What are depositories? What have they got to do with the trading life cycle. Who are depository participants?

1. Sai Surya Teja Maddikonda

2. I will cover in this presentation:
 What is a Depository?
 Necessity of a Depository
 Services offered by Depository
 Depository Participant
 Depository System: How it works
 Benefits of Depository System
 What are the costs involved?

3.  A depository can be defined as an institution where the investors can
keep their financial assets such as equities, bonds, mutual fund units
etc in the dematerialised form and transactions could be effected on
it.
 Examples:
National Securities Depository Limited Central Depository Services Limited

4.  An effective and fully developed depository system is essential for
maintaining and enhancing the efficiency of a mature capital market.
 Before introduction of Depository system, the problems faced by
investors and corporates in handling large volume of paper were as
follows:
 Bad deliveries
 Fake certificates
 Loss of certificates in transit
 Mutilation of certificates
 Delays in transfer
 Long settlement cycles
 Mismatch of signatures
 Delay in refund and remission of dividend etc

5.  Through a system of paperless securities, depositories have made
the going easier to other institutions as well such as Stock
Exchanges and its clearing houses, stock broking firms, equity
issuing companies, share transfer agents etc.
 Dematerialisation is a process where in securities certificates held in
physical form converted into electronic form and credited to demat
account of an investor opened with a depository participants.

6.  Maintenance of accounts of investors.
 Dematerialisation and re-materialisation of shares.
 Settlement of market transaction through the release and receipt of
securities in the investor's account.
 Off market transfers.
 Inter-depository transfers.
 Distribution of non-financial benefits from corporates to its
shareholders.
 Nomination facilities.
 Transmission of shares.
 Hypothecation of dematerialised securities for a bank loan.
 Freezing of account to protect one's holdings when he is temporarily
out of the scene etc.

7.  A Depository Participant (DP) is a registered agent of the depository
concerned and it is through the DP that an investor gets the services
of a depository.
 To avail this service, one has to open a Depository Account (or
Beneficial Owner Account) with the DP and shares for
Dematerialisation have to be surrendered.
 Banks, Non Banking Financial Companies (NBFC) and Stock Brokers
can act as Depository Participants after obtaining the required
approval from SEBI and also complying with other statutory
requirements.

8.  The DP account links the investor to the Depository which in
turn has electronic links with the Stock Exchanges, corporates
and their Transfer agents etc as stated above.
 This interface of the depository with various associates opens
up a lot of services to the investor through the DP account.
 Examples:
 Payment or receipt of shares towards his transactions via Stock
Exchanges,.
 Receipt of bonus or right shares from the corporates in which
he/she is a share holder.
 Registering of share transfer.
 Dematerialisation etc.


9.  A depository system carries out its activities through various
associates that include depository participants (DP), issuing
companies and their share transfer agents, clearing corporation of
Stock Exchanges etc.
 The depository is electronically linked to each of these business
partners via satellite links or through leased lines.
 This integrated system including the electronic links as stated above
and the software at NSDL and each business partners end is called
the National Electronic Settlement and Transfer System. (NEST)

10.  In the depository system, the ownership and transfer of securities
takes place by means of electronic book entries.
 Bad deliveries could be eliminated since shares are registered in the
electronic form that can not be mutilated easily.
 Elimination of all risks associated with physical certificates.
 Dealing in physical securities has associated security risks of theft of
stocks, mutilation of certificates, and loss of certificates during
movements through and from the registrars etc. Such problems do
not arise in the depository environment.

11.  No stamp duty for transfer of any kind of securities in the
depository.
 This waiver extends to equity shares, debt instruments and units of
mutual funds etc in the depository. Thus, cost can be reduced.
 Immediate transfer and registration of securities: In the depository
environment, once the securities are credited to the investors
account on pay out, he becomes the legal owner of the securities.
There is no further need to send it to the company's registrar for
registration. Else, having purchased securities in the physical
environment, the investor has to send it to the company's registrar
so that the change of ownership can be registered and this usually
takes many months.

12.  Faster settlement cycle: The exclusive demat segments follow rolling
settlement cycle of T+2 i.e. the settlement of trades will be on the
5th working day from the trade day. This will enable faster turnover
of stock and more liquidity with the investor.
 Faster disbursement of non cash corporate benefits: NSDL provides
for direct credit of non cash corporate entitlements like rights,
bonus etc to an investor's account, thereby ensuring faster
disbursement and avoiding risk of loss of certificates in transit.
 Low brokerage for trading in dematerialised securities: Brokers
provide this benefit to investors as dealing in dematerialised
securities reduces their back office cost of handling paper and also

13.  Eliminates the risk of being the introducing broker: Elimination of
problems related to address Change, Transmission etc.
 In case of change of address or transmission of demat shares,
investors are saved from undergoing the entire change procedure
with each company or registrar. Investors have to only inform their
DP with all relevant documents and the required changes are
effected in the database of all the companies, where the investor is a
registered holder of securities.
 Elimination of problems related to selling securities on behalf of a
minor. A natural guardian is not required to take court approval for
selling demat securities on behalf of a minor.

14.  There are 3 operations that can be done to the securities in the
depository:
 Debit: Securities (such as shares) are debited to the Depository. (Similar to
selling off the securities)
 Credit: Securities are credited to the Depository. (Similar to buying of
securities).
 Custody: The securities idly reside in the depository.
 The Depository charges the Depository participant only for the debit
transactions.
 No matter how much is the volume of the transaction, the charge
per transaction is the same. (i.e. For a transaction of 10 shares or 1
million shares, the transaction cost is the same)

15.  But the Depository does not charge anything for the credit or
custody of securities.
 The Depository Participant in turn levies some add-ons to the
amount charged by the Depository and charges this cumulative
amount from the Individual.
 The individuals have to select their Depository Participant to open a
demat account with, by considering various cost factors as
mentioned above.

16. Thank You