A participant is a market intermediary through whom NSDL interacts with the investors). 2. Sign an Agreement with the participant. 3. Submit Dematerialisation Request form along with share certificate to the Issuer.
  37. 37. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 30 ROLE OF DEPOSITORY PARTICIPANTS A depository participant is a representative in the depository system of an investor. As per the SEBI guidelines, financial institutions/banks/custodians/stock brokers etc. can become depository participants provided they meet the necessary requirements prescribed by SEBI. A depository participant is a first point of contact with the investor. The depository participant serves a link between the investor and the company through the depository in dematerialization of shares and other electronic transactions. BENEFITS OF PARTICIPATION IN DEPOSITORY 1. Immediate transfer of securities 2. No stamp duty on transfer of securities 3. Elimination of risk associated with physical certificate such as bad delivery, fake securities, etc 4. Reduction in paper work involved in transfer of securities 5. Reduction in transactions cost 6. Nomination facility 7. Change in address recorded with DP get registered electronically with all companies in which investors hold securities eliminating the need to correspond with each of them separately 8. Transmission of securities is done by DP eliminating correspond companies 9. Convenient method of consolidation of accounts 10. Holding investment in equities, debt instrument and government securities in single account
  38. 38. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 31 Functions of depository 1 SERVICES OFFERED BY NSDL The following services are offered by NSDL to the investors, through its agents viz. Depository Participants. Holding the investors securities in electronic form. Dematerialization and rematerialization of securities. Settlement of trades in electronic form. Electronic credit of public offerings and non-cash corporate actions such as rights, bonus etc. 2 ACCOUNT OPENING Opening a depository account is as simple as opening a bank account. You can open a depository account with any DP convenient to you. There is no restriction on the number of depository accounts a person can open. However, if your existing physical shares are in joint names, you have to open the account in the same order of names before you submit your share certificates for demat. 3 DEMATERIALIZATION Dematerialisation and trading in the demat mode is the safer and faster alternative to the physical existence of securities. Demat as a parallel solution offers freedom from delays, thefts, forgeries, settlement risks and paper work. This system works through depository participants (DPs) who offer demat services and the securities are held in the electronic form for the investor directly by the Depository.
  39. 39. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 32 4 REMATERIALIZATION Remat means converting electronic form into physical form. During a rematerialization process, the request goes from the DP to the r&t agent via NSDL. The r&t agent, after processing the request, will print and dispatch the share certificate directly to you. No transfer duty will be charged to you when you rematerialize your shares. You have the option of rematerializing your total holdings or part of it. In addition to this, you have the option to get the certificates in market lot.
  40. 40. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 33 5 TRADING & SETTLEMENTS At present, the facility of trading and settlement in dematerialised shares is available in The Stock Exchange, Mumbai (BSE), National Stock Exchange (NSE), Bangalore Stock Exchange (BSE), The Calcutta Stock Exchange Ltd (CSE), The Delhi Stock Exchange Association Ltd (DSE), Ludhiana Stock Exchange (LSE) and the Over The Counter Exchange of India (OTCEI). These Stock Exchanges have distinct trading segments viz. the unified (physical) and depository (dematerialised). In the unified segment, investor has the option of delivering physical or dematerialised shares. However, with effect from 4th January, 1999 shares included in the list of select list of companies (including of RELIANCE ENERGY) can be delivered only in the dematerialised form in all stock exchanges linked to NSDL. The other stock exchanges, at present, have only the physical segment. However, in times to come, other stock exchanges too may be providing depository segments. The settlement of trades done in the exclusive dematerialised segments at BSE, DSE, NSE, BSE, CSE, DSE and OTCEI follow the rolling settlement concept, where trade done on each day is settled after a fixed number of days. Right now, the dematerialized segments follow T+5 rolling settlement, which means that trades are settled on the fifth working day from the date of the trade. Current Scenario SEBI has since introduced T+2 rolling settlements from April 1, 2003. T+2 settlement cycle means that the final settlement of transactions done on T, i.e., trade day by exchange of monies and securities between the buyers and sellers respectively occurs on second business day after the trade day excluding Saturdays, Sundays, bank holidays and exchange holidays.
