Depository
A depository is a company having networth of Rs. 100 crores and
registered with SEBI.
It provides for transfer of shares through book entry form without
physical movement of scrips.
It maintains accounts of the investors in electronic form and
provides for settlement of trades of securities held in the depository.
The system of depositories have revolutionized stock markets.
The most single important development in the Indian Capital
Market in the last decade is the emergence of the Depositories
System.
A depository is a company where securities of investors are
held in electronic accounts.
Just as the banks holds money, in the same way a depository
holds securities.
A depository in India, must have a net worth of 100 crores and
must obtain a certificate of commencement of business from
SEBI.
CONSTITUENTS
There are four constituents in the depositories system:
The depository
The depository participants
The beneficial owner
The issuer
The depository: The depository holds the securities of the
investors in the form of electronic book entries (dematerialized
form). It maintains ownership records of securities and effects
transfer ownership through book entry.
The depository participant: The depository cannot deal with
millions of investors directly. It appoints agents called
depository participants who open and maintain accounts. It is
similar to the branch of a bank. You can open account in any
branch of a bank.
Beneficial owner: By fiction of law, the depository is registered
owner of the securities held with it with the limited purpose of
effecting transfer of ownership at the behest of the owner. The
name of the depository appears in the records of the issuer as
registered owner of securities. The name of actual owner
appears in the records of the depository as beneficial owner.
The beneficial owner has all the rights and liabilities associated
with the securities. The owner of securities intending to avail of
depository services opens an account with a depository through
a depository participant (DP). The securities are transferred
from one account to another through book entry only on the
instructions of the beneficial owner.
The issuer: It is the company which issues the security.
FACILITIES OFFERED BY DEPOSITORY
Depository also provides electronic credit in new issued wherein
investor opens an account with the depository participant, submits
application with depository giving DP-Id and client-Id, the registrar
uploads list of allottees to the depository and depository credits allottee
account with depository participant (DP). The refunds, if any, are sent
by registrar as usual in any public issue. The following facilities are
offered by a depository:
Dematerialisation i.e., converting physical certificates to electronic
form;
Rematerialisation i.e., conversion of securities in demat form into
physical certificates;
Facilitating repurchase/redemption of units of mutual funds;
Electronic settlement of trades in stock exchanges connected to
depository;
Pledging/hypothecation of dematerialised securities against loan;
Electronic credit of securities allotted in public issued, rights issue;
Receipt of non-cash corporate benefits such as bonus, in electronic
form;
Freezing of demat accounts, so that the debits from the account are
not permitted;
Nomination facility for demat accounts;
Services related to change of address;
Effecting transmission of securities;
Instructions to your DP over Internet through SPEED-e facility.
Account monitoring facility over Internet for clearing members
through SPEED facility;
Other facilities viz. Holding debt instruments in the same account,
availing stock lending/borrowing facility etc.
EFFECTS OF DEPOSITORY SYSTEM ON COMPANIES ACT
Sec. 83 Shares shall cease to have distinctive numbers.
Sec. 41 The beneficial owner specified in the register maintained by the
depository shall be deemed to be the member of the company.
Sec.152 A The register and index of beneficial owners maintained by the
depository shall be deemed to be the register and index of
members and debenture holders.
Sec. 113 No share certificate shall be issued to the shareholder when
shares are issued in dematerialized form. Also, where shares are
transferred in dematerialized form, the transferee shall not be
issued a share certificate.
However, where the shares are required to be issued in
dematerialized form, the company shall immediately, after
allotment, intimate the details of allotment to the depository.
Sec. 108 The provisions relating to production of transfer deed along
with share certificate for effecting the transfer of shares shall
not apply where the shares are held in dematerialized from. In
other words, no transfer deed is required to be executed where
shares are held in depository system.
