Depositories Act, 1996, defines a depositary as ” a company formed, registered under the Companies Act, in 1956 and which has been granted by the certification of the enrollment of the Securities and Exchange Board of India Act, 1992.
At present, the two depositaries are registered with SEBI
The National securities depositary Limited ( NSDL )
Cardinal Depository Services Limited ( CDSL ) .
The term depositary is defined as the cardinal location for maintaining securities on sedimentation ” . It can besides defined as the installation for keeping securities, or either in certificated or uncertificated signifier to enable the book entry transportation of securities ” . It is understood from the above definitions that the depositary is the topographic point where securities are stored, and recorded in the books on the behalf of the investors. Therefore, a depositary can besides be defined as, “ an establishment which transfers the ownership of the securities in electronic manner on the behalf of its members ” .
The operations of depositaries are chiefly governed by Depositories Act, 1996, and the Securities and Exchange Board of India Regulations, 1996, and Bye-Laws approved by the SEBI, and Business Rules framed in the conformity with the Regulations and Bye-Laws. Merely the company registered that is under a Companies Act, in 1956 and are sponsored by the specified class of establishments can be set up the depositary in India. Before the commencing operations, and depositaries should obtain the certification of the enrollment and a certification of the beginning of concern from the SEBI.
The chief map of the depositary is to dematerialise securities and to enable their minutess in the book-entry signifier. The securities are transferred by the debiting the transferor ‘s depositary history and crediting the transferee depositary history.
FUNCTIONS OF DIPOSITORY
The primary maps of the depositary is to extinguish or to minimise the motion of the physical securities in the market. This can be achieved through dematerialization of the securities. Dematerialization is the procedure of the change overing securities held in physical signifier into the retentions in book entry signifier.
The depositary gives effects to all the transportations ensuing from the colonies of the trades and other minutess between the assorted good proprietors by the entering entries in the histories of such good proprietors.
Transportation and Registration:
A transportation is the legal alteration of ownership of the security in the records of the issuer. For set uping the transportation, certain legal stairss have to taken like indorsement, and executing of the transportation instrument and payment of the cast responsibility. The depositary accelerated the transportation of procedure by registering the ownership of the portions in the name of the depositary.
A depositary made handle corporate actions in the two ways. In the first instance, it is simply provides information to issuer about the individuals entitled to have corporate benefits. And in the following instance, depositary itself takes the duty of the administering the corporate benefits.
Pledge and Hypothecation:
The securities held with NSDL may be used as the collateral to procure loans and other credits by clients. In the manual environment, borrowers are required to be deliver pledged securities in the physical signifier to the loaner or custodian. These securities are verified for the genuineness and frequently necessitate to be transferred in name of loaner. This has the clip and money cost by the manner of transportation fees or stomp responsibility. If borrower wants to replace the sworn securities, so these stairss have to be repeated. Use of depositary services for the pledging/hypothecating the security makes procedure really simple and cost effectual. The securities pledged or hypothecated are transferred to the segregated or indirect history through the book entries in the records of the depositary.
Linkages with Clearing System:
Whether it is the separate glade corporation attached to the stock exchange or glade house ( section ) of stock exchange, the glade system performs the maps of the determining the pay-in ( sell ) or pay-out ( purchase ) of the agents who have been traded on the stock exchange. Actual bringing of the securities to the glade system from the merchandising agents and the bringing of securities from uncluttering system to the purchasing agent is done by depositary. To accomplish this, the depositaries and the glade system should electronically linked.
Key Features of the Depository System in India
Multi-Depository System: The depositary theoretical account adopted in India provides for acompetitive multi-depository system. There can be assorted entities supplying depositary services. A depositary should be a company formed under the Company Act, 1956 and should hold granted a certification of enrollment under Securities and Exchange Board of the India Act, 1992. Soon, there are two depositaries registered with SEBI, viz. : o National Securities Depository Limited ( NSDL ) , and Central Depository Service Limited ( CDSL ) .
Depository services through depositary participants: The depositaries can supply their services to investors through their agents called depositary participants. These agents are appointed capable to the conditions prescribed under Securities and Exchange Board of India ( Depositories and Participants ) Regulations, 1996 and other applicable conditions.
Dematerialisation: The theoretical account adopted in India provides for dematerialisation of securities. This is a important measure in the way of accomplishing a wholly paper-free securities market. Dematerialization is a procedure by which physical certifications of an investor are converted into electronic signifier and credited to the history of the depositary participant.
Fungibility – The securities held in dematerialized signifier do non bear any noteworthy characteristic like typical figure, folio figure or certificate figure. Once portions get dematerialized, they lose their individuality in footings of portion certificate typical Numberss and folio Numberss. Thus all securities in the same category are indistinguishable and interchangeable. For illustration, all equity portions in the category of to the full paid up portions are interchangeable.
