Depository System

Meaning of Depository System

• Depository system eliminates voluminous and cumbersome paperwork of
the scrip-based system.
• Enables paperless trading through advanced technology.
• A depository is a central organisation that maintains electronic records of
securities.
• It is similar to a bank, but for securities.
• Example: NSDL (National Securities Depository Limited): Established in
1996, it was India's first depository and is primarily promoted by the
National Stock Exchange (NSE), IDBI Bank, and UTI.
• CDSL (Central Depository Services Limited): Established in 1999, it is the
second-largest depository and is promoted by the Bombay Stock Exchange
(BSE) along with several public sector banks.
 Understanding Depository
• A depository is an organisation which:
➢Maintains electronic record of ownership of securities
➢Holds securities in certificated or uncertificated form
➢Enables book-entry transfer of securities
• Reduces:
➢Back-office costs
➢Handling & transportation costs
➢Storage of physical certificates
 How Depository System Works
• Investor deposits securities with the depository.
• Investor’s Demat account is credited.
• Transactions of sale and purchase are updated electronically.
• No physical movement of share certificates.
 Dematerialisation (Demat)
• Physical share certificates are converted into electronic form.
• Certificates lose their physical existence.
• Investor becomes Beneficial Owner.
• Depository becomes Legal Owner.
Beneficial Ownership vs Legal Ownership

Beneficial Owner (Investor) Legal Owner (Depository)

Entitled to dividends Name registered in company records

Entitled to bonus shares Holds securities in its name

Entitled to voting rights Facilitates transfer

Entitled to interest Acts as custodian

 Rematerialisation (Remat)
• Conversion of electronic shares back into physical form.1
• Provides flexibility to investors.
• Ensures dual facility (Electronic Physical).
 Advantages of Depository System
• The following are the benefits for the investors:
1. Bad deliveries are almost eliminated.
2. The risks associated with physical certificates such as loss, theft, mutilation of certificate etc. are
eliminated.
3. It eliminates handling of huge volumes of paper work.
4. There is immediate transfer and registration of the securities (at the end of every settlement cycle,
which is 4 working days i.e. T+3) and you need not have to suffer delays on account of processing time.
5. It leads to faster settlement cycle and faster realization of sale proceeds so the fund of the investor is
not tied up unnecessarily.
6. The system facilitates a faster disbursement of security holding benefits like rights shares, bonus shares
etc.
7. The stamp duty on transfer of securities, which is 0.25% of the consideration on transfer of shares in
physical form is not applicable.
8. Availability of periodical status report to investors on their holding and transactions is disseminated by
the depository.
 Features of the Depository System
1. Securities in Dematerialized Form – Depository system provides for maintenance
of ownership record of the securities of the investor in a book entry form. The
system immobilizes physical securities so that there is no physical certificate in
existence.
2. Fungibility - In the depository system, the securities dematerialized are not
identified by distinctive numbers or certificate numbers as in the physical
environment. Thus all securities in the same class are identical and
interchangeable.
3. Parties Involved - In a depository system, the parties involved are: I. The
depository II. The depository participant (DP) III. The beneficial owner IV. The
issuer. The depository renders service connected with the recording of allotment of
securities or transfer of ownership of securities in its record. A depository functions
through depository participants who are the agent of the depository through
whom the investors avail of the depository service. In the depository system, the
ownership of securities dematerialized is bifurcated between Registered Owner
and Beneficial Owner. For the securities dematerialized, depository is the
Registered Owner in the books of the issuer (i.e. company)
4. Free Transferability of Shares: Transfer of shares held in
dematerialized form takes place freely through electronic book-entry
system. The system dispenses with the transfer deed and other
procedural requirements with respect to transfer of securities.
5. No Stamp Duty: No stamp duty for transfer of securities in the
electronic form is payable. In case of transfer of physical shares, stamp
duty of 0.5 percent is payable on the market value of shares
transferred.
6. No Risk: All risks associated with physical certificates such as delays,
loss in transit, theft, bad deliveries, etc. eliminated in the depository
system. Depositories curb the irregularities in the capital market and
protect the interests of the investors and pave a way for an orderly
conduct of the financial markets through the free transferability of
securities with speed, accuracy, transparency etc.
 Functioning of Depository System
• The depository system functions as under:
1. The system envisages setting up of one or more depositories to hold securities
of investors in the electronic form.
2. The depository functions through its agents, who are called Depository
Participants (DP).
3. The investor, who wants to avail the services of the Depository, has to open a
beneficiary account with the Depository through a DP. The account known as
the “Demat” account can be opened with more than one DP.
4. After opening the demat account, the investor is required to dematerialize the
securities held by him in the physical form. To dematerialize the securities, the
investor has to fill the Dematerialization Request Form (DRF) and submit the
same to the DP along with the security certificate. The DP through the
Depository will intimate the company/issuer and surrender the security
certificate. The process known as ‘dematerialization takes about 30 days.
5. The issuer/company on receipt of the intimation shall cancel the security certificate and
substitute the name of the Depository as the registered owner of the security.
6. The Depository on being intimated by the company/issuer, enters the name of the
investor in its record as the beneficial owner of the security.
7. Whenever any rights, bonus or dividend is announced by a company for its particular
security, the Depository would furnish all details of the investors having electronic
holdings of that security on the record date. The disbursement of the rights, dividends etc.
will be done by the company based the information provided.
8. In case of sale of the security under this mode, the investor/transferor (the client) has to
intimate the DP through issuing a Delivery Instruction Slip (DIS) duly signed and containing
the details of the security transaction. In case of purchase, the client will send the
intimation to the DP giving details of the security purchased. The Depository on receiving
the information through the DP will register the transfer of securities in the name of the
transferee in its record.
9. DP will also make book entries in the account of the investor to record sale/purchase of
securities.
10. DP is required to send statement of accounts to the clients at regular intervals, and
update the account after each transaction.
11. The client/investor has to pay charges to the Depository and the DP for availing the
services.
 The Depositories Act 1996