  41. 41. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 34 DAY ACTIVITY T �Trading and daily downloading of statements showing details of transactions and margins at the end of each trading day. T+1 �Confirmation of 6A/7A data by the custodians up to a specified deadline time. Downloading of securities and funds obligation statements by members. T+2 �Pay-in of funds and securities and pay-out of funds and securities by pre specified deadline times. The members are required to submit the pay-in instructions for funds and securities to banks and depositories respectively. T+3 �Auction for shortages in delivery of securities. T+4 �Auction pay-in and pay-out of funds and securities. 6 CORPORATE ACTIONS When any corporate event such as rights or bonus or dividend is announced for a particular security, NSDL will give the details of all the clients having electronic holdings in that security as of the record date to the registrar or share transfer agent. The registrar will then calculate the corporate benefits due to all the shareholders. The disbursement of cash benefits such as dividend/interest will be done by the registrar whereas NSDL will do the distribution of securities entitlements (Rights or Bonus) based on the information provided by the registrar to all those clients who have opted for electronic allotment. 7 NOMINATION The investors have an option of nominating persons who would be entitled to receive shares outstanding in their names in the event of their death. While opening the account with the DP, the investor is required to fill up an application form for
  42. 42. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 35 operating the Account , wherein the investor has an option to fill in the names of their nominees. Shareholders have an option to hold securities in joint names with or without nomination or in single name with nomination which is optional. Such a facility has been recently introduced under the Companies (Amendment) Ordinance, 1998 for shares held in physical form. As far as concerned the nominee entered by the investor while opening the demat account will be the beneficiary and shall be deemed to be the member of the Company. 8 ACCOUNT TRANSFER INSTRUCTIONS An account holder can transfer his account from one DP to another DP account in the prescribed format given by the SEBI. 9 INTERDEPOSITORY INSTRUCTIONS There are two depository i.e., NSDL and CSDL. For e.g. if my depository account is with NSDL, can I receive my securities from an account holder having account with some other depository in India. 10 FREEZING / DEFREEZING A depository account holder (beneficiary account) may freeze securities lying in the account for as long as the account holder wants it. By freezing the account holder can prevent unexpected debits or credits or both, creeping into its account. The following types of freeze facility available in the NSDL the system may BE availed of by submitting freeze instructions to the DP in a prescribed form. Defreezing is vice versa to freeze.
  43. 43. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 36 11 ACCOUNT CLOSING An account holder can close his account by just filling the closing form, which is available with the entire depository participant 12 TRANSMISSION Transmission of securities due to death, lunacy, bankruptcy, and insolvency or by any other lawful means other than transfer is also possible in the depository system. In the case of transmission, the claimant will have to fill in a transmission request form, (which is available with the DP) supported by valid documents. The DP, after ensuring that the application is genuine, will transfer securities to the account of the claimant. For this, the claimant must have a depository account. The major advantage in transmission of dematerialized holdings is that the transmission formalities for all securities held with a DP can be completed in one go, unlike in the case of share certificates, where the claimant will have to interact with each issuing company or its R&T Agent. In case where the deceased was one of the joint holders in the Client account, the surviving client(s) shall be the person(s) recognized by depository as having title to the securities held in that joint Client account. 16 PLEDGING The Depositories Act permits the creation of pledge against securities. Securities held in depository mode can be pledged against a loan or credit or such other facility availed by beneficial owner of such securities. Procedure: 1. Pledgor gives a pledge creation request to DP who enters it in the system. 2. The request reaches the pledgee‘s DP through the NSDL system. Pledgee is intimated by his DP.
  44. 44. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 37 3. Pledgee gibes a pledge creation confirmation to his DP who enters it in the system. 4..Securities are transferred from ‗free balances‘ head to ‗pledged balances‘ head. 5. Loan is given by pledgee to pledgor outside the NSDL system Registered Owner/ Beneficial Owner - In the depository system, the ownership of securities dematerialised is bifurcated between Registered Owner and Beneficial Owner. For the securities dematerialised, NSDL is the Registered Owner in the books of the issuer; but ownership rights and liabilities rest with Beneficial Owner. All the rights, duties and liabilities underlying the security are on the beneficial owner of the security. Free Transferability of shares: Transfer of shares held in dematerialised form takes place freely through electronic book-entry system. Issuing company and registrar and transfer agent The issuing company is that organization which issues the securities. The issuing company sends a list of the shareholders to the depositories. An Issuer of share is the company which had launched its shares in the market via IPO. Registrar and Transfer Agents(RTA) are appointed by Issuer companies to act on their behalf.R&T Agents form an important link between the investors and issuers in the securities market. A company, whose securities are issued and traded in the market, is known as the Issuer. The R&T Agent is appointed by the Issuer to act on its behalf to service the investors in respect of all corporate actions like sending out notices and other communications to the investors as well as dispatch of dividends and other non-cash benefits. R&T Agents perform an equally
  45. 45. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 38 important role in the depository system as well... RTA is a trust company, bank or similar financial institution assigned by a corporation to maintain records of investors and account balances and transactions, to cancel and issue certificates, to process investor mailings and to deal with any associated problems. Clearing corporations Clearing corporation is an entity who takes the responsibility of every trade, which is being dealt on the floor of stock exchange. It acts as a central mechanism for consolidating and settling transactions instead of the member firms settling each trade individually amongst themselves. The members of Clearing Corporation are called as clearing members. Stock bokers/ stock exchange Stockbrokers are the intermediaries who are allowed to trade in securities on the exchange of which they are members. They buy and sell on their own behalf as well as on behalf of their clients. Traditionally in India, partnership firms with unlimited liabilities and individually owned firms provided brokerage services. There were, therefore, restrictions on the amount of funds they could raise by way of debt. With increasing volumes in trading as well as in the number of small investors, lack of adequate capitalisation of these firms exposed investors to the risks of these firms going bust and the investors would have no recourse to recovering their dues. Stock Exchange (SE) is an organised market for dealings in securities commonly referred as secondary market. One of its main functions is price discovery i.e to cause prices to reflect currently available information about a security.
