Finance(mba) 151

CONTENTS
CONTENTS
Chapter TITLE PAGE
No
Executive Summary 1
1.0 Background of the research 3
2.0 Design of the study 7
2.1 Operational Definition of the study 9
3.0 Profile 12
3.1 Evolution of online trading 17
3.2 Reasons for online trading in India 22
4.0 Analysis & Interpretation 27
4.1 Dematerialized Trading 29
4.2 Depository Service in India 31
4.3 Benefit Of Demat 35
4.4 Bank Account 43
4.5 Trading 50
4.6 Squaring Off 51
4.7 Selling and Buying Of Shares 52
5.0 Findings 64
5.1 Conclusion 66
5.2 Suggestion 68
6.0 Bibliography 70
6.1 Annexure 71

List of tables
Serial No. TITLE PAGE
No.
1) Table 1 Showing usage of Online
trading system continent wise.
24
2) Table 2 Showing ranking of major
benefits of online trading system.
25
3) Table 3 Showing products traded
online.
26
4) Table 4 Showing statistics of NSDL as
on Aug’2004.
33
5) Table 5 Showing savings for a person
who buys shares for long term
investment.
37
6) Table 6 Showing savings for an investor
who sells dematerialised shares.
39
7) Table 7 Showing savings for a trader
who buys and sell very often.
41

List of Graphs
No.
1) Graph showing usage of Online trading
system continent wise.
24
2) Graph showing ranking of major benefits
of online trading system.
25
3) Graph Showing products traded online. 26
4) Graph Showing statistics of NSDL as on
Aug’2004.
33
5) Graph Showing savings for a person who
buys shares for long term investment.
38
6) Graph Showing savings for an investor
who sells dematerialised shares.
39
7) Graph Showing savings for a trader who
buys and sell very often.
41
List of charts
No.
1) Chart 1: Showing NSDL and its Interface 32
2) Chart 2: Showing procedure of opening a
demat account
47

Executive Summary
The term "market" can have many different meanings. It consists of
production to ultimate consumption. One usage of the term denotes the
primary market and the secondary market. These two markets distinguish
between the market where securities are created and the market where they
are traded among investors. Their function is key in understanding how
securities are traded.
The primary market is where securities are created. It's in this market that
firms sell (float) new stocks and bonds to the public for the first time.
Secondary market is where most trading occurs, the secondary market is
the one in which securities are traded after having been initially offered in
the primary market. It is basically a market in which an investor purchases
an asset from another investor, rather than an issuing to corporation. This
includes the NYSE, NASDAQ and all major exchanges around the world.
The defining characteristic of the secondary market is that investors trade
among themselves. For example, if you go to buy Microsoft stock, you are
dealing only with another investor who owns shares in Microsoft.
Microsoft (the company) is in no way involved with the transaction.
However there was an improvement in the mechanism of trading whereby
it was seen that there was a shift from the traditional method of physical

trading to the updated version of online trading. This gave birth to the
system of DEMATERIALISATION (Demat). With the age of computers
and the Depository Trust Company, securities no longer need to be in
certificate form. They can be registered and transferred electronically.
Dematerialisation is nothing but the process by which physical certificates
of an investor are converted to an equivalent number of securities in
electronic form and credited in the investor's account with his (DP)
Depository Party. Only those certificates that are already registered in your
name and are in the list of securities are admitted for Dematerialisation at
NSDL/ CDSL.
Investors readily accepted and are still continuing with this system as
trading in Demat segment completely eliminates the risk of bad deliveries.
In case of transfer of electronic shares, one saves around 0.5% in stamp
duty.
Demat shares are supposed to remove all the problems of physical trading.
The biggest attraction of trading in Demat shares is that the shares an
investor buys comes with a clean title and immediately after the settlement
on the relevant stock exchange. Buying shares in the Demat form always
guarantees the investor a good title as soon as the settlement is over and
hence it is a preferred mode of trading today and will be so in the future
also.

Background of the research
Online brokering global scenario:
Online brokerage has grown substantially since the introduction of Internet
and now account for 40%-50% of retail trade. This change has come in
because individual investors want to increase control over their finances
and do not want someone else to manage the money.
Online trading has become very popular in last couple of years because of
convenience of ease and use. Numerous companies have gone on-line to
meet their customer’s demands enabling them to trade when they want and
how they want to.
Online trade, which now accounts for 50%-60% of all retail trade, is
forecasted to increase to 70% by 2007. At present online brokers hold
$574billion in assets but this figure is expected to grow to $4 trillion by
end of 2007. The market has become saturated and very competitive. As
the number of players increase, it becomes very difficult to differentiate.
The volatility in US equity, market in 1999 and September 11 World Trade
Center attack in 2001 has hurt the online brokerage trading volumes.
Established E-brokerage firms have created bearer to entry that makes it
difficult for new player to enter into the market.

Indian e-broking scenario
The Indian stock broking business has gone through a sea of changes.
From that of a business dominated by few individual players to
institutional members, as did trading open outcry and hidden deeds to
screen best and transparency.
India enters the cyber-trading era to equal the current market trends taking
into consideration the need to facilitate inflow of funds in the capital
market. The trading system will enable all categories of investors, resident
and non-resident Indian, to trade online.
Online brokerage in India is still in its early days. Though the trade
through online broking is very miniscule compare to total trading, the signs
are that it will grow to 30%-35% in next few years.
Effect on off-line Business
With the emergence of e-broking, which offers many benefits like, level
playing filled to all investors, comfort of the house, simplicity, low
brokerage and value added services it could be possible for some of the
offline trade to shift to online trade.

The proportion of online broking business compare to off line broking is
miniscule about less than 1%. The offline player would not be affected
unless the figure reaches a minimum of 8-10%.
Online trade has not started to eat the volumes of, off line business till
now. But at he same time it has created new set of clients for e.g., NRI’s
who were not very active in the market due to lack of transparency and
information, have moved to use this facility. Housewives are another new
category. Net savvy student’s and retired persons are the next expected
category.
But a question is still there, those who get value added services from
broker will continue to stay offline and those that are like any other normal
retail investors, will have no hesitation to shift to online trading. The fact is
that over a few years we would see more non-professionals getting to
access to the market. E-broking has eaten the share of offline broking
business especially into the sub-broking where the same investors went to
get whatever services was provided.
Depository services-beginning of the era of stocks at click
Today it is a practical reality that one can arrange delivery of securities
(shares) sold anytime, anywhere to anyone by a ‘click’ of the mouse and it
is possible to trade in securities and settlement of the accounts from the
convenience of a sitting room or via a laptop. The depository is responsible
to deliver and receive securities trade at the stock exchange, which are the