Registered Owner/ Beneficial Owner – In the depositary system, the ownership of securities dematerialized is bifurcated between Registered Owner and Beneficial Owner. Harmonizing to the Depositories Act, ‘Registered Owner ‘ agencies that a depositary whose name is to come in as such in the registry of issuer. A ‘Beneficial Owner ‘ means a individual whose name is recorded as such with the depositary. Though the securities are registered in the name of the depositary really keeping them, the rights, benefits and liabilities in regard of the securities held by the depositary remain with the good proprietor. For the securities dematerialized, NSDL/CDSL is the Registered Owner in the books of the issuer ; but ownership rights and liabilities rest with Beneficial Owner. All the rights, responsibilities and liabilities underlying the security are on the good proprietor of the security.
Free Transferability of portions: Transportation of portions held in dematerialized signifier takes topographic point freely through electronic book-entry system.
Need of Depository System
Time devouring trading system
Inefficient system to reassign of ownership
Hazard of larceny, counterfeit and mutilation of securities
Time consuming and costlier colony
Benefits/Advantages of the Depository System
The advantages of dematerialization of securities are as follows:
Share certifications, on dematerialization, are cancelled and the same will non be sent back to the investor. The portions, represented by dematerialized portion certifications are fungible and, hence, certification Numberss and typical Numberss are cancelled and become non-operative.
It enables processing of portion trading and transportations electronically without affecting portion certifications and transportation workss, therefore extinguishing the paper work involved in scrip-based trading and portion transportation system.
Transportation of dematerialized securities is immediate and unlike in the instance of physical transportation where the alteration of ownership has to be informed to the company in order to be registered as such, in instance of transportation in dematerialized signifier, good ownership will be transferred every bit shortly as the portions are transferred from one history to another.
The investor is besides relieved of jobs like bad bringing, forge certifications, portions under judicial proceeding, signature difference of transferor and the similar.
There is no demand to make full a transportation signifier for transportation of portions and affix portion transportation casts.
There is salvaging in clip and cost on history of riddance of poster of certifications.
The menace of loss of certifications or deceitful interception of certifications in theodolite that causes anxiousness to the investors, are eliminated.
Disadvantages/Problems of the Depository System
Some disadvantages were about the depositary system were known beforehand. But since the advantages outweighed the defects of dematerialisation, the depositary system was given the green light.
Lack of control: Trading in securities may go uncontrolled in instance of dematerialized securities.
Need for greater supervising: It is incumbent upon the capital market regulator to maintain a close ticker on the trading in dematerialized securities and see to it that trading does non move as a hurt to investors. The function of cardinal market participants in instance of dematerialized securities, such as stock agents, demands to be supervised as they have the capableness of pull stringsing the market.
Complexity of the system: Multiple regulative models have to be confirmed to, including the Depositories Act, Regulations and the assorted Bye Laws of assorted depositaries. Additionally, understandings are entered at assorted degrees in the procedure of dematerialization. These may do anxiousness to the investor wishful of simpleness in footings of minutess in dematerialized securities. Besides the above mentioned disadvantages, some other jobs with the system have been discovered later. With new ordinances people are happening more and more loopholes in the system.
There are four parties in the demat dealing: the client, the depositary participant, the depositary, and the portion registrar and reassign agent.
Opening an history
An investor who want to avail of the services will hold to be unfastened an history with depositary through a DP, who could ethier be the custodian, a bank, a agent, or single with a minimal net worth R. 1 crore. The investor has to come in into an understanding with the DP after which he is issued a client history figure or the client ID figure.
Dematerialisation is a procedure by which the physical certifications of an investor are taken back by the Company or its Registrars and an tantamount figure of securities is electronically credited in the demat history of that investor. In other words, the shareholding gets converted from physical signifier to that of electronic signifier.
For Dematerialisaion of securities, an investor will hold to first open an history with a Depository Participant and so subject petition for dematerialisation of the securities in a specified signifier alongwith relevant certifications. The demat petition alongwith the certifications is forwarded by DP to the Company or its Registrar who after due confirmation will corroborate the dematerialization and the investor ‘s history with his Depository Participant will acquire credited to the extent of portions applied for demat. However, in the records of the Company or its Registrar the Depository ‘s history will acquire credited as it is keeping the securities on behalf of the investor, and the name of the investor is shown in records as good proprietor of shares.The full procedure of Dematerialisation has to be completed within a period of 21 yearss from the day of the month of reception of demat petition by Depository Participant ( DP ) . Whenever there is any Corporate Action, like, distribution of dividend or issue of bonus portions, the company will obtain the shareholding