  46. 46. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 39 Investor He is a person who wants to deal in shares and whose name is recorded with a depository. The investor is the real owner of the shares who has lodged them with the depository through book entry till the day he sells them.
  48. 48. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 41 DEPOSITORIES IN INDIA 1. National Securities Depository Limited (NSDL) National Securities Depository Limited is the first depository to be set-up in India. It was incorporated on December 12, 1995. The Industrial Development Bank of India (IDBI) - the largest development bank in India, Unit Trust of India (UTI) - the largest Indian mutual fund and the National Stock Exchange (NSE) - the largest stock exchange in India, sponsored the setting up of NSDL and subscribed to the initial capital. NSDL commenced operations on November 8, 1996. The aim is to provide facilities for holding and handling securities in electronic form. Ownership NSDL is a public limited company incorporated under the Companies Act, 1956. NSDL had a paidup equity capital of Rs. 105 crore. The paid up capital has been reduced to Rs. 80 crore since NSDL has bought back its shares of the face value of Rs. 25 crore in the year 2000. However, its net worth is above the Rs. 100 crore, as required by SEBI regulations. The following organisations are shareholders of NSDL as on December 31, 2009: 1. Industrial Development Bank of India 2. Unit Trust of India 3. National Stock Exchange of India Limited 4. State Bank of India 5. Oriental Bank of Commerce 6. Citibank N.A. 7. Standard Chartered Bank
  49. 49. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 42 8. HDFC Bank Limited 9. The Hongkong and Shanghai Banking Corporation Limited 10. Deutsche Bank A.G. 11. Dena Bank 12. Canara Bank 13. Union Bank of India Management of NSDL NSDL is a public limited company managed by a professional Board of Directors. The day-today operations are conducted by the Managing Director and CEO. To assist the MD and CEO in his functions, the Board appoints an Executive Committee (EC) of not more than 15 members. The eligibility criteria and period of nomination, etc. are governed by the Bye-Laws of NSDL in this regard. 2. CENTRAL DEPOSITORY SERVICES (INDIA) LTD. (CDSL) Bombay Stock Exchange Limited (BSE) promoted CDSL jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, and Union Bank of India and Centurion Bank CDSL was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all market participants. CDSL received the certificate of commencement of business from SEBI in February 1999. All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmadabad, etc have established connectivity with CDSL.
  50. 50. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 43 NSDL CDSL Year operation started 1996 1999 Promoters IDBI, UTI and NSE BSE, SBI, BOB, HDFC, Standard chartered Bank, Union Bank etc. Number of Accounts 1,26,88,865 83,27,482 Value of demat securities (Rs. Cr) 76,79,027 9,73,908 Number of companies 10,843 12,801 DP service centres 14,641 12,601
  52. 52. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 45 ROLE OF DEPOSITORY IN CAPITAL MARKET Introduction to capital market The capital market consists of primary and secondary markets. The primary market deals with the issue of new instruments by the corporate sector such as equity shares, preference shares and debt instruments. Central and State governments, various public sector industrial units (PSUs), statutory and other authorities such as state electricity boards and port trusts also issue bonds/debt instruments. The primary market in which public issue of securities is made through a prospectus is a retail market and there is no physical location. Offer for subscription to securities is made to investing community. The secondary market or stock exchange is a market for trading and settlement of securities that have already been issued. The investors holding securities sell securities through registered brokers/sub-brokers of the stock exchange. Investors who are desirous of buying securities purchase securities through registered broker/sub-broker of the stock exchange. It may have a physical location like a stock exchange or a trading floor. Since 1995, trading in securities is screen-based and Internet-based trading has also made an appearance in India. The secondary market consists of 22 stock exchanges. The secondary market provides a trading place for the securities already issued, to be bought and sold. It also provides liquidity to the initial buyers in the primary market to re-offer the securities to any interested buyer at any price, if mutually accepted. An active secondary market actually promotes the growth of the primary market and capital formation because investors in the primary market are assured of a continuous market and they can liquidate their investments.
  53. 53. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 46 Capital Market Participants There are several major players in the primary market. These include the merchant bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and individual investors. In the secondary market, there are the stock exchanges, stock brokers (who are members of the stock exchanges), the mutual funds, financial institutions, foreign institutional investors (FIIs), and individual investors. Registrars and Transfer Agents, Custodians and Depositories are capital market intermediaries that provide important infrastructure services for both primary and secondary markets. Market Regulation It is important to ensure smooth working of capital market, as it is the arena for the players associated with the economic growth of the country. Various laws have been passed from time to time to meet this objective. The financial market in India was highly segmented until the initiation of reforms in 1992-93 on account of a variety of regulations and administered prices including barriers to entry. The reform process was initiated with the establishment of Securities and Exchange Board of India (SEBI). The legislative framework before SEBI came into being consisted of three major Acts governing the capital markets: 1. The Capital Issues Control Act 1947, which restricted access to the securities market and controlled the pricing of issues. 2. The Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities and disclosures to be made in public issues.