business partners of the depository. It dose not deal with financial aspect of
the settlement of the trade.
Dematerialisation of securities (shares) was the commencement of the era
of stocks. The beginning was made in 1996, with legislation of the
depository act 1996 and SEBI regulations 1996.
Concept of depositories
A depository means a place where anything is deposited. It can be anything
and can include securities, physical goods, cash and or money or valuables.
We have safe deposit vaults where we deposit our valuables for safe
custody but under our control. This is also a form of depository.
Internationally, there are two systems to hold securities.
• The first is to hold securities in a physical form. The ownership can be
transferred by any means, including the electronic media. This is also
known as ‘immobilization of securities’. This system is followed where the
physical volume of securities is low, for example bullion.
• The second system is to retain the details of the security holding in an
account in an electronic format, which is similar to maintaining a bank
account. This is known as ‘Dematerialisation of securities’. This system is
followed where the volume of securities is substantial.
With the growth of the Indian capital market in the decade and the
increasing trading activity in the stock market, the volume of paper being
exchanged has increased exponentially and will continue to increase. This

was one of the primary reasons for India opting for the ‘Dematerialisation’
depository route.

Statement of problem:
Online trading and Demat are the two emerging concepts in stock market.
It involves personal factors, technical factors, business factors and
economic factors. The interplay of these factors on stock market requires a
deep study about the pattern process and procedures and performance. This
study is intended to identify the various concepts about Demat and the
online trading and its way of functioning.
Scope of the Study
The study encompasses only the major Secondary market that have a
substantial share in the share market. The scope of the study is limited to
the performance of the secondary market for the limited period.
Need for the study
• Physical trading has been given up by many stock exchange
around the world and till India is catching up.
• Transparency has become an important issue with the regular
series of scams over the years
• At this junction, Indian investors are able to avail the facilities of
Depository participants, Depositories, along with brokerage.
• So how far this system is working in India and the investors
experience with these new system of trading.

Objectives of the Study
The awareness level of various concepts of Demat & online trading.
• Most preferred Demat & online trading.
• To study various plans of any company.
• To study the cost of online trading.
• To know the market leaders in the segment.
• To offer suggestions based on findings
Research Design
Throughout the study an attempt has been made to arrive at the
conclusions with help of economic reasoning, experience derived from
secondary markets from the lessons of the economic history. The assets,
which the corporation has inherited, have deep roots and justify full
discussion in its historical perspective.
Sources of data
Database can be classified into two categories, which are:
Primary data: The procedure followed in the collection of primary data is
from the interview method i.e., personal interview with the managers.
Secondary data: The secondary data collected from different websites,
journals, company reports and the available literature on the subject.

OPERATIONAL DEFINITION OF THE STUDY
SECONDARY MARKET: Secondary market is the one in which
securities are traded after having been initially offered in the primary
market. It is basically a market in which an investor purchases an asset
from another investor, rather than an issuing corporation.
STOCK EXCHANGE: It is an association, organization or body of
individuals whether incorporated or not, established for the purpose of
assisting, regulating and controlling business in buying, selling and dealing
in securities.
CLEARING HOUSE (CH): Clearing House is entities setup by Stock
exchanges to ensure that process of settlement takes place smoothly.
Generally Stock Exchange will set aside some capital to start the CH.
ROLLING SETTLEMENT CYCLE: Rolling settlement cycle starts and
ends on the same day and the settlement takes place on T+2, which is 2
business days from the date of the same day from the date of the
transaction.
INITIAL PUBLIC OFFERING – (IPO): The first sale of stock by a
private company to the public. IPOs are often smaller, younger companies
seeking capital to expand their business. IPOs can be a risky investment,
for the individual investor it is tough to predict what the stock will do on
its initial day of trading. It is also known as going public.

FLOAT: It indicates that portion of a new issue which has not yet been
procured by the public. The term also depicts the amount of funds that are
in the process of collection and represented by cheques possessed by one
bank drawn on other local or out of town banks. It also signifies the value
of cheques covered by the Federal Reserve but which are not collected by
the Federal Reserve from the bank on which the cheques were drawn.
MARGINAL TRADING: It suggests buying of security or commodity by
a person from the funds borrowed for part of the purchase price rather than
the entire price. Such a person does not pay for the entire transaction from
his own funds but borrows money for part of the purchase price.
DEMATERIALISATION: Dematerialisation is the process by which
physical certificates of an investor are converted to an equivalent number
of securities in electronic form and credited to the investor’s depository
account with his Depository Party (DP).
DEPOSITORY: A depository account is similar to a bank account. It
gives a summary of an investor’s holding of securities in the companies in
the Indian stock exchange and records transaction details of securities
bought and sold during the period. The information of securities holding is
maintained in the electronic form.
SCRIP: It denotes any temporary document entitling its holder or bearer
to receive stock or a fractional share of stock in a corporation, cash, or
some other article of value upon demand, or at some specified future date.

DEPOSITORY PARTICIPANT: A Depository Participant (DP) is an agent
appointed by the Depository and is authorized to offer depository services
to all investors. An investor cannot directly open a demat account with the
depository. An investor has to open his account through a DP only. The DP
in turn opens the account with the Depository. The DP in turn takes up the
responsibility of maintaining the account and updating them as per the
instructions given by the investor from time to time. The DP generates and
provides the holdings statement from time to time as required by the
investor. Thus, the DP is basically the interface between the investor and the
Depository.
LIMITATIONS OF THE STUDY
 The information provided by the managers may not be the actual figures; it
may be a virtual data in the sense conclusions based on the real data vary
from the virtual data.
 The study is conducted in the short period of time, and due to time
constraints.
 The study covers only to a particular geographical region, and hence the
conclusions cannot be considered as a whole outcome of the industry.

Indian Stock Market Overview
The two primary exchanges in India are the Bombay Stock Exchange
(BSE) and the National Stock Exchange of India Ltd (NSE). In addition,
there are 25 Regional Stock Exchanges. However, the BSE and NSE have
emerged as the two leading exchanges and account for about 80 percent of
the equity volume traded in India.
The NSE and BSE are almost equal in size in terms of daily traded volume.
The average daily turnover at the exchange has increased from Rs 851
crore in 1997-98 to Rs 17,351 crores in 2005- 2006(march) and further to
20000 crores (source; nseindia.com). NSE has around 1900 shares listed with a
total market capitalization of around Rs 31,40,392.32 crore. The BSE has
over 7000 stocks listed and has a market capitalization of around Rs
22,54,378 crore (march06) source; bseindia.com.
Most of the key stocks are traded on both the exchanges and hence an
investor can buy these stocks from either of the two exchanges. Both the
exchange has same settlement cycle, which does not allow investors to
shift their positions. The primary index of BSE is BSE Sensex comprising
30 stocks.
The BSE Sensex is the older and more widely followed index. Both these
indices are calculated on the basis of market capitalization and contain the
heavily traded shares from key sectors. The timing of trading hours starts
from 9.55 am to 3.30 pm. The markets are closed on Saturdays and
Sundays.