DEMAT ACCOUNT
introduction
Demat refers to a dematerialised account. Just as you have to open an
account with a bank if you want to save your money, make cheque
payments etc, you need to open a demat account if you want to buy or
sell stocks. So it is just like a bank account where actual money is
replaced by shares. You have to approach the DPs (remember, they
are like bank branches), to open your demat account.
Let’s say your portfolio of shares looks like this: 40 of Infosys, 25 of
Wipro, 45 of HLL and 100 of ACC. All these will show in your
demat account. So you don’t have to possess any physical certificates
showing that you own these shares. They are all held electronically in
your account. As you buy and sell the shares, they are adjusted in
your account. Just like a bank passbook or statement, the DP will
provide you with periodic statements of holdings and transactions.
Nowadays, practically all trades have to be settled in dematerialised
form. Although the market regulator, the Securities and Exchange
Board of India (SEBI), has allowed trades of upto 500 shares to be
settled in physical form, nobody wants physical shares any more. So a
demat account is a must for trading and investing
Buying & Selling
The procedure for buying and selling dematerialized securities is similar
to the procedure for buying and selling physical securities. The
difference lies in the process of delivery (in case of sale) and receipt (in
case of purchase) of securities.
In case of purchase:-
The broker will receive the securities in his account on the payout
day
The broker will give instruction to its DP to debit his account and
credit investor’s account
Investor will give ‘Receipt Instruction to DP for receiving credit by
filling appropriate form. However one can give standing
instruction
For credit in to ones account that will obviate the need of giving
Receipt Instruction every time.
In case of sale:-
The investor will give delivery instruction to DP to debit his account and
credit the broker’s account. Such instruction should reach the DP’s
office at least 24 hours before the pay-in as other wise DP will accept
the instruction only at the investor’s risk.
Demat Conversion
Dematerialisation : It is the process of conversion of physical scrips
into electronic book entry form. It results in elimination of paper
certificates.
NSDL 2
(depository) Depository Participant
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5 1
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Registrar Investor
In dematerialisation process, investor surrenders defaced
certificates along with Dematerialisation Request Form to the
depository participant.
Depository participant intimates NSDL of the request through the
system.
Depository participant submits the certificates to the registrar.
Registrar confirms the dematerialisation request from NSDL.
After dematerialising certificates, registrar updates accounts and
informs NSDL of the completion of dematerialisation.
NSDL updates its accounts and informs the depository participant.
Depository participant updates its accounts and informs investor.
Converting physical holding into electronic holding (dematerializing
securities)
In order to dematerialize physical securities one has to fill in a DRF
(Demat Request Form) which is available with the DP and submit the
same along with physical certificates one wishes to dematerialize.
Separate DRF has to be filled for each ISIN Number.
The complete process of dematerialization is outlined below:
Surrender certificates for dematerialization to your depository
participant.
Depository participant intimates Depository of the request through
the system.
Depository participant submits the certificates to the registrar of
the Issuer Company.
Registrar confirms the dematerialization request from depository.
After dematerializing the certificates, Registrar updates accounts
and informs depository of the completion of dematerialization.
Depository updates its accounts and informs the depository
participant.
Depository participant updates the demat account of the investor.
Rematerialisation
The process of converting electronic holdings (demat shares) back
into Physical Certificates is called Rematerialisation.
If one wishes to get back his securities in the physical form one has to
fill in the RRF (Remat Request Form) and request his DP for
rematerialisation of the balances in his securities account. The process of
rematerialisation is outlined below;
One makes a request for rematerialisation.
Depository participant intimates depository of the request through
the system.
Depository confirms rematerialisation request to the registrar.
Registrar updates accounts and prints certificates.
Depository updates accounts and downloads details to depository
participant.
Registrar dispatches certificates to investor.