  54. 54. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 47 3. The Securities Contracts (Regulation) Act, 1956, SC(R)A which regulates transactions in securities through control over stock exchanges. In addition, a number of other Acts, e.g., the Public Debt Act, 1942, the Income Tax Act, 1961, the Banking Regulation Act, 1949, have substantial bearing on the working of the securities market. Indian Capital Market has been linked to the International Financial Market and the standard has been increased in terms of efficiency and transparency through Dematerialization of the Indian Capital Market. Considering the limitations exposed by the Indian Capital Market in terms of handling and dealing in securities in paper mode, the main objective of this study is to analyse trends in growth of dematerialization process in the Indian Capital Market. Data‘s were collected from the website of Bombay Stock Exchange during the period of 1998 to 2000 and statistical tools like average percentage and regression analysis were used. The findings clearly revealed that the growth in the Dematerialization process was not keeping pace with the Indian Capital Market due to unpopularity of Demat, lack of information, short direction after the inception of the scheme or the earliest time taken to evaluate its popularity. Dematerialization is the process of conversion of physical certificate in to electronic balances maintained with the depository participants. The securities held in dematerialized form are fungible i.e they do not bear any distinguishing features. In investor should first open an account with a DP and than request for a dematerialization of his certificates by submitting the same to the participant.
  55. 55. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 48 Dematerialization is a process by which physical certificates are converted into electronic form. The certificates are returned to issuer/ registrar by the Beneficial owner (BO) through his depository participant (DP) and one then defaced/ destroyed and an equitant number of securities are credited in the Bo's securities account maintained by the depository, Indian has opted for dematerialization route which is a better option is view of the given the huge paper work involved. An investor makes a dematerialization request, along with the investor‘s physical certificates of securities, to the issuer or its registrar through a depository participant. After prescribed verification and confirmation, their registrar substitutes in its records NSDL as registered owner is respect of the securities and informs NSDL accordingly. NSDL then enters the name of the investor as the beneficial owner of securities, credits the investor‘s accounts and informs the investors depository participant.The introduction of demat system is made on December 1996. But the effective trading on demat commenced only on January 1998. Therefore the investors have converted their physical holding into demat segment to enjoy the benefits of available in demat segment. According to regulation 28 of the SEBI (Depositories and Participants) Regulation 1996, the following securities shall be eligible for being held in Dematerialized form in depository: a. Shares, scrip, stocks, bonds, debentures, debentures stock or other marketable securities of any incorporated company or other body corporate. b. Units of Mutual Funds, Rights under collective Investment Schemes and Venture Capital Funds, Commercial paper, Certificate of Deposit, Securities Debt, Money Market Instruments and unlisted form in a Depository
  56. 56. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 49 WHAT IS DEPOSITORY SYSTEM IN CAPITAL MARKET? The Depositories Act, 1996, defines a depository to mean "a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub-section (IA) of section 12 of the Securities and Exchange BoardofIndiaAct,1992. The principal function of a depository is to dematerialise securities and enable their transactions in book-entry form. The securities are transferred by debiting the transferor's depository account and crediting the transferee's depository account. A depository is very much like a bank in many of its operations. We can draw an analogy between the two in order to get a better understanding of the depository system. In a bank the medium of exchange is money, whereas a depository deals in securities. In a bank, money is given for safe-keeping. In a depository, securities are kept safely. Banks hold and transfer funds; depositories perform the same function with securities. Banks can transfer funds from one account to another without handling cash; a depository can do the same with physical securities. Just as in a bank an account is opened to avail of the banking services, an account has to be opened with a DP for holding scrips in the depository segment. ➨ Either of holders can sign instructions ➨ All joint holders to sign instructions ➨ Minimum balance to be maintained ➨ No minimum balance required ➨ Entitled for interest
  57. 57. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 50 ➨ Interest can be earned only by participating in Stock Lending Scheme ➨ Uses balances in accounts ➨ Does not move balances in account without account holder‘s authorization ➨ Nomination is kept confidential ➨ Signature and photograph of nominee to be provided In case of transactions in a bank account, any one of the joint holders can sign the instructions (cheques), whereas in the depository, all joint holders are required to sign all the instructions. Minimum funds balance prescribed by the bank has to be maintained in the bank account; no minimum balance of securities is required to be maintained in a depository account. A bank uses the funds held in a bank account for lending purposes. The securities maintained in a depository account by an investor can be moved from the account only on basis of a proper authorisation from the account holder. A depository cannot use the client's security balances. Nomination is kept confidential in case of bank accounts. The photograph and signature of the nominee is required to be affixed on the nomination form for registering the nomination for a depository account.
