Scribd
Upload
13 views7 pages

Overview of the Depositories Act, 1996

The document discusses concurrent audits of depository participants. It defines concurrent audit as the process where all depository participants associated with NSDL must get their demat account opening, delivery instruction slip control and verification processes audited on a daily or weekly basis by practicing chartered accountants or company secretaries. The concurrent auditor must submit quarterly reports to NSDL indicating any deviations or non-compliance found. The document also discusses fungibility under the Depositories Act of 1996, which refers to the interchangeability of securities in depository form, as well as depository agreements.

Uploaded by

Tarachand Soni
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
13 views7 pages

Overview of the Depositories Act, 1996

The document discusses concurrent audits of depository participants. It defines concurrent audit as the process where all depository participants associated with NSDL must get their demat account opening, delivery instruction slip control and verification processes audited on a daily or weekly basis by practicing chartered accountants or company secretaries. The concurrent auditor must submit quarterly reports to NSDL indicating any deviations or non-compliance found. The document also discusses fungibility under the Depositories Act of 1996, which refers to the interchangeability of securities in depository form, as well as depository agreements.

Uploaded by

Tarachand Soni
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

3 DEPOSITORIES ACT, 1996

SHORT NOTES

2008 - June [2] (a) Write a short note on the following:


(i) Concurrent audit of depository participants (3 marks) [CSIG - I]
Answer :
(i) Applicability of con-current Audit: It applies to all Depository
Participants (DPs) associated with NSDL, w.e.f. 1st August, 2006. All
DPs are required to get the process of demat account opening, control
and verification of delivery instruction slips (DIS), to be audited by a
firm of practicing chartered Accountants or a Practicing Company
Secretaries.
(ii) Scope of Audit: The con-current Auditor should conduct the audit in
respect of all accounts opened, DIS issued, during the day, by the next
working day. However in case of large volume of transactions
con-current audit should be completed within a week.
(iii) Reporting: The con-current audit report should be submitted to NSDL,
on a quarterly basis, in a hard copy form. The report must clearly
indicate any deviation and/ or non-compliance, in the specified area of
scope of audit.
Space to write important points for revision

2008 - Dec [2] (a) Write a short note on the following :


(ii) Fungibility (3 marks)
Answer :
Fungibility : As per Section 9 of Depository Act 1996, Securities in
depositories shall be in fungible form. Here fungibility can be defined as
interchangeability of securities, held in depository form. As we are aware that
shares in physical form carry a distinctive number, to distinguish one share
[Chapter  3] Depositories Act, 1996 O 6.9

from another shares like we see on the “Currency – Notes” But when the
physical shares are dematerialized, it results into losing of their distinctive
identity number and that is called “fungibility”
In fungibility, investor has no right to obtain the exact certificate, he has
surrendered at the time of entry into depository. So fungibility, add more
liquidity to securities and they become interchangeable.
Space to write important points for revision

2011 - June [8] Write a note on the following :


(iii) Depository agreement (4 marks)
Answer :
Depository agreement lays down the detailed arrangements entered into by
the company with the Depository, the forms and terms of the depository
receipts which are represented by the deposited shares. It also sets forth the
rights and 'duties of the depository in respect of the deposited shares and all
other securities, cash and other property received subsequently in respect
of such deposited shares.
Space to write important points for revision
6.10 O Scanner CSEP M-II Paper 6 (2017 Syllabus)

DESCRIPTIVE QUESTIONS

2008 - June [4] (b) “On line trading of corporate securities has originated the
depository services in the capital markets.” Comment.
(4 marks) [CSIG - I]
Answer :
The saying that “On line trading of Corporate Securities has originated the
depository services in the capital markets” is absolutely correct and
highlights the need of depository-services.
Since, in On line trading, there is no physical movement of securities
so, the investor before buying or selling shares on stock-exchange, requires
a demat A/C, which is opened with a Depository, through depository
participant.
So, Depository provides a safe and efficient system of trading and
settlement, without physical movement of securities. So it can be concluded
that depository is giving a new dimension and new scope for trading in
primary as well as secondary market in a more efficient & effective-manner,
in a paper less form on an electronic book entry basis.
Space to write important points for revision

2008 - June [8] (b) State briefly whether electronic-holding of securities can
be converted into physical form. Also state in brief whether instructions for
delivery of securities can be given to a depository participant via internet.
(4 marks) [CSIG - I]
Answer :
(i) Conversion of Electronic-holding of Securities into physical
forms: Yes, the investor at his volition can get physical-shares instead
of electronic shares, held by him with depository. This process is
called rematerialization of securities. The process of rematerialization
can be summarized as follow; or as under:
• Submit rematerialization request form (RRF) to DP.
[Chapter  3] Depositories Act, 1996 O 6.11