• The Depositories Act, 1996, which came into force from 20th September
1995, provides a legal framework for establishment of depositories to
facilitate holding of securities including shares in the demat form
(electronic form) and to effect transfer of shares through book entry in
accounts maintained by the depository.
 Rights and Obligations
1. Agreement between depository and participant. A depository shall enter into an
agreement with one or more participants as its agent in the prescribed form.
(Section 4).
2. Services of depository. Any person, through a participant, may enter into an
agreement, in such form as may be specified by the bye-laws, with any depository
for availing its services. (Section 5).
3. Surrender of certificate of security. (a) Any person who has entered into an
agreement with the depository will have to surrender the certificate of security, for
which he seeks to avail the services of a depository, to the issuer; (b) The issuer, on
receipt of certificate of security shall cancel the certificate of security and
substitute in its records the name of the depository as a registered owner in
respect of that security and inform the depository accordingly; and (c) the
depository, thereafter will enter the name of the person referred to in sub-section
(1) in its records, as the beneficial owner. (Section 6).
4. Registration of transfer of securities with depository. Every depository shall, on receipt of
intimation from a participant, register the transfer of security in the name of the transferee. Further,
if a beneficial owner or a transferee of any security seeks to have custody of such security the
depository shall inform the issuer accordingly. (Section 7).
5. Options to receive security certificate or hold securities with depository. Every person subscribing
to securities offered by an issuer shall have the option either to receive the security certificates or
hold securities with a depository. (Section 8).
6. Securities in depositories to be in fungible form. All securities held by a depository shall be
dematerialized and shall be in a fungible form. (Section 9).
7. Rights of depositories and beneficial owner. A depository shall be deemed to be the registered
owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial
owner. The depository as a registered owner shall not have any voting rights or any other rights in
respect of securities held by it. The beneficial owner shall be entitled to all the rights and benefits
and be subjected to all the liabilities in respect of his securities held by a depository. (Section 10).
8. Register of beneficial owner. Every depository shall maintain a register and an index of beneficial
owners in the manner provided in Section 150, Section 151 and Section 152 of the Companies Act,
1956. (Section 11).
9. Pledge or hypothecation of securities held in a depository. A beneficial owner may with the
previous approval of the depository create a pledge or hypothecation in respect of a security owned
by him through a depository. Every beneficial owner shall give intimation of such pledge or
hypothecation to the depository and such depository shall thereupon make entries in its records
accordingly. (Section 12).
10. Furnishing of information and records by depository and issuer. Every depository is
required to furnish to the issuer information about the transfer of securities in the name of
beneficial owners at such intervals and in such manner as may be specified by the bye-laws.
Every issuer also has to make available to the depository copies of the relevant records in
respect of securities held by such depository. (Section 13).
[Link] to opt out in respect of any security. If a beneficial owner seeks to opt out of a
depository in respect of any security he shall inform the depository accordingly who will
make appropriate entries in its records and shall inform the issuer. (Section 14).
[Link] to indemnify loss in certain cases. The depository shall have to indemnify
any loss caused to the beneficial owner due to its negligence or the participant. Where the
loss due to the negligence of the participant is indemnified by the depository, the depository
shall have the right to recover the same from such participant.
[Link] and procedures. Every depository shall have systems and procedures which will
enable it to co-ordinate with the issuer or its agent, and the participants, to reconcile the
records of ownership of securities with the issuer or its agent, as the case may be, and with
participants, on a daily basis. (Regulation 30 of SEBI Regulations).
[Link] monitoring, review and evaluation of systems and controls. Every depository
shall have adequate mechanisms for the purposes of reviewing, monitoring and evaluating
the depository's controls, systems, procedures and safeguards.