  58. 58. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 51 The model for Dematerialization of NSDL (a) Investor surrender certificates for dematerialization to depositary participant. (b) Depositary participant intimates NSDL of the request through the system. (c) Depositary participant‘s submits the certificate to the registers. (d) Registrar confirms the dematerialization request from NSDL (e) NSDL up dates its account of informs the depositary participant. (f) Depositary participant up dates its accounts and inform the investor. The entire process of dematerialization may take about 15 days. An Investor makes a dematerialization request, along with the investor physical certificates of securities, to the issuer or its registrar through a depositary participant. After prescribed verification and confirmation, their registrar substitutes in its records NSDL as registered owner in respect of the securities and inform NSDL accordingly. NSDL then enters the name of the investor as the beneficial owner of the securities, credits the investor‘s account, and informs the investor‘s depositary participant accordingly. investor depository participant NSDL Register
  59. 59. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 52 Statement of the problem The studies have explored the various aspects in the depository system like cost aspects., difficulties faced by the investor and others of the benefits available to the investor. The Indian capital market has witnessed numerous changes in the recent past as seen earlier. Traditionally stock market booms and decline have resulted in a number of problems for the lay investor. A close introspection of these problems will reveal that most of them are due to intrinsic nature of the paper based trading and settlement system. The capital market exposed the limitation of handling and dealing in securities in physical/paper mode. The short learning‘s of the market became manifest in terms of bad deliveries, delays in transfer and irregular settlement e.t.c. The remedial measure for this may be the system of dematerialization (also called demat) under depositary system. Hence it is an attempt to study about the trends in the growth of the demat process its popularity, the parties involved in the depository system, the location and mechanism in trading and settlement in demat mode. Indian capital market has been linked to the International Financial Market, and the standard has been increased in terms of efficiency and transparency through Dematerialization of the Indian Capital Market. In this context dematerialization is one of the right steps taken by the Government to make the share transfer process easier and on other hand the earlier demerits of the paper transfer process can be rectified. Dematerialization is a process in which the company takes the physical certificates of an investor back and equivalent number of shares is credited in the electronic holdings of the investor. The Indian Capital Market has been showing rapid grow the in the recent part this can be observed from the key indicators of the capital market. But this
  60. 60. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 53 growth has not matched with the supporting infrastructure to handle the growing volume of paper that has flooded the market choking in our existing system this has caused a lot of problems like delay in transfer of shares, settlement of claims high level of failed trade, bad deliveries and high systematic risk exposure etc. The problem of Indian Capital Market is not its size but the lack of infrastructure services to handle its present size and potential growth in the future with the entry of foreign investors and the institutionalization of markets. There had been tremendous pressure on the stock market. For its smooth operations the capital market regulator, SEBI, mandated that stock exchanges must begin the phased introduction of compulsory trading in dematerialized shares by all investors.
  61. 61. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 54 COMPARISON BETWEEN PHYSICAL AND DEMAT SHARES Meaning of physical shares In the past, shareholders received a physical paper stock certificate that indicated that they owned "x" shares in a company. Today, brokerages have electronic records that show ownership details. Owning a "paperless" share makes conducting trades a simpler and more streamlined process. While shares are often used to refer to the stock of a corporation, shares can also represent ownership of other classes of financial assets, such as mutual funds. At present, some shares are still held in physical form as India is still going through the process of popularising the demat format. A time will come when physical shares are finally retired. Over the last 20 years, India has seen boom in the capital market. There has been tremendous increase in the number of companies and the shares issued by these companies. Many investors are participating in the share market today. Earlier, when companies sold their shares to public, share certificates were issued to investors in paper format and the owner of the shares to physically hold the certificates. However, keeping shares in physical form is now leading to a series of problems. Currently, many investors—especially senior citizens—who have physical shares are finding it difficult to convert them into demat form. These investors are also struggling to claim their bonus shares and split shares issued by their respective companies. A large number of investors still hold shares in physical form.
  62. 62. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 55 Most of these shares were purchased by investors as long term investment. Also, they didn‘t intend to trade or sell their shares. Hence these investors didn‘t convert their shares to demat form and pay for demat or annual maintenance charges of depository participants. What is demat? Dematerialisation is the process of converting physical shares into electronic format. An investor who wants to dematerialise his shares needs to open a demat account with Depository Participant. Investor surrenders his physical shares and in turn gets electronic shares in his demat account. In order to mitigate the risks associated with share trading in paper format, dematerialisation concept was introduced in Indian Financial Market. Dematerialisation or Demat in short is the process through which an investor‘s physical share certificate gets converted to electronic format which is maintained in an account with the Depository Participant. India adopted the demat System successfully and there are plans to facilitate trading of almost all financial assets in demat format in future. Through this article, we will try to understand the demat process and its benefits from common investor‘s perspective. Storage of Dematerialised Shares – Depository Depository is the body which is responsible for storing and maintaining investor's securities in demat or electronic format. In India there are two depositories i.e. NSDL and CDSL.