The key regulator governing Stock Exchanges, Brokers, Depositories
participants, Mutual Funds, FIIs and other participants in Indian secondary
and primary market is the Securities and Exchange Board Of India
(SEBI) Ltd.
India ranked top 08 countries in term of the market capitalization of its
stock market. If you decide to operate through an exchange, you have to
avail the services of a SECURITIES AND EXCHANGE BOARD OF
INDIA registered broker/sub-broker. You have to enter into a broker-client
agreement and file a client registration form. Since the contract note is a
legally enforceable document, you should insist on receiving it.
You have the obligation to deliver the shares in case of sale or pay the
money in case of purchase within the time prescribed. If you have opted
for transaction in physical mode, in case of bad delivery of securities by
you, you have the responsibility to rectify them or replace them with good
ones.
To affect a transfer in the physical mode the securities should be sent to
the company along with a valid, duly executed and stamped transfer deed
duly signed by or on behalf of the transferor (seller) and transferee (buyer).
It is essential to send by registered post with acknowledgement due and
watch out for the receipt of the acknowledgement card.
If the confirmation of receipt is not received within a reasonable period,
the postal authorities should be immediately approached for confirmation.
Sometimes, for our own convenience, we may choose not to transfer the
securities immediately. This may facilitate easy and quick selling of the

securities. In that case care should be taken to see that the transfer deed
remains valid. However, in order to avail the corporate benefits like the
dividends, bonus or rights from the company, it is essential to get the
securities transferred in our name.
On receipt of our request for transfer, the company proceeds to transfer the
securities as per provisions of the law. In case they cannot affect the
transfer, the company returns back the securities giving details of the
grounds under which the transfer could not be affected. This is known as
Company Objection.
In case we are unable to get the errors rectified or get them replaced, we
may have to recourse to the seller and his broker through the stock
exchange to get back our money. Sometimes securities in physical form
may be lost or misplaced then we must immediately request the company
to record a stop transfer of the securities and simultaneously apply for
issue of duplicate securities.
For transactions in Demat mode we are requested to refer to the
trading/settlement in depositories section. Whom to approach for
Grievance Redressal? There will be occasions when there are grievances
against the company in which we are stake-holders.
Given below are types of grievances for which we could approach SEBI:
 Issue related i.e. non-receipt of refund order/allotment advice,
cancelled stock invests.
 Non-receipt of dividend.
 Shares related i.e. non-receipt of share certificates.

 Debenture related i.e. non-receipt of deb. certificates, non-receipt of
interest warrant.
 Non-receipt of letter of offer for rights and interest on delayed
payment of refund orders.
 Complaints related to collective investment schemes.
 Complaints related to Mutual Funds Mutual Funds Dept., SEBI
 Complaints related to Dematerialisation or DPs, Depositories and
Custodian Cell.
Apart from taking up grievances against companies of the types
mentioned above through SEBI the following types of grievances
could be taken up with other authorities/agencies as given below:
With the Stock Exchange: At the investor Information Centre of all
the recognised Stock Exchanges:
 Complaints related to securities traded/listed with the exchanges.
 Regarding the trades effected in the exchange against the companies.
 Complaints regarding the trades affected in the exchange against the
members of the exchange.
With the Department Of Company Affairs/ concerned Registrar of
Companies (ROC)
 Complaints against unlisted companies.
 Complaints regarding non-receipt of annual report, AGM Notice.
 Fixed deposit in manufacturing companies.

With the Reserve Bank of India:
Fixed deposits in banks and NBFCs.
With the concerned company/ROC:
Forfeiture of shares.
Moreover two other avenues always available to the investors to
seek redressal of their complaints. They areas follows:
 Complaints with Consumers’ Disputes Redressal
 Suit in the court of Law.

EVOLUTION OF ON-LINE TRADING
The history of e-trading began in 1983, when a doctor in Michigan
placed the first online trade using E TRADE technology. What began with
a single click over 16 years ago has now taken the world by storm. The
concept was visualized by one Bill Porter, a physicist and inventor with
more than a dozen patents to his credit, who provided online quotes and
trading services to Fidelity, Charles Schwab, and Quick & Reilly.
This led Bill to wonder why, as an individual investor, he had to pay a
broker hundreds of dollars for stock transactions. With incredible foresight,
he saw the solution at hand: Someday, everyone would own computers and
invest through them with unprecedented efficiency and control.
And today his dream has become a reality. e-trading has become a
way of investing in the developed world and is soon catching on in
developing countries too.
There are three basic things needed for e-trading, a bank account, a
Demat account and a brokerage account. The steps in e-trading replicate
the real life situation and are fairly simple to follow. Once these three
accounts are opened, the money and shares are transferred to your bank
and Demat account automatically, electronically and without any paper
work.

The first step is of course to open an account. One can open multiple
accounts with him or herself as the first name in the account. Then it is
necessary to determine the type of account that you want and how you
want to pay for the trades you make. Accounts can be Individual, Joint,
Sole Proprietorship, Corporate, or Partnership etc.
The form filling requires simple personal details like full legal name,
Citizenship status, Residency status, employer's name and address, your
passportPAN number, Date of birth, etc.
One can download the forms or request for them by post or even
request for a representative of the firm to come over to help you with the
form. Post-submitting, you are allotted a USER ID and PASSWORD while
giving details for registration.
Then an Account Reference Number is generated and displayed to
you. These three things are unique to an individual and ensure security of
transactions. The acceptance of the application is communicated by email.
The Online Trading is a discount trading service appropriate for
individuals who require fast execution, lowest commissions and have the
expertise to make their own trading decisions without the direction of a full
service broker. It gives you an opportunity to leverage your independence
to execute, receive automatic fills, monitor, and manage your account on
your time. With online order-entry system the investor can transmit his/her
orders via the Internet (electronically), directly to the Pit or to the
Exchange floor in real time (in as little as 2.5 seconds).

