THE DEPOSITORY SYSTEM IN INDIA

A project submitted to

Army Institute of Law, Mohali

In partial fulfillment of the requirements for the award of
Degree of BA LLB

Submitted to: Submitted By

Dr. Gurleen Kaur Neha Kumar

Roll No 2223

Punjabi University Patiala (Punjab)

Session 2025-26
DECLARATION
It is certified that the project work presented in this report entitled ‘THE DEPOSITORY
SYSTEM IN INDIA’ embodies the results of original research work carried out by me. All
the ideas and references have been duly acknowledged.

Name- Neha Kumar

Roll no.- 2223
ACKNOWLEDGEMENT
In preparation of my assignment, I had to take the help and guidance of some respected persons,
who deserve my deepest gratitude. As the completion of this assignment gave me much
pleasure, I would like to show my gratitude towards Dr. Gurleen Kaur for giving me guidance
for assignment throughout numerous consultations. I would also like to extend my gratitude
to all those who have directly and indirectly guided me in writing this assignment.

I would like to thank my family and peers, whose constant encouragement kept me motivated
to work towards the completion of this project. I would also like to extend my gratitude towards
Army Institute of Law, Mohali and Dr. Tejinder Kaur, the Principal, Army Institute of Law,
Mohali for giving me this golden opportunity of making a project on such an interesting and
engaging topic.
 TABLE OF CONTENTS

INTRODUCTION .............................................................................................................................. 5
WHAT IS A DEPOSITORY? ............................................................................................................. 5
HOW DOES A DEPOSITORY WORK? ............................................................................................ 5
DEPOSITORY PARTICIPANT (DP) ................................................................................................. 6
SERVICES PROVIDED BY A DEPOSITORY .................................................................................. 6
DEMATERIALIZATION PROCESS ................................................................................................. 7
RIGHTS AND OBLIGATIONS UNDER DEPOSITORIES ACT, 1996 ............................................. 8
ROLE OF SEBI REGARDING DEMAT SYSTEM ............................................................................ 9
PROCEDURAL REQUIREMENTS OF SEBI TO OPERATE DEMAT ACCOUNTS ........................ 9
POWER OF SEBI TO ISSUE PENALTIES...................................................................................... 10
KEY FEATURES OF THE DEPOSITORY SYSTEM IN INDIA ..................................................... 11
LEGAL FRAMEWORK ................................................................................................................... 12
CASE LAWS ................................................................................................................................... 12
CONCLUSION ................................................................................................................................ 14
BIBLIOGRAPHY............................................................................................................................. 15
INTRODUCTION
This article takes you in short through some of the key components of the Depositories Act,
1996. Before we get into the details of the Act, let us in short understand the need for this Act
in the first place. India witnessed rapid growth in the capital market in the 21st century.
However, the transactions involved paperwork that was tedious as well as voluminous. The
existing system was paper-based and had issues like bad deliveries, delays in transfers,
settlement periods that were long, etc. These characteristics were the sign of a market that was
underdeveloped. Also, this was not on par with international markets and standards. To
overcome these challenges, a Depository system was introduced. The aim was to remove the
challenges with the state-of-the-art technology.

WHAT IS A DEPOSITORY?
To explain in simple terms a depository is a place where something is deposited for security
purposes. It could be a bank, a company or an institution that holds securities and facilitates
the exchange of the securities. The depository is an institution that is allowed to accept
monetary deposits from its customers.

The definition of depositories under the Depositories Act, 1996 is that a “depository” is a
company registered under the Companies Act, 1956. It would be granted a certificate of
registration under Section 12 subsection (1A) of Securities and Exchange Board of India Act
(SEBI), 1992. Hence the Depository becomes an organization like a central bank. The main
role of Depositories is to dematerialize the securities which mean converting the securities
from physical form to electronic form and enabling transactions in electronic form. The
depository needs to obtain a certificate of commencement of business from SEBI. At present
two Depositories are functioning in India:

National Securities Depository Limited (NSDL) Central Depository Services (India) Limited
(CDSL)

HOW DOES A DEPOSITORY WORK?

In the depository system, share certificates belonging to the investors are dematerialized
which means shares are converted to electronic form. As per the system the names of the
investors are then recorded in the depository as beneficial owners. After this change, the
investor’s names in the company register get replaced by the name of the depository as the
registered owner of the securities. The depository does not have any voting rights or any other
economic rights in respect of the shares as a registered owner. The beneficial owner continues
to enjoy all the rights and benefits and is subject to all the liabilities held by a depository. A
beneficial owner is a person whose name is recorded with the depository.

DEPOSITORY PARTICIPANT (DP)

The Depository Participant is the link between the owner of the securities and the depositors.
He is deemed to be an agent of the depository. Accordingly, he is authorized to offer
depository services to investors. As per SEBI regulations and Depository Act, a depository
cannot interact directly with beneficial owners. He has to deal with its agents called
Depository Participant. Neither can the investors directly approach the depository for any
services. They have to interact through the DP.