  63. 63. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 56 Process of dematerialisation Dematerialisation process 1. Investor surrenders the physical certificates to the DP for dematerialisation 2. DP informs the Depository about the request 3. DP submits the certificates to the registrar of the issuer company 4. Registrar communicates with the Depository to confirm the request 5. Dematerialisation of the certificates is done by the registrar 6. Accounts are updated by the Registrar & the depository is informed about the completion of dematerialisation 7. Accounts are updated by the Depository & DP is informed about the same 8. Demat account of the investor is updated by DP
  64. 64. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 57 Advantages of Demat Dealing in demat format is beneficial for investors, brokers and companies alike. It reduces the risk of holding shares in physical format from investor‘s perspective. It‘s beneficial for brokers as it reduces the risk of delayed settlement and enhances profit because of increased participation. From share issuing company‘s perspective, issuance in demat format reduces the cost of new issue as papers are not involved. Efficiency and timeliness of the issue is also maintained while companies deal in demat format. There are a lot of other benefits, but let‘s focus on benefits with respect to common investor and the same are listed below. • Demat format reduces the risk of bad deliveries. • Time and money is saved as you are not dealing in paper now. You need not go to the notary, broker for taking delivery or submitting the share certificate. • Liquidity is very high in case of demat format as whole process in automated. • All the benefits of corporate action like bonus, stock split, rights etc are managed through the depository leading to elimination of transit losses • Interest on loan against demat shares are less as compared to physical shares • Investors save stamp duty while transferring shares in demat format. • One needs to pay less brokerage in case of demat shares Demat Conversion Most of the trading in shares are done in demat format now a day, but there are few investors who still hold shares in paper format. You cannot deal in paper shares now, so you need to dematerialise them first. In order to dematerialise
  65. 65. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 58 physical/paper shares, investors need to fill Demat Request Form (DRF), and submit the same along with physical shares. DRF is available with the DP and you simply need to raise a request for demat conversion with the DP. Their representative will come and get the DRF form signed. So the complete process of dematerialisation involves: 1. Investor surrenders the physical certificates for dematerialisation to the DP along with DRF. 2. DP updates the account of the investor and shares are allocated in investor demat holding.
  67. 67. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 60 OBJECTIVES OF THE STUDY At Present the Indian stock exchanges are following screen based trading and electronic settlement system. But investors scattered at various distant places from trading and settlement place. So there are some problems arising in the settlement and transfer system. Thus, there is a need to evaluate the effectiveness of Indian Depository system. The Main objectives of the study are: 1) To evaluate the performance of the Depository system in India with reference to NSDL. 2) To study the Organizational frame work, Operational policies, Problems and Prospects and financial performance of NSDL. 3) To present legislative measures of dematerialization and to understand the present status of dematerialization in India. 4) To analyze services rendered and quality among the DPs and opinions of investors with regard to the functioning of NSDL. 5) To identify the Investors expectations from the DP companies and to exhibit the Investor‘s perceptions on the services offered by the DP companies . 6) To make appropriate and relevant recommendations to the management of the organization under study.
  68. 68. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 61 RESEARCH METHDOLOGY Although India adopted multi-depository system model to provide competitive and healthy depository system for surpass services to Investors. There is a chance to various entities to enter into Depository system but only two organizations National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) are providing depository services presently. The data has been collected from the following sources:- 1. Primary data 2. Secondary data Primary data In this study the questionnaire method have been used to collect primary data. Secondary data Secondary data is collected from the website of NSDL ( and CDSL (, website of Indian central depository system (CDS), published reports of NSDL and Govt. of India, Depository Act-1996, SEBI Act- 1992, and Capital Market Services, published books and printed material on financial services or Intermediaries. Sampling Plan a. Sampling units – it consist of investors. b. Sampling size – 50 investors were questioned.
  70. 70. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 63 ANALYSIS AND INTERPRETATION Q.1 Are you aware of the services of Depository? Particulars Respondents Percentage Yes 45 90% No 5 10% Total 50 100% Interpretation:- The above table shows the opinion of the investors about the Depository services. 90% of the respondents are aware of the Depository services but only 10% are not aware about the Depository services. So the majority of the investors are aware of the Depository Services. Yes 90% No 10%
  71. 71. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 64 Q.2 How do you come to know about Demat? Particulars Respondents Percentage Brokers 12 24% Friends 28 56% Newspaper 10 20% Others 0 0 Total 50 100% Interpretation:- The above data represents that 56% of the respondents came to know about the demat from their friends, 24% from the brokers and 20% from newspaper. So, most of the investors are aware of it from their friends. 24% 56% 20% 0 0 5 10 15 20 25 30 Brokers Friends Newspaper Others
  72. 72. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 65 Q.3 In which Depository do you hold an account? Particulars Respondents Percentage LSE 15 30% India Bulls 10 20% Karvy 12 24% Master Trust 8 16% Others 5 10% Total 50 100% Interpretation:- From the above table it has been observed that about 30% of the respondents hold their Depository account in LSE, 20% in Indian Bulls, 24% in karvyi, 16% in Master Trust and 10% of the respondents hold their Depository account in others. LSE 30% India Bulls 20% Karvy 24% Master Trust 16% Others 10%
  73. 73. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 66 Q.4 What is your opinion about the Depository System? Particulars Respondents Percentage Excellent 20 40% Very Good 15 30% Good 9 18% Average 6 12% Total 50 100% Interpretation:- The above table enlists the investor‘s opinion about the Depository. 40% of the respondents commented that the Depository organization is excellent and another 30% gave their opinion as very good. 18% of the respondents claimed the Depository system as good and another 12% respondents gave their opinion as average. 40% 30% 18% 12% 0 5 10 15 20 25