In order to start trading online it is important that you deposit money
in your bank account before placing a buy order. In order to place a sell
order you must have shares in your DEMAT Account. In order to place a
buy order you need to fund your account.
You can do this by depositing money in your bank account or else you
can sell some shares existing in your Demat account and use the proceeds
of sale to fund your purchase transaction. The amount of money required
before placing a buy order would depend on the value of order and the type
of e-invest account you have enrolled for - whether cash or margin.
In a Margin account one can use a line of credit to buy marginable
securities or for overdraft protection. Such an account is opened after
taking into consideration Annual income, Net worth, description of your
investment objectives, as it involves lending a line of credit. In a cash
account, the amount of securities bought has to be backed by the cash in
the account.
Then comes placing the order. For this you enter your Trading
password and go to trade. From the Trading tab, select Enter Order under
the Stocks heading. Select a transaction type: Buy, Sell. At 'Number of
Shares', type the number of shares that you want to buy. At 'Stock Symbol
or Name(s)', type the stock symbol.
If you don't know the symbol, click 'Find Symbol', type the company
name, click 'Search' and click the symbol that you want from the list. For a

market order, select 'Market'. Otherwise, select 'Limit', 'Stop' or 'Stop
Limit' and enter the price.
'Market Order': you just ask the broker to buy or sell your stocks at the
best price available. 'Limit Order': you tell the broker to trade only when
the stock hits a certain price or better. 'Stop Order': you tell the broker to
sell your shares if the stock drops below a certain price.
Select either 'Good for Day' or 'Good Until Canceled'. If you want to
place an 'All-or-None' order, click 'All or None'. Type your trading
password and click 'Preview Order'. If you want to change your order,
click 'Cancel' and make your changes.
To see if your order has been executed and filled as you expect, check
your account balance. The 'Account Balances' page shows your account
equity (the value of your account) and your buying power.
If an order to buy or sell stock hasn't been executed yet, you might be
able to change or cancel the order. Orders that you have placed but for
which you haven't yet received execution reports appear when you click
'View Open Orders' under the 'Stocks' heading of the 'Trading' tab.
To change a stock order from the 'Trading' tab, select 'View Open
Orders', make sure you're currently in the correct account, the click
'Change' beside the order you want to change.

Enter your change or changes - you can change the quantity, price,
and term. For a new price, select the appropriate option button and then
enter the price (unless you're changing it to a market order).
You cannot change the stock symbol or the transaction type (Buy,
Sell, Sell Short, or Buy to Cover). Enter your trading password and click
'Preview Change Order'. Or, if you want to cancel your changes, click 'Do
Not Change'.
The account opening charge, commission rates and the minimum limit
of transaction vary from site to site. Other charges can include Annual
Services Charges, Custody charges, D-Mat account charges etc.
So sitting at home one can take an investment decision at ease after
having researched and read up fully about the stock. With the advent of
online trading, it would seem that the markets are just a click away.
However, do remember that currently in India the handful of online
trading offers are mere order routing systems. But it will not be long
enough before the entire system goes online.

REASONS FOR ONLINE TRADING IN INDIA:
Each investor has one or other reasons to go for online trading instead
of offline trading. They are as follows:
 They are independent. They fell they have control over their
account, can make their own decisions and don’t have to give
reasons for their actions.
 They have a reason to participate in the stock market and learn about
it.
 They find it interesting, cheap, easy, fast and convenience.
 A lot of information is online so they can keep up-to-date with what
is happening in the trading world.
 They are sure and overconfident.
 They have access to numerous tools to invest and can create their
own portfolio.
 They feel that trading through net can hide from others.
REASONS FOR THE EMERGENCE OF ONLINE
TRADING IN INDIA:
The reasons for providing online trading facility to investors by the Indian
companies are various. They are as follows:
 Online trading has a very good future in India, as it is not exploited
properly so far.
 Consistent increase in the number of users of interest.
 Consistent increase in the number of personal computer users.

 Part of diversification.
 Less investment in technology and other areas compared to the
returns.
 More awareness in investors about the stock market.
RECENT DEVELOPMENTS:
The bumpy Bull Run in the stock markets has triggered a slowdown in
the opening of new account by the depository participants (DPs). Faced
with the sudden dip in the number of new account being opened the DPs
are devising ways to attracts customers.
On offer is Interactive Voice Response (IVR) for the latest update on
Demat accounts and services through the Internet.
Analysts said there was booms in Demat account opening as retail
customers were riding high on the loans extended to pick up initial public
offers. Most of these Demat accounts are now dormant.
Several DPs are planning to launch Interactive Voice Response (IVR)
units and Demat services on the Net, Through these IVR units, investor
will be able to know the current value of their portfolio, current holdings,
transaction list, etc.
Some DPs are providing Demat services on the Net to enable
customer to access their account and get the holding and transaction
statement on a daily basis. For eg: HDFC Bank.

With Online trading an investor can:
 Enter orders through Internet.
 Review your account balances and transaction activity.
 Obtain stock quotes in real time.
 Access company profiles and research.
 Receive the most competitive and current commission schedule.
 Direct Floor Access-Submit trades directly to the pit in real time.
 Institutional Quality Order Entry.
 Market-to-Market Dynamic Account Updates.
 Reduced Commissions - Up to 80% discounted commission rates.
Table 1: Showing usage of Online trading system continent wise.
Continent Percentage
N.America 25%
Asia Pacific 21%
W.Europe 44%
Rest of the world 10%
Usage of online trading system continent w ise
N.America
Asia Pacific
W.Europe
Rest of the
w orld
25%
21%44%
10%

Source: Primary data
Table 2: Showing ranking of major benefits of online trading system
Benefit Single bank Multi-bank
IIT 4 1
TS 1 2
CS 6 3
BS/A 2 4
STP 3 5
QR/A 5 6
0
2
4
6
8
10
12
Ranks
IIT TS CS BS/A STP QR/A
Benefits
Ranking of major benefits multi-bank
Single bank
Source: Secondary data
IIT: Improved Information Transparency.
TS: Time Saving
CS: Cost Saving
BS/A: Better Security/Audit
STP: Straight Through Processing

QR/A: Quality of Research /Analytics
Table 3: Showing products traded online
Product Percentage
Swaps and options 8%
Bonds 15%
Commercial paper 12%
Shares 65%
Products traded online Sw aps and
options
Bonds
Commercial
paper
Shares
65%
12%
15%
8%

Physical Trading
Indian investor community has undergone sea changes in the past few
years. India now has a very large investor population and ever increasing
volumes of trades. However, this continuous growth in activities has also
increased problems associated with stock trading.
Most of these problems arise due to the intrinsic nature of paper based
trading and settlement, like theft or loss of share certificates. This system
requires handling of huge volumes of paper leading to increased costs and
inefficiencies. Risk exposure of the investor also increases due to this
trading in paper.
The risks involved in dealing of shares:
• Delay in transfer of shares.
• Possibility of forgery on various documents leading to bad
deliveries, legal disputes etc.
• Possibility of theft of share certificates.
• Prevalence of fake certificates in the market.
• Mutilation or loss of share certificates in transit.
The physical form of holding and trading in securities also acts as a
bottleneck for broking community in capital market operations.
The introduction of NSE and BOLT has increased the reach of capital
market manifolds. The increase in number of investors participating in the

capital market has increased the possibility of being hit by a bad delivery.
The cost and time spent by the brokers for rectification of these bad
deliveries tends to be higher with the geographical spread of the clients. The
increase in trade volumes lead to exponential rise in the back office
operations thus limiting the growth potential of the broking members.
The inconvenience faced by investors (in areas that are far flung and
away from the main metros) in settlement of trade also limits the opportunity
for such investors, especially in participating in auction trading. This has
made the investors as well as broker wary of Indian capital market. In this
scenario Dematerialised trading is certainly a welcome move.
Trading can be at minimum number in capital market. Split of shares
made more investors to join the investment scenario.