SERVICES PROVIDED BY A DEPOSITORY

The following services are provided by a depositor through a DP:

1. Opening a Demat Account

The first step is to open a Demat Account. Demat Account is the short form for
Dematerialisation Account. It is the process of holding investments like mutual funds, shares,
bonds, government securities, etc. It does away with the hassles of maintenance of physical
documents.

2. Dematerialization
This process is the conversion of physical shares to electronic shares. When a shareholder
uses this facility, the Company takes back the physical shares through the depository system
and equal numbers of shares are credited into the shareholder’s account.

3. Rematerialization
This is the exact opposite of Dematerialization. Here physical securities are issued in place of
securities in electronic form.

4. Other services
 Pledging Dematerialized shares
Dematerialized shares can be pledged. After the loan is repaid a request can be made through
one’s DP to close the pledge through a standard format.
 Initial Public Offerings
Public offer credits can be directly received into the Demat account.

 Receipt of cash/non-cash benefits

When rights or bonus or dividend is announced by any corporate event for a particular
security, the depository will give the details of all the clients having electronic holdings to the
registrar as on that date. The registrar will then calculate the benefits due to all the
shareholders.

 Stock lending and borrowing

Securities in the Demat form can be easily lent/ borrowed. Instructions are to be given to DP
through a standard format (which is available with DP).

 Transmission of securities
In case there is a need for transmission of securities due to death, lunacy, bankruptcy,
insolvency, or by any other lawful means, it is possible through the depository system. The
claimant will have to fill in a transmission request form supported by valid documents.

 Freezing Account with DP

If at any time one wishes that no transaction should be affected in one’s account, one may
advise one’s DP accordingly. DP will freeze the account of the investor until further
instructions.

DEMATERIALIZATION PROCESS

1. Appointing DP
The investor chooses a DP of his choice and opens an account with him. The process will be
just like opening an account with a bank. The Investor gets an identification number called
Client ID. This is just like the bank account number. This no is the reference point for all
transactions with DP. Every investor with the help of a DP has to agree with a depository to
get his holding dematerialized. This step is necessary whether an investor already has
securities or securities are yet to be issued in a fresh issue.

2. “Demat” Request
The investor makes an application to DPs in a form called Dematerialisation Request Form is
known as DRF. This form is provided by the DP, the investor hands over his share
certificates after cancelling them in writing. The certificates are then surrendered to get
dematerialized for Demat. The DP will accept certificates registered only in the investor’s
name.

3. Verification and confirmation by Registrar

The depository electronically intimates the issuer or its Registrar of the dematerialization
request. The issuer or the Registrar has to verify the security certificates. He also has to verify
that the DRF has been made by the person recorded as a member in its Register of Members.
Once the Registrar is satisfied, it dematerializes the scrip and updates its record. The Registrar
then authorizes electronic credit for that security in the investor’s favour and informs the
depository of the same.

4. Crediting the Client’s Account

The investor’s account is credited by DP with the number of shares dematerialized. After this,
the investor holds the securities in electronic form. The investor gets the information in the
form of a statement. However, in case, there is a rejection then such credit is not given.

RIGHTS AND OBLIGATIONS UNDER DEPOSITORIES ACT, 1996

1. A depository has to enter into an agreement with one or more participants as its agent
under the Act.
2. Any person can enter into an agreement with a depository to avail its services through
a participant in the procedure specified by the bye- laws of that particular depository.
3. After a person enters into an agreement with the depository, such person has to surrender
his or her certificate of security to the issuer.
4. After receipt of certificate of security by the issuer, the issuer is supposed to cancel the
certificate of security and make a record in its entries with the depository’s name as the
registered owner of that security and inform the depository about the entry.
5. If the participant intimates a depository about transfer of security, then
the depository has to register the transfer of security in the name of the transferee.
6. If a beneficial owner or a transferee of any security seeks to have custody of such
security the depository shall inform the issuer accordingly.
7. Under the Act, every person who subscribes to securities offered by an issuer has the
option of either receiving security certificates or holding those securities with
 a depository.
8. All securities held by a depository is dematerialised and in fungible (mutually
interchangeable) form.
9. Under the Act, the depository is the registered owner for the purpose of effecting transfer
of ownership of securities on behalf of the beneficial owner.
10. The beneficial owner of the securities is entitled to all the rights, benefits and liabilities of
securities held by the depository.
11. Every depository is required to maintain a register and index of beneficial owners.
12. As per the regulations and bye- laws of the depository, a beneficial owner can pledge or
hypothecate in respect of every security owned by him or her with the previous approval
of the depository.
13. If a beneficial owner seeks to opt out of a depository in respect of any security he or she
has to inform the depository accordingly. After the depository receives intimation from
the beneficial owner, it has to make appropriate entries in its records and inform
the issuer.
14. After the issuer receives intimation from the depository about the wishes of
the beneficial owner to opt out of the depository for any security, the issuer has to issue
certificate of securities to the beneficial owner or transferee as the case may be within a
period of 30 days after the completion of the requisite conditions and payment of the
required fees.
15. The depository has to indemnify the beneficial owner in case of any loss caused due to
the negligence of the depository or participant.
16. If negligence is caused by the participant and the depository indemnifies loss on behalf
of the participant, then the depository is fully entitled to recover the amount from
the participant.