• DP intimates Depository;
• Depository intimates the Issuer company;
• Issuer company confirms the Depository and issue “Physical
Share- Certificate”.
• Depository debits the investors account.
(ii) Whether instructions can be given to DP Via internet: Yes, an
investor can give instructions about delivery to the depository
participant through internet. However, for using this facility, investor
must have
• User ID,
• Password.
Space to write important points for revision

2008 - Dec [4] (c) “Depository system is a boon to capital market and
investors, both.” Elucidate the statement and bring out the advantages of the
dematerialisation of securities. (5 marks)
Answer :
The Statements is correct, which signifies the advantages of
dematerialization or the advantages of conversion of physical – shares into
electronic – shares are as follow:
Depository:
(a) It means a body corporate, which converts the physical shares of an
investor into electronic form and provides the facility of easy
transferability, pledging of shares, settlement of securities / account.
(b) A depository can be compared as a bank, which keeps securities.
Instead of cash.
(c) If an investor wants to utilize the services offered by a depository, he
has to open a demat account with the depository through any
depository participant.
Advantages of Depository System:
(a) No risk regarding physical – certificate: When physical certificates
are converted into electronic form, then the risk of theft, mutilation of
certificates loss of certificates etc, are eliminate.
6.12 O Scanner CSEP M-II Paper 6 (2017 Syllabus)

(b) No bad deliveries: In depository environment, since holdings of an


investor are dematerialised, so the question of bad delivery doesn’t
arise. Now, transfer of electronic shares can’t be objected by the
company.
(c) Exemption of stamp duty: Since in case of shares, physical –
transfer deed is not used so, it result into saving of stamp duty;
(d) Reduction in Brokerage charges: Since dematerialized securities
reduces paper work and broker charges less commission from the
investor.
Space to write important points for revision

2009 - June [3] (c) Explain the term 'demat'. State the benefits of demat
securities. (3 marks)
Answer :
'Demat' refers to dematerialisation which is a process by which the physical
share certificates of an investor are taken back by the Company and an
equivalent number of securities are credited to the investors account in
electronic form at the request of the investor.
Benefits of Demat Securities
Elimination of bad deliveries
Elimination of all risks associated with physical certificates
 Immediate transfer and registration of securities
 Faster disbursement of non cash corporate benefits like rights, bonus,
etc.
 Reduction in handling of huge volumes of paper
Space to write important points for revision

2009 - Dec [4] (c) What do you mean by 'dematerialisation of securities'?


State its benefits. (5 marks)
Answer :
Dematerialisation is a process by which the physical share certificate of an
investor are taken back by the company and an equivalent number of
securities are credited to the account in electronic form at the request of the
[Chapter  3] Depositories Act, 1996 O 6.13

investor. An investor will have to first open an account with a Depository


Participant and then request for the dematerialization of his share certificates
through the Depository Participant holdings can be credited into account.
Benefits of Dematerialisation
 Elimination of bad deliveries
 Elimination of all risks associated with physical certificate
 Immediate transfer and registration of securities
 Faster disbursement of non-cash corporate benefits like rights, bonus etc.
 Reduction in handling of huge volumes of paper and periodic status
reports.
Space to write important points for revision

2010 - June [3] (a) Explain the following terms related to capital market:
(ii) Depository participant. (2 marks)
Answer :
(i) Meaning / Definition :
(a) Depository participant means a middleman or link between the
investor / security holder and the depository;
(b) It can also be called of a branch, where the investor open “Demat
A/c” for keeping securities in e-form (i.e. electronic form).
(ii) Eligibility for DP: As per SEBI (Depository and Participant) Reg.
2018, following persons can work as depository, subject to registration
from SEBI:
(a) Public financial Institutions
(b) Schedule commercial banks
(c) Foreign Banks
(d) Clearing corporations
(e) Stock – brokers
(f) State financial corporation
(g) An institution engaged in providing financial services.
(iii) Features / Function of DP: DP performs the following functions:
(a) Opening of demat A/c to facilitate the investor to keep securities in
e-form;
(b) Working as an agent of depository as well as customer interface of
6.14 O Scanner CSEP M-II Paper 6 (2017 Syllabus)

depository
(c) Settlement of electronic – trading with the clients and stock –
exchange ;
(d) Crediting the benefits in the customer’s Account.
Space to write important points for revision

2010 - Dec [2] (a) Comment on the following statement:


(iii) “Depository system works very much like a banking system.”
(3 marks)
Answer :
The Depository System functions very much like the banking system. A bank
holds funds in accounts whereas a Depository holds securities in accounts
for its clients. A Bank transfers funds between accounts whereas a
Depository transfers securities between actual handing of funds or securities.
Both the Banks and the Depository are accountable for the safe keeping of
funds and securities respectively.
Space to write important points for revision

2011 - Dec [4] Comment briefly on the following statement:


(vi) “Dematerialisation and immobilisation are distinct activities”.
(3 marks)
Answer :
Dematerialisation and Immobilisation are distinct activities. Dematerialisation
is the process by which shares in the physical/ paper form are cancelled and
credits in the form of electronic balances are maintained on highly secure
system at the depository.
Immobilisation of securities, on the other hand, occurs when physical
security certificates are stored or lodged with depository for safe custody. All
subsequent transactions in these securities take place in book – entry form.
The actual owner has the right to withdraw their physical securities as and
when desired. The immobilization of fresh issue may be achieved by issuing
a jumbo certificate representing the entire issue in the name of depository,
as nominee of the beneficial owners.
Space to write important points for revision

Common questions

Powered by AI

Depository participants (DPs) serve as intermediaries between investors and depositories, effectively functioning as service facilitators. They open demat accounts for investors, allowing them to maintain securities in electronic form. DPs also manage settlements of electronic trading, credit benefits to customers' accounts, and perform as an agent and customer interface of the depository, facilitating smooth operation and management of securities transactions .

The depository system reduces risks associated with physical certificates by converting them into electronic form, which mitigates risks such as theft, loss, or damage, and eliminates issues of bad deliveries. In the electronic format, there is no physical handling; therefore, the securities are securely maintained within the system. This setup also leads to exemption from stamp duty and potential reductions in brokerage charges, as the efficient digital system lowers operational costs .

Online trading of corporate securities has significantly expanded the role and services of depositories in capital markets by eliminating the physical movement of securities. This necessity for a dematerialized account – a demat account – requires investors to engage depository participants for safe and efficient electronic trading and settlement. Depository services have thus become a pivotal component in enhancing the efficiency of trading in both primary and secondary markets by providing paperless systems and electronic book entries, allowing for swift and secure transactions .

To participate in the depository system, an investor must open a demat account with a registered depository participant (DP). The DP, acting as an intermediary, requires the investor to provide necessary documentation, comply with identification requirements, and obtain registration from regulatory authorities such as SEBI. After meeting these prerequisites, the investor can hold and manage securities electronically, facilitated by the DP’s services .

Electronic holding of securities contributes to cost savings and operational efficiencies by eliminating the need for physical certificates, thus reducing risks such as theft or damage and removing the necessity for stamp duties. This electronic framework also minimizes paperwork, leads to faster transactions, and often results in reduced brokerage charges, as brokers face less paperwork and complexities in conducting trades. These efficiencies streamline operations for both brokers and investors .

The concurrent audit process for depository participants (DPs) applies to all DPs associated with the National Securities Depository Limited (NSDL) since August 1, 2006. Its key objectives include auditing the process of demat account opening, and control and verification of delivery instruction slips (DIS). Audit should be conducted by practicing chartered accountants or practicing company secretaries. It aims to ensure all accounts opened and DIS issued are audited daily, and in cases of high transaction volumes, within a week. The audit report, highlighting any deviations or non-compliance, must be submitted quarterly to NSDL .

Rematerialization involves several steps: submitting a rematerialization request form (RRF) to the DP, who then informs the depository. The depository notifies the issuer company to confirm the issuance of a physical share certificate. Following confirmation, the issuer company issues the physical certificate and the depository debits the corresponding electronic shares from the investor's account. Prerequisites include having a rematerialization request form and an account with a registered depository participant .

The depository system is akin to the banking system because both are responsible for holding and transferring assets on behalf of clients. While banks manage financial funds in accounts and facilitate the transfer of these funds, depositories hold securities electronically and ensure their safe transfer between account holders. Both systems uphold accountability for the assets they manage, ensuring secure and efficient service for their clients .

Dematerialization involves converting physical share certificates into electronic balances stored on secure systems within the depository, eliminating the need for physical certificates. In contrast, immobilization refers to storing physical certificates with the depository while all transactions occur via book entries without the physical movement of the certificates. Unlike dematerialization, immobilization still involves retaining the original physical certificates, which can be retrieved by the owner .

Fungibility in depository systems refers to the interchangeability of securities, which becomes possible when physical shares lose their distinctive identity after dematerialization. This interchangeability provides increased liquidity to securities, as investors no longer have the right to the exact certificates surrendered initially. The shares become like currency notes, where each unit is indistinguishable and interchangeable, facilitating simpler trading and transfer processes .

You might also like