  74. 74. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 67 Q.5 Since how long have you been operating Demat? Particulars Respondents Percentage Less than 1 years 10 20% 1-2 years 8 16% 2-3 years 14 28% More than 3years 18 36% Total 50 100% Interpretation:- It is clear from the above data that 30% of the investors are operating their demat for more than 3 years, 28% b/w 2-3 years, 20% less than 1 year and 16% are operating b/w 1-2 years. The majority investors are operating their demat for more than 3 years. 0 5 10 15 20 Less than 1 years 1-2 years 2-3 years More than 3years 20% 16% 28% 36%
  75. 75. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 68 Q.6 Are the Depository participants service center are assessable to the common investors? Particulars Respondents Percentage Yes 42 84% No 8 16% Total 50 100% Interpretation:- The above table shows the accessibility of the depository services center to the common investor. 84% of the total respondents disclosed the essay accessibility of depository participants‘ service center to the common investor and only 16% has negative opinion. So it can be concluded that majority of the participants are positive with accept of accessibility of the depository service centers. Yes 84% No 16%
  76. 76. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 69 Q.7 Do you receive regular statements about your Demat account? Particulars Frequency Percentage Yes 40 80% No 10 20% Total 50 100% Interpretation:- The above table shows that 80% out of the total respondents receive regular statement about their demat account and only 20% of the respondents did not receive regular statement about their demat account. So, majority of the investors are aware of it. Yes 80% No 20%
  77. 77. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 70 Q.8 Are you satisfied with the existing fee structure of Depository system? Particulars Respondents Percentage Yes 30 60% No 20 40% Total 50 100% Interpretation:- The above data shows the opinion of the investors on the existing fee structure of Depository. 60% of the respondents declared their favourism towards the present fee structure and 40% of the respondents turned negatively. So, the majority investors have positive opinion. 60% 40% 0 5 10 15 20 25 30 35 Yes No
  78. 78. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 71 Q.9 Did you know that how to open a Demat account? Particulars Respondents Percentage Yes 42 84% No 8 16% Total 50 100% Interpretation:- The table represents that 84% of the investors are aware of the procedure of the demat account and only 16% of the total investors don‘t know about the demat procedure. Therefore, majority investors are aware of the procedure of demat. Yes 84% No 16% Yes No
  79. 79. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 72 Q.10 What is your opinion on the security of the new transferring and settlement system? Particulars Respondents Percentage Positive 50 100% Negative 0 0% Total 50 100% Interpretation:- The above table shows the opinion on the security of new transfer and settlement system. It can be clearly inference that all the respondents unanimously voted positively in favour of the new transfer and settlement system, which can be termed as the total positive approach. Positive 100% Negative 0% Positive Negative
  80. 80. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 73 Q.11 Are you aware about capital markets? Particulars Frequency Percentage Yes 38 76% No 12 24% Total 50 100% Interpretation:- The above data depicts that about 76% of the total respondents are aware of capital market and only 24% of the investors are not aware of capital market. Yes 76% No 24%
  81. 81. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 74 Q.12 What is your usual mode of trading? Particulars Respondents Percentage Online Trading 8 16% Trading through Brokers 30 60% Both 12 24% Total 50 100% Interpretation:- The above data represents that 60% of the total respondents usually prefers trading through brokers, 16% prefers online trading and 24% respondents prefers both. So, the majority investors prefers trading through brokers and the brokers charge commission from such investors. 0 5 10 15 20 25 30 Online Trading Trading through Brokers Both 16% 60% 24%
  82. 82. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 75 Q.13 What are the most frequent defaults in the service of the DP? Particulars Frequency Percentage Insufficient information 16 32% Enquiry problems 23 46% Delay in statement delivery 6 12% Delay in transactions 5 10% Total 50 100% Interpretation:- The above diagram shows that 46% of the total investors think that there is enquiry problem in the services of DP, 32% think it provide insufficient information, 12% investors say that there is delay in statement delivery & 10% says there is delay in transactions. Insufficient information 32% Enquiry problems 46% Delay in statement delivery 12% Delay in transactions 10%
  83. 83. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 76 Q.14 Are you aware of the working of CDSL and NSDL? Particulars Frequency Percentage Yes 30 60% No 20 40% Total 50 100% Interpretation:- The above figure depicts that 60% of the total investors are aware of the working of NSDL and CDSL but 40% of the investors don‘t know that how NSDL & CDSL perform its work. 60% 40% 0 5 10 15 20 25 30 35 Yes No
  84. 84. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 77 Q.15 According to you which one is the most important factor for a trading company to enhance the loyalty and customers? Particulars Respondents Percentage Provide maximum profit 20 40% Provide tips from time to time 15 30% No hidden charges 10 20% Other factors 5 10% Interpretation:- The above data represents that 40% of the total investors think that Profit maximization is the most important factor for the company to enhance loyality & customers, 30% thinks that company should provide time to time tips to the customers, 20% says there should not be any hidden charges charged by the company and 10% goes for other than the above factors. 40% 30% 20% 10% 0 5 10 15 20 25 Maximum Profits Time to time tips No hidden charges Other factors
  85. 85. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 78 FINDINGS  Majority of the investors are aware of the services provided by the Depository system.  Most of the respondents are aware of the basic functions of DEMAT A/C (like procedure of account opening, transaction statement of DEMAT Account, nomination facility, Re-materialization of DEMAT Securities etc.) but most of them do not have any knowledge about NSDL, CDSL and Depositaries Act 1996.  There are more number of male respondents as compare to female respondents.  The investors are satisfied with the fee structure of Depository System.  Investors believes that Demat form is better than the physical form of shares.  Mostly investors wants to get regular statements of their Demat account.  Investors are aware of the Capital market. They required full information about the plans before investment.  Investors invest large amount of their income in order to earn maximum profits but mostly investors believes that it is very risky to invest in the stock market.