ROLE OF SEBI REGARDING DEMAT SYSTEM

As per the Securities and Exchange Board of India, (SEBI), certain guidelines need to be
followed for opening a Demat account in India. There are guidelines for opening and closing
the account.

PROCEDURAL REQUIREMENTS OF SEBI TO OPERATE DEMAT

ACCOUNTS
Following documents are required as per SEBI while opening the account.
 Application form,
 Address proof,
 Pan card, and
 Bank statement.
The purpose of obtaining these documents is to ensure the right information about the investor
is obtained. These documents need to be submitted to the DP. There are no stringent rules to
be followed while closing the account however there is a procedure that is expected to be
followed from SEBI. An application has to be made for closing the Demat account.
Information like DP’s ID, the Client ID is required. Also, one needs to give a reason for
closing the Demat account. The purpose of asking the reason is to get feedback on the DP.
Below are the general recommendations by SEBI for operating Demat accounts in India: The
charges for Demat accounts are predetermined.

Verifying the account holder is mandatory. Demat account needs to be linked to the PAN
card as per KYC rules. No minimum amount is necessary to maintain the Demat account The
account holder has to pay annual charges as well as a percentage of investors trading as
mandatory brokerage charges.

SEBI keeps updating the guidelines to ensure that it is safer to maintain these transactions in
the market.

POWER OF SEBI TO ISSUE PENALTIES

Below are a few sections that outline the failure and penalties imposed by the Board.

Section 15A1
Whoever fails to furnish document, return or report to the board within the time specified in
the regulations, penalty shall not be less than one lakh rupees for each day during which the
failure continues for a maximum of one crore.

Section 15B2
Whoever fails to (a) furnish any information, (b) fails to file any return (c) fails to maintain
books of account or records as per the regulations, penalty of one lakh rupees for each day
during which such failure continues subject to a maximum of one crore rupees.

Section 15B3

1
Securities and Exchange Board of India Act, 1992, s 15A
2
Securities and Exchange Board of India Act, 1992, s 15B
3
Ibid
When a person who is registered as an intermediary is required under this Act to enter into an
agreement, fails to enter into such agreement. A penalty of one lakh rupees for each day
during which such failure continues subject to a maximum of one crore rupees.

Section 15C4
When a listed company or a person registered as an intermediary, after having been called
upon, to redress the grievances of the investors, fails to do so within the specified time frame.
A Penalty of one lakh rupees for each day during which such failure continues to a maximum
of one crore.

Section 15E5
Where an asset management company of a mutual fund registered under this act, fails to
comply with the regulations for restrictions of activities of asset management companies. A
Penalty shall not be less than one lakh rupees but may extend to one lakh for each day to a
maximum of one crore rupees.

Section 15HB6
Whoever fails to comply with any provision of this Act, or directions issued by the board for
which no special penalty has been provided. A penalty not less than one lakh rupees may
extend to one crore rupees.

KEY FEATURES OF THE DEPOSITORY SYSTEM IN INDIA

1. Securities in dematerialized form

The depository model is more or less similar to holding funds in bank accounts. Transfer of
ownership of securities is done through simple account transfer. This method is simpler and
avoids cumbersome paperwork.

2. Fungibility
Fungibility means an asset can be interchanged with another asset of a similar type. The
dematerialized securities are not identified by share certificate numbers. Hence all securities
which are in the same class can be interchanged.

4
Securities and Exchange Board of India Act, 1992, s 15C
5
Securities and Exchange Board of India Act, 1992, s 15E
6
Securities and Exchange Board of India Act, 1992, s 15HB
3. Registered and beneficial owner
There are two types of ownership of securities. One is a registered owner and the other is a
beneficial owner. For all the dematerialized securities, NSDL is the registered owner but
ownership rights, duties and liabilities are with beneficial owners.

4. Easy transferability of shares

The transfer takes place freely through the electronic system and dispenses the procedural
formalities related to paperwork.

5. No stamp duty
For the transfer of physical shares, then the stamp duty of 0.5% is payable on the market value
of the shares. However, there is no such duty on the electronic form.

6. No risk
Physical certificates have issues like loss in transit, theft, bad deliveries, etc. There is hardly
any risk involved in the electronic system as compared to physical certificates.

LEGAL FRAMEWORK
SEBI has laid down and regulates the legal framework for a depository system The Act is
regulated by:
1. The Depositories Act, 1996
2. The SEBI (Depositories and Participants) Regulations, 1996
3. Bye-laws of Depository
4. Business Rules of Depository.

Depositories are also governed by certain provisions of:

1. The Companies Act, 2013
2. The Indian Stamp Act, 1899
3. Securities and Exchange Board of India Act, 1992
4. Securities Contracts (Regulation) Act, 1956
5. Benami Transaction (Prohibition) Act, 1988
6. Income Tax Act, 1961
7. Bankers’ Books Evidence Act, 1891

CASE LAWS
PTC India Financial Services Ltd. v. Venkateswarlu Kari7
PIFSL, a non-banking finance company, loaned ₹125 crore to NSL Nagapatnam Power and
Infratech Ltd., secured by a pledge of 31,80,678 shares in NSL Energy Ventures Private Ltd.
(NEVPL) owned by Mandava Holdings Private Ltd. After default, insolvency proceedings
were initiated under the Insolvency and Bankruptcy Code, 2016. PIFSL invoked the pledge
and was registered as “beneficial owner” of the shares under the Depositories Act.
The National Company Law Tribunal and the National Company Law Appellate Tribunal
held that PIFSL’s claim as a financial creditor was extinguished since the shares stood
transferred in its name. PIFSL appealed to the Supreme Court.

The Court overturned the NCLT and NCLAT decisions, holding that:
 Registration as beneficial owner is not an “actual sale.” It merely enables the
pledgee to exercise the power of sale later.
 Sections 176–177 of the Contract Act continue to govern pledges of dematerialized
shares: notice of sale is mandatory, and the pledgor may redeem the shares until an
actual sale to a third party occurs.
 The Depositories Act, 1996 and SEBI regulations do not override or amend these
contractual rights.
 Consequently, PIFSL remained a financial creditor under the Insolvency and
Bankruptcy Code, 2016 since the debt was not discharged by mere transfer of
beneficial ownership.

National Securities Depository Ltd. v. SEBI8

In this case before the Supreme Court, a circular issued by SEBI was challenged. These
circular advised depositories to amend all bye- laws, rules and regulations from 09/01/2006 to
ensure that no charges would be levied on a depository and consequently, by a depository on a
beneficial owner when the beneficial owner transfers all securities lying in his account to
another branch of the same depository or to another depository. The Supreme Court upheld
the circular and dismissed the appeals.

Jayanand Jayant Salgaonkar v. Jayashree Jayant Salgaonkar & Anr. 9

In this case, the Bombay High Court held that legal heirs and not the nominees will obtain the
ownership rights of share certificates. It held that nomination only provides a depositary
quittance. The nominee continues to hold the securities in trust and as a fiduciary for the legal

7
PTC India Financial Services Ltd. v. Venkateswarlu Kari, (2022) 9 SCC 704
8
National Securities Depository Ltd. v. SEBI, (2017) SCC OnLine SC 256
9
Jayanand Jayant Salgaonkar v. Jayashree Jayant Salgaonkar & Anr, AIR 2015 BOM 296
heir claimants under the succession law. Therefore, the rights of a nominee cannot override
the rights of legal heirs of deceased and this is because the Depositories Act, 1996 does not
displace the law of succession.

CONCLUSION
The advantages are paperless trading and transfer of shares through the use of technology, the
transfer is immediate, the investor is relieved of problems with physical certificates like bad
delivery, fake certificates, elimination of physical forms, similarly elimination of stamp duty,
time and cost gets saved in posting certificates, investors are relieved of issues like loss of
certificates, etc. However, there are disadvantages too. The key market players like
stockbrokers need to be monitored as they have the capability of market manipulation. Some
multiple legal frameworks and acts need to be adhered to. Also, at different levels in the
process of Dematerialization, various agreements are entered. This makes the process
complex. However, the advantages of dematerialization outweigh the disadvantages. SEBI
emphasizes the level of advancement.
BIBLIOGRAPHY

1. [Link]
2. [Link]
india/19920
3. [Link]
4. Jayanand Jayant Salgaonkar v. Jayashree Jayant Salgaonkar & Anr, AIR 2015 BOM 296
5. National Securities Depository Ltd. v. SEBI, (2017) SCC OnLine SC 256
6. PTC India Financial Services Ltd. v. Venkateswarlu Kari, (2022) 9 SCC 704
7. Securities and Exchange Board of India Act, 1992
8. Subject: Financial Services: Chapter Depository and Custodial services prepared by Dr
Sukumar Pal; Associate professor in commerce; Shree Chaitanya Mahavidyalaya
9. The Depositories Act, 1996
10. The SEBI (Depositories and Participants) Regulations, 1996