Beneficial owner or shareholder submits a request to the DP for
Rematerialisation of its holdings in its account. DP is basically
known to intimate NSDL or CDSL of the request electronically
through the system. NSDL or CDSL is basically known to confirm
Rematerialisation request to the RTA. RTA is often known to
update accounts and prints certificates. NSDL or CDSL updates
accounts and downloads details to DPs. RTA dispatches
certificates to investors. The question that is known to persist is
that what the basic procedure for applying for a Duplicate
Certificate is. The Shareholder has to first and foremost inform the
Company of the loss of Share Certificate and file an FIR with the
Police Station of his area reporting the loss of shares which
describes the process of Rematerialisation. Related to the process
of Rematerialisation it can well be said that a copy of the FIR
accordingly attested in innovative has to be sent to the Company
along with a letter, signed by the investor to allow us to send him
the process for obtaining Shares which can well be termed as
duplicate.
Regarding the Rematerialisation it can also be told that the
Company requires the shareholder to execute an Indemnity Bond
and Affidavit on hundred rupees and ten rupees non Judicial Stamp
paper as per the attached formats. According to the process of
Rematerialisation it can well be told that Indemnity Bond and
Affidavit should be signed by the shareholder and joint holders.
The Company requires the shareholder to execute an Indemnity Bond
and Affidavit on Rs.100/- and Rs.10/- Non Judicial Stamp paper as per
the attached formats. The Indemnity Bond and Affidavit should be
signed by the shareholder and joint holders if any and their signatures
SHOULD tally with the one in the Application / Transfer Deed.
When to rematerialise?
Security settlement in Indian securities markets takes place only in
the demat form and hence, it is advisable to hold shares in the
demat form only to quickly sell shares as and when desired. An
investor can rematerialise shares only when he has no intention to
sell his holdings and wants to hold shares only for the purpose of
investment for the long term.
TRANSMISSION OF SHARES
1. Mean of Passing of title of a person to another by operation of
‘transmissi law.
on’
2. Transmi Where the shares are held jointly by two or more
ssion in persons, transmission shall take place only when all
case of joint the joint holders die.
holding
3. Reasons a) Death of a member.
for b) Insolvency of a member.
transmissio
n
4. Effect of A person entitled to the shares as a
death or consequence of death or insolvency of a member
insolvency does not automatically become a member in the
of a company.
member He becomes a member only when
he makes an application in writing to the
company, and the company registers him as a
member by making an entry in the register of
members.
5. Rights of Right The person entitled to the shares is required
a legal to to make an application in writing to the
representat become company requesting the company to admit
ive a him as a member. No transfer deed is
membe required in such a case.
r
Right If the person entitled to the shares chooses
to to sell such shares without first becoming a
transfer member, he is required to execute a transfer
the deed. The transfer deed signed by him shall
shares be valid for transfer of such shares, even
to any though he is not a member in relation to
other such shares.
person
COMMON GROUNDS FOR REFUSAL TO TRANSFER
THE SHARES IN A PRIVATE COMPANY
Malafide object Where acquisition of shares is not made as
a genuine investment but only to acquire
membership rights for the purpose of
taking other actions available under the
Act.
Where the transferee belongs to a rival
concern
Transferee being a
rival
Transferor indebted to Where the transferor is indebted to the
the company company and the articles give the authority
to the Board to refuse the transfers made
by indebted members
Apprehended Where the intended transfer of shares will
mismanagement lead to a change in the management, which
would be prejudicial to the interests of the
company or to public interest
Transferee incapable Where the transferee is not financially
of paying calls capable of paying the calls remaining
unpaid on the shares
Transfer to minor Where partly paid shares are proposed to
be transferred to a minor
Transfer prejudicial to Where transfer of shares is not in the
the company interest of the company
Invalid transfer deed Where the instrument of transfer is not
properly filled in, or is not properly
executed, or is not properly stamped
Offer to existing Where the articles stipulate that the shares
shareholders cannot be transferred to an outsider if any
member of the company is willing to
purchase the shares at a fair price, which
shall be determined by the auditors of the
company or the company in GM.
Employees leaving Where the articles provide that the
employment members who are also employees of the
company, shall offer their shares to other
members when they leave the employment
in the company