  86. 86. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 79 LIMITATIONS OF THE STUDY The study suffered from certain limitations which are as under:- Whole area is not covered in this project so only 50 respondents are representative for complete area. The overall sample was restricted to respondents of Ludhiana. It was difficult to convince the investors that information provided by them was to be used for study purpose only.
  87. 87. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 80 SUGGESTIONS AND RECOMMENDATIONS 1. Since dematerialization has a great bearing on the creation and protection of wealth and investment earnings of an investor, DPs must increase their efforts in promoting enhanced services in general, and in those involving security and safety in particular. 2. To encourage the existing and prospective shareholders, all efforts should be made to ensure good returns, in addition to providing greater security and safety. 3. Since the investors expect better service form depository participants, it should provide them value-added services. 4. The processing of the DEMAT account opening should be made fast and non-tedious. 5. The DEMAT a/c holder should be given basic information about NSDL, CDSL and Depositaries Act 1996. 6. Clear picture of the deductions made by depository participant or the charges levied on the customers should be provided in black and white. 7. Bank should expand its network by opening its more branches and franchise and there should be easy accessibility of services rendered by this system. 8. The processing of the demat account opening should be made fast.
  88. 88. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 81 CONCLUSION To conclude, it can be said that the demat account opening is same as bank account, i.e, single or joint accounts or with nominee. The growth rates of demat account holder in increasing over years. The Indian system of capital market is a two tire system. Indian government allows holding securities in any form i.e either in physical securities or in demat form. The transaction of securities is completely done through electronic form. Investors are not aware of the services offered by depositories. Most of the speculators do no utilize demat account in day-to-day online trading. They trade through broker pool account. Dematerialization process can be done through online trading by utilizing computers.
  90. 90. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 83 BIBLIOGRAPHY 1 BOOKS Dematerialisation in the Indian Capital Market By P.V Nishanth Security analysis and portfolio management By Prasanna Chandra Securities Laws and Compliances By Institute of Company Secretaries of India 2 WEBSITES
  92. 92. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 85 QUESTIONNAIRE 1. Name 2. Age 3. Gender Male ( ) Female ( ) 4.Current status Student ( ) Serviceman ( ) Professional ( ) Businessman ( ) 5. Monthly Income(Rs.) : Below 5000 ( ) 5001-15000 ( ) 15001-25000 ( ) Above 250000 ( ) Q.1 Are you aware of the services of Depository? Yes ( ) No ( ) Q.2 How do you come to know about demat? Brokers ( ) Friends ( ) Newspaper ( ) Others ( ) Q.3 In which Depository do you hold an account? LSE ( ) India Bulls ( ) Karvy ( ) Master Trust ( ) Others ( ) Q.4 What is your opinion about Depository system?
  93. 93. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 86 Excellent ( ) Very Good ( ) Good ( ) Average ( ) Q.5 Since how long have you been operating Demat? Less than year ( ) 1-2 years ( ) 2-3 years ( ) More than 3 years ( ) Q.6 Are the DP Service centre are assessable to the common investors? Yes ( ) No ( ) Q.7 Are you satisfied with the existing fee structure of Depository system? Yes ( ) No ( ) Q.8 Do you know how to open a Demat account? Yes ( ) No ( ) Q.9 What is your opinion on the Security of new transferring and settlement system? Positive ( ) Negative ( ) Q.10 What is your usual mode of trading? Online Trading ( ) Trading through brokers ( ) Both ( ) Q.11 Do you receive regular statements about your Demat account? Yes ( ) No ( ) Q.12 Are you aware about capital markets? Yes ( ) No ( ) Q.13 What are the most frequent defaults in the service of the DP?
  94. 94. LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM 87 Insufficient information ( ) Enquiry problem ( ) Delay in statement delivery ( ) Delay in transactions ( ) Q.14 Are you aware of the working of CDSL and NSDL? Yes ( ) No ( ) Q.15 According to you which one is the most important factor for a trading company to enhance the loyalty and customers? Provide maximum profits ( ) Provide tips from time to time ( ) No hidden charges ( ) Other factors ( ) “Thanks for your co-operation”