Dematerialised Trading
Dematerialisation or "Demat" is a process whereby the investors
securities like shares, debentures etc, are converted into electronic data and
stored in computers by a Depository. Securities registered in the investors
name are surrendered to depository participant (DP) and these are sent to
the respective companies who will cancel them after "Dematerialisation"
and credit investors depository account with the DP.
The securities on Dematerialisation appear as balances in investors
depository account. These balances are transferable like physical shares. If
at a later date, the investor wishes to have these “Demat" securities
converted back into paper certificates, the Depository helps them to do
this.
Depository functions like a securities bank, where the Dematerialised
physical securities are traded and held in custody. This facilitates faster,
risk free and low cost settlement. Depository is much like a bank and
performs many activities that are similar to a bank.
Following table compares the two
Bank Depository
Holds funds in accounts Holds securities in account

Transfers funds between accounts Transfers securities between accounts
Transfers without handling money Transfers without handling securities
Safekeeping of money Safekeeping of securities
Sample of physical securities being defaced and marked
‘surrendered for dematerialization’
,

DEPOSITORY SERVICES IN INDIA
India has two depository service providers. The National Securities
Depository Limited (NSDL) was incorporated on 8th
November 1996, and
The Central Depository Services Limited (CSDL) was incorporated in 1996
as the second depository, to provide depository services to the investors.
The depositories are required to operate within the legal framework of:
• Depository Act 1996
• SEBI (Depository and Participants) Regulation, 1996
• SEBI’s guidelines issued from time to time
• Bye-laws
• Business Rules
The bye-law and business rules are designed by the depository based
on the above to govern its functioning and operational procedures, and also
that of it business partners.

The procedures of NSDL and CSDL’s procedures are not significantly
different from as it has to follow the same legal framework to operate.
National Securities Depository Limited (NSDL)
At present there are two depositories in India, National Securities
Depository Limited (NSDL) and Central Depository Services (CDS).
NSDL is the first Indian depository; it was inaugurated in November
1996. NSDL was set up with an initial capital of US$28mn, promoted by
Industrial Development Bank of India (IDBI), Unit Trust of India (UTI)
and National Stock Exchange of India Ltd. (NSEIL). Later, State Bank of
India (SBI) also became a shareholder.
NSDL has since its inception built a network of its business partners
and 10 stock exchanges are now trading in securities in the Demat form.
Chart 1: Showing NSDL and its Interface
Investor
Depository
Participant
R & T
NSDL
Clearing House

NSDL carries out its activities through various functionaries called
business partners who include Depository Participants (DPs), Issuing
corporates and their Registrars and Transfer Agents, Clearing corporations/
Clearing Houses etc. NSDL is electronically linked to each of these business
partners via a satellite link through Very Small Aperture Terminals
(VSATs). The investor interacts with the depository through a depository
participant of NSDL. A DP can be a bank, financial institution, a custodian
or a broker.
Table 4: Showing statistics of NSDL as on Aug’2005
Companies available for demat 4,464
Companies signed for demat 4,510
Debt instruments admitted for demat 4,767
Commercial papers admitted for demat 619
Depository participants of NSDL 213
Depository participants' service centre
locations
1,718
Active clients accounts (in thousands) 3,798
Demat custody (Qty. in crores) 6170
Demat custody (Value in Rs crores) 478,845

Statistics of NSDL as on Aug'05 1
2
3
4
5
6
7
8
9
Central Depository Services (CDS)
The other depository is Central Depository Services (CDS). It is still
in the process of linking with the stock exchanges. It has registered around
20 DPs and has signed up with 40 companies. It had received a certificate of
commencement of business from SEBI on February 8, 1999.
These depositories have appointed different Depository Participants
(DP) for them. An investor can open an account with any of the
Depositories’ Participant (DP). But transfers arising out of trades on the
stock exchanges can take place only amongst account-holders with NSDL's
DPs. This is because only NSDL is linked to the stock exchanges (nine of
them including the main ones-NSE and BSE).
Once connected to both the depositories the stock exchanges have also
to ensure that inter-depository transfers take place smoothly. It also involves

the two depositories connecting with each other. The NSDL and CDS have
signed an agreement for inter-depository connectivity.
Benefits Of Demat
Transacting the depository way has several advantages over the
traditional system of transacting using share certificates. Some of the
benefits are:
• Trading in Demat segment completely eliminates the risk of bad
deliveries, which in turn eliminates all cost and wastage of time
• Associated with follow up for rectification. This reduction in risk
associated with bad delivery has lead to reduction in brokerage to the
extent of 0.05% by quite a few brokerage firms. In case of transfer of
electronic shares, you save 0.10% in stamp duty.

• The investor can also avoid the cost of courier/ notarization/ the need
for further follow-up with your broker for shares returned for company
objection
• In case the certificates are lost in transit or when the share certificates
become mutilated or misplaced, to obtain duplicate certificates, the
investor may have to spend at least Rs 500 for indemnity bond, newspaper
advertisement etc, which can be completely eliminated in the Demat form
• The investor can also receive his/her bonuses and rights into their
depository account as a direct credit, thus eliminating risk of loss in transit.
• The investor can also expect a lower interest charge for loans taken
against Demat shares as compared to the interest for loan against physical
shares. This could result in a saving of about 0.25% to 1.5%. Some banks
have already announced this.
• The exclusive demat segments follow rolling settlement cycle
of T+3 i.e. the settlement of trades will be on the 3rd
working day from the
trade day. This will enable faster turnover of stock and more liquidity with
the investor.
• Reduction in handling of huge volumes of paper
• Periodic status reports to investors on their holdings and
transactions, leading to better controls.
• RBI has increased the limit of loans against Dematerialised securities
as collateral to Rs 2mn per borrower as against Rs1mn per borrower in
case of loans against physical securities.

• RBI has also reduced the minimum margin to 25% for loans against
Dematerialised securities as against 50% for loans against physical
securities.
• Demat functions not only in capital market; it also does in money
market.
Savings
Trading in dematerialised shares results in substantial savings for the
investors. Following tables and graphs gives an idea about these savings.
Table 5: Showing savings for a person who buys shares for
long term investment. (On a purchase of Rs10000)
Item
Physical
(Rs)
Depository (demat)
(RS)
Savings
(Rs)
Brokerage 100 50 50
*Stamp Duty 50 1.5 48.5
Postal Charges 30 - 30

Company Objection (courier
etc.)
35 - 35
Settlement charges 10 5 5
Custody (5 years) 50 30 20
Total
275 86.5
188.5
* Stamp duty of 0.015%.
Long term investment
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Brokerage Stamp
Duty
Postal
Charges
Company
Objection
(courier
etc.)
Settlement
charges
Custody
(5 years)
Items
Savings
Savings (Rs)
Demat (Rs)
Physical (Rs)
Analysis: In physical trading an investor incurs 50% charges more than
he/she does in demat. Due to trading in demat an investor saves upto 10%
in brokerage, 50% in stamp duty, postal charges and company objection

like courier etc. Investor can save upto 25% in settlement charges and 20%
in custody of 5 years.
Inference: As compared to physical trading, an investor saves a lot in
demat on account of brokerage, settlement charges and custody and does
not incur any cost in stamp duty, postal charges and courier.
Table 6: Showing savings for an investor who sells
dematerialised shares (For a sale of Rs10000).
Item
Physical
(Rs)
Depository (demat)
(Rs)
Savings
(Rs)
Brokerage 75 50 25
Company Objection (courier,
etc.)
35 - 35
Total
120 55
65

0
10
20
30
40
50
60
70
80
Savings
Physical
(Rs)
Demat (Rs) Savings
(Rs)
Form of shares
Selling of dematerialised shares
Brokerage
Company Objection
(courier, etc.)
Settlement charges
Analysis: Many brokers offer reduced brokerage for selling of
dematerialised securities since they will not have the fear of bad delivery.
Saves upto 35% in company objection, 20% in brokerage charges and 5%
in settlement charges when trading is done through demat rather than doing
physical trading.
Inference: Selling of dematerialised shares is more profitable than
physical selling of shares.

Table 7: Showing savings for a trader who buys and sells very
often. (For a trader who turns over his portfolio of Rs10000 ten
times in a year).
Item Physical (Rs) Depository (demat) (Rs) Savings (Rs)
Brokerage 1000 500 500

Custody (5 years) 125 25 100
Total
1125 575
650
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Savings
Brokerage Settlement
charges
Custody (5
years)
Items
Frequent buying & selling of shares Savings (Rs)
Demat (Rs)
Physical (Rs)
Analysis: For those who sell and buy shares frequently, they save upto
20% in brokerage and settlement charges and upto 40% in custody for 5
years if trading is done through demat and not physically.
Inference: For frequent traders in the stock market demat is a better
option.

Bank Accounts
How to open a bank account with a Depositary participants (DP)?
Opening a depository account is as simple as opening a bank account. To
open an account the investor has 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 DP and the person wishing to open the account.

• Receive your client account number (client ID).
• This client ID along with investors DP ID gives them a unique
identification in the depository system.
There is no restriction on the number of depository accounts a person
can open. However, if the existing physical shares are in joint names,
investor has to open the account in the same order of names before they
submit their share certificates for demat. A sole holder of the share
certificates cannot add more names as joint holders at the time of
dematerializing his/her share certificates.
However, if the investor wants to transfer the ownership from his
individual name to a joint name, he should first open an account as the sole
holder (account A) and dematerialise the share certificates. He should then
open another depository account (account B) in which he is the first holder
and the other person is the second holder and make an off market transfer
of the shares from the account A to account B. The investor will incur a
charge on this transaction.
A client can choose to open more than one account with same DP. In
addition to this, he has a choice of opening accounts with more than one
DP. There is no compulsion for the client to open his account with the
same DP as that of his broker. Even if he has an account with another DP,
he can carry out normal business with his broker. There is no loss in
operational efficiency.
How to choose a DP?

Following are the few aspects that you should consider before
choosing a DP:
Branch-level service: Most DPs offer depository services from their main
branch as well as through other branches and franchisees. Higher the
number of branches your DP has greater will be the geographical
convenience you will have. Before opening an account with a DP you
should also check whether the DP is offering all the services through its
branches.
DPs mandate a time limit for submission of debit instructions before
settlement pay-in time. It should be checked whether the time limit applies
equally to all the branches (or franchisees) of the DP or whether it varies.
Backup facilities: Having an adequate backup system is extremely
necessary for a DP. In case of a system failure all the data could be lost if
backup facilities are not present. Although depositories too have the data
with them but a strong system with the DP ensures no risks and hassles. So
before opening an account get details from your DP about its computer
system's technical specifications and backup facilities.
Safe procedures: Your securities account can get debited only if you
submit to your DP a duly filled and signed 'delivery instruction' form
(separate for market trades and off-market transfers) that authorizes the DP
to debit your account. This form will be executed only when the investor
has sold shares. But the investor could have worries that some one else can
forge your signature on such a form, which your DP will not be able to
detect, and their account will get debited .To get rid of these worries

investor should check that delivery instruction form book that they get
from their DP must be serial-numbered with numbers unique to their
account and recorded in the DP's system.
There is an additional safety feature available with the DPs. Investor
can freeze their account on the debit side if they do not want to sell the
shares from their account, this will ensure that no debit is done in their
account. When they want to sell their shares they can execute the same
form to unlock their account.
Customer Service: DPs should have adequate customer service facilities.
At some time or other the investor will need some information on their
account. DP should be able to provide quick service, so it should be
checked whether the DP has a dedicated customer service department.
OPENING OF DEPOSITORY ACCOUNT
An investor is required to open a depository account with a depository
participant, if he / she wish to buy or sell securities listed in demat form in
the Indian stock exchanges. At present, the following groups of investor
are permitted to open a depository account:

• Individuals
• Non- Resident India
• Foreign nationals of Indians origin, except those from Pakistan,
Nepal and Bangladesh.
• Corporate
• Clearing Members (CM)
• Foreign Institutional Investors (FIIs)
• Mutual Funds (MFs).
SEBI, on 28 January 2000, also permitted foreign corporation and
individuals to invest in the Indian market, albeit with some restrictions. It
has, however, yet to issue the guidelines for opening depository accounts
for this group of investors.
PROCEDURE OF OPENING A DEPOSITORY
ACCOUNT
Chart 2: Showing procedure of opening a demat account
Investor

• Select a Depository Participant
• Complete Depository Account Opening
Form
• Prepare Required Documents, Detailed
• Submit DAOF, with documents to DP
• Sign Agreement with DP
• Open Depository Account
• Generate Client ID (account) number
• Transmit details to depository
• Acknowledge Client ID
• Client ID Activated
• Communicates to investor
• Client ID number
• Guidelines for availing depository
services
Investor
Investor
Depository
Participant
Depository
Participant
Depository
Depository
Participant

Dematerialisation and Rematerialisation
How to Dematerialise Your Shares?
To dematerialise the share certificates the investor has to:
• Fill up a dematerialisation request form, which is available with the
DP;
• Submit their share certificates along with the form; (write
"surrendered for demat" on the face of the certificate before
submitting it for demat)
• Receive credit for the dematerialised shares into their account in 15
days.
Dematerialised shares do not have any distinctive or certificate
numbers. These shares are fungible - which means that 100 shares of a
security are the same as any other 100 shares of that security.
Shares held in street name (market deliveries) cannot be
dematerialised. Odd lot share certificates can also be dematerialised. No
transfer deed is required for dematerializing certificates, the certificates
have to be accompanied by a demat request form (DRF) which can be
obtained from DPs. It is compulsory to mention the ISIN number of the
company while filling up the Demat Request form.
This, to a certain extent, ensures that the security mentioned in the
Demat Request Form is the same as the one the investor intends to
dematerialise. According to the Depositories Act, 1996, an investor has the
option to hold shares either in physical or in dematerialised form. An

investor can hold part of his holdings in demat form and part of his
holdings in the form of share certificates for the same security. An investor
can dematerialise shares that are pledged with a bank, which is a DP as
well.
How to Rematerialise Your Shares?
During a rematerialisation 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 the investor. No transfer
duty will be charged when they rematerialise their shares. They have the
option of rematerializing their total holdings or part of it.

Trading
Trading in dematerialised securities is quite similar to trading in
physical securities. The major difference is that at the time of settlement,
instead of delivery/ receipt of securities in the physical form, it is done
through account transfer. An investor cannot trade in dematerialised
securities through his DP.
Trading at the stock exchanges can be done only through a registered
trading member (broker) of the stock exchange irrespective of whether the
securities are held in physical or dematerialised form. DPs role will only be
to facilitate settlement of trade in the dematerialised form, by transferring
securities from and to the account of the investor, for selling and buying
respectively. Trading in dematerialised securities is presently available at
NSE, BSE, CSE, DSE, BgSE, LSE, MSE, ISE and OTCEI.
Any investor, who buys securities from any of the stock exchanges
where dematerialised securities are available, may receive his delivery in
the dematerialised form as dematerialised shares can be delivered in the
physical segment at the option of the seller. Therefore those investors who
buy securities from these exchanges should necessarily open a depository
account to take delivery of these shares.

Squaring off
In the exclusive demat segment, the trades can be squared off within
the same day as this segment follows a rolling settlement cycle. In the
physical segment the trades can be squared off within the trading period
specified for that stock exchange. This is presently five working days,
between Wednesday to Tuesday at NSE, Monday to Friday at BSE and
Thursday to Wednesday at CSE
If an investor squares off his position within the trading period, he
does not need to open a depository account. Depository account is required
for taking delivery or giving delivery of dematerialised securities in case
an investor buys or sells respectively. In case the investor squares off his
trade and does not have to take or give delivery of dematerialised
securities, the depository account is not used. As in the physical segment,
an investor can go long or short in the demat segment also.
How to access a scrip?
At NSE, the AE and BE segments can be accessed by selecting the scrip
the investor wants to trade in and typing AE or BE in place of EQ.
At the BSE, all scrips have a scrip code. For going to the Demat segment,
add 500000 to the scrip code. For eg If the scrip code of RIL is 325 in
the physical segment, the scrip code to be typed for going to Demat
segment is 500325.

Selling and Buying Of Shares
How To Sell Dematerialized Shares
Selling dematerialized shares in stock exchanges is similar to the
procedure for selling physical shares. Instead of delivering physical shares to
the broker, you instruct your DP to debit your account with the number of
shares sold by you and credit your broker's clearing account.
For this, a delivery instruction has to be given to your DP in a
standardized format, which will be available with your DP.
In short, for selling demat shares;
• You can sell shares in any of the stock exchanges linked to a
depository through a broker of your choice.
• Give an instruction to your DP to debit your account and credit your
broker's clearing member pool account. (this is a depository account
used exclusively for settling transactions by a broker)
• On the pay-in day, your broker gives instruction to his DP for delivery
of the shares to clearing corporation of the relevant stock exchange.
• The broker receives payment from the clearing corporation
• You receive payment from your broker for the sale in the same
manner you would receive payment for a sale in the physical mode.

How To Buy Dematerialized Shares.
The procedure for buying dematerialized shares in stock exchanges is
similar to the procedure for buying physical shares. When you want to
purchase shares in electronic form, you have to instruct your broker to
purchase the dematerialized shares from the stock exchanges linked to a
depository.
Once the order is executed, you have to instruct your DP (vide a
simple format which is available with the DP) to receive securities from
your broker's clearing account.
Alternatively, you may give a standing instruction to receive credits
into your account and do away with giving a separate receipt instruction
each time you expect a credit. You have to ensure that your broker too gives
a matching instruction to his DP to transfer the shares purchased on your
behalf into your depository account.
You should also ensure that your broker transfers the shares purchased
from his clearing account to your depository account, before the book
closure. This is really important because shares that remain in the clearing
account of the broker on the book closure/ record date will not be eligible for
corporate benefits.

In brief, the transactions relating to purchase of shares are:
• You can purchase shares in any of the stock exchanges connected to a
depository through a broker of your choice and make a payment to
your broker;
• Your broker receives credit in his clearing account with his DP on the
pay-out day;
• Broker gives instructions to his DP to debit his clearing account and
credit your account;
• You instruct your DP for receiving credit into your depository account
either through a specific receipt instruction or using the "standing
instruction" facility.

Charges
NSDL does not charge the investor directly but charges its DPs, who are
free to charge their clients. NSDL charges its DPs under the following
heads:
Transaction Fees: Market Trade - sale - nil; purchase - 5 basis points (i.e.
0.05% of the value of net receipts to a clearing members account)
Off Market Trade: sale - nil; purchase - 10 basis points (i.e. 0.1% of
value of securities)
Custody Fees: 3.5 basis points p.a. (i.e. 0.035% p.a. of average value of
securities)
Rematerialisation: Rs. 10/- per certificate
One time payment scheme: NSDL has announced a new scheme under
which, if a company makes a one-time payment of 5 basis points (0.05%)
of the average market capitalization during the preceding 26 weeks, then
NSDL will not charge any custody fees to the DPs for shares of that
company. Future issues by such companies would require a payment of 5
basis points on the new share capital created. The valuation for new shares
will be done at the issue price. Companies would not be required to pay
any additional amount, if they make a bonus issue.

Receipt of Cash/ Non-Cash and Corporate benefits
When any corporate event such as rights or bonus or dividend is
announced for a particular security, depository will give the details of all
the clients having electronic holdings in that security as of the record date
to the registrar.
The disbursement of cash benefits such as dividend/ interest will be
done directly by the registrar. In case of non-cash benefits, depository will
directly credit the securities entitlements in the depository accounts of all
those clients who have opted for electronic allotment based on the
information provided by the registrar.
If an investor has holdings in physical form, he can receive the bonus/
rights issue against this in the dematerialised form. In case of fractional
part, as in the physical segment, it would be paid in cash and the remaining
whole part would be credited to the investors account.
NSDL provides details of the beneficial owner as on (the record date)
to the Issuer Company / register so as to enable the company the benefits
arising out of these holdings. Shareholders are given the option by the
issuer, of receiving their securities entitlements (like bonus or rights) in the
form of physical certificates or in the form of dematerialised holdings. If
the investor chooses to receive securities in the dematerialised form, he
gets a direct credit to his account through NSDL, thereby avoiding the risk
of loss of certificates in transit..

Lending, borrowing and transmission of securities
How to Lend Securities?
The investor has to instruct their DP through a standard format (which is
available with your DP) to deposit their securities with the intermediary. If
the intermediary accepts the deposit of securities, the securities will be
moved from their account into the intermediary's account. If they wish to
recall the securities lent, then they can make a request through a standard
format available with their DP.
How to Borrow Securities?
The investor has to instruct their DP through a standard format (which is
available with your DP) to borrow securities from the intermediary. If the
intermediary accepts the request, the securities will be moved from the
intermediary's account to their account. If they wish to return the securities
borrowed, then they can make a request through a standard format
available with the DP.
Transmission of Securities:
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. 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 dematerialised 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.
In case where the deceased was a sole holder of the Client account, his
legal heir(s) or the legal representative(s) will be the person(s) recognized
by depository as having title to the securities held in that sole Client
account.

Security
National Security and Depository Limited claims to have undertaken
sufficient security measures. These measures are:
• A DP can be operational only after registration by SEBI, which is
based on the recommendation from NSDL and SEBI’s own
independent evaluation.
• Every day, there is a system driven mandatory reconciliation between
the DP and NSDL.
• There are periodic inspections into the activities of both DP and R&T
agent by NSDL. This also includes records based on which the debit/
credit are affected.
• The data interchange between NSDL and its business partners is
protected by standard protection measures such as encryption. This is
a SEBI requirement.
• There are no direct communication links between two business
partners and all communications between two business partners are
routed through NSDL
• All investors have a right to receive their statement of accounts
periodically from the DP.
• Every month NSDL forwards statement of accounts to a random
sample of investors as a counter check.

• In the depository, the depository holds the investor holdings 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. These
investors can then either dematerialise their holdings or transfer them
to a different account held with another DP.
• Investor grievance: All grievances of the investors are to be resolved
by the concerned DP. If they fail to do so the investor has the right to
approach NSDL.
• Insurance Cover: NSDL has taken a comprehensive insurance policy
to protect the interest of the investors in cases of failure of the DP to
resolve a genuine loss. The details of the policy is as under:
• Upper limit per claim: Rs200mn
• Number of claims allowed: unlimited
• Minimum value of the claim: Rs150, 000
• To cover claims valued less than Rs150, 000 NSDL has an investor
protection fund in place.
Besides all these safety measures efforts have been done to make this
electronic system foolproof.

Demat Shares: Are They 100% Safe
When an investor buys physical shares from the stock market, they
can never be certain of the validity of the title of shares. There were many
reasons- the sellers' signature did not match, or the certificates were fake,
forged or stolen, and so on.
Demat shares are supposed to obviate these problems. Buying shares
in the demat form always guarantees the investor a good title as soon as the
settlement is over. The biggest attraction of trading in demat shares is that
the shares an investor buys comes with a clean title and immediately after
the settlement on the relevant stock exchange.
Rule 100 of market regulator SEBI determines whether the shares
delivered in a settlement, are good or not. Under rule 100, the shares that
have been transferred any number of times can still be withdrawn by the
company, if a transfer is found to be invalid for any reason.
Suppose an investor <A> sells physical shares to investor <B> and
investor <B> gets them dematerialised. Later <B> sells the shares in the
stock exchange and investor <C> buys them. Meanwhile <A> discovers
that his share certificates were stolen and fraudulently sold by someone
else. He gets a court order restraining the company from further
transferring the shares and attaching them (currently in possession of C).
This is known as 'stop transfer'. So <C> who has bought dematerialised
shares is now struck with the shares. He cannot sell these shares since they
would be frozen in his account

Safety of the system has given boost to secondary market operations.
Volume increased and number of securities increased by reducing the face
value. In demat shares, pre-demat problems about the validity of a share do
not affect the interest of the buyers after dematerialisation. Shares go
through a verification process at the registrars' before they are
dematerialised.
Therefore the responsibility lies with the registrar. The registrar must
find a remedy if the original transfer of shares, before their
dematerialisation comes under doubt. But there is a catch. The company
and its registrars are not responsible if the reasons for original transfer
being invalid were not available at the time of dematerialisation. Matters
have to be dealt with, on a case-to-case basis. Which means that even
demat buyer may find that his shares have been frozen in his demat
account. This kind of case has to be contested in court by the parties
involved.
This issue is not directly addressed in ‘The Depositories Act, 1996’.
SEBI’s regulations on depositories and depository participants also do not
mention the issue. Matters get more complex if an investor has traded
further in shares of the same company in his demat account. Demat shares
are fungible and don’t have distinctive numbers. It is not easy to track the
sale or trade of shares after they are dematerialised.

One of the major worries in case of dematerializing the physical
holdings is the taxman. Through depositories or DPs Income Tax
department can easily track down your holdings in capital market. This
could be a reason for worry to the people as it is not possible at all as the
settlement process is streamlined.

Findings
• After the introduction of dematerialisation the stock market has
become more transparent and it attracts more investors day by day.
• If the volume increases continuously, DPs will be in a position to
decrease the charges for opening and maintenance of demat a/c.
• It is observed that banks normally levy a lower service charge
compared to other depository participants.
• There are some other banks which charges less services charges for
demat services than other securities companies.
• When the numbers of users are more on line, the speed of the
transaction is affected.
• Since the rolling settlement is one day, people who are speculating
without having full amount of money or shares with their DP, tend to face
higher degree of risk.
• Some securities have not yet started with the Interactive Voice
Response (IVR) units and demat on net.

• Even though online trading provides privacy to the clients, trends
available from the trading room will not help most of the online traders.
• Investors dealing online must possess good knowledge for analyzing
the information passed on by the companies through net.
• Online service depends highly on technology.

Finance(mba) 151

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Finance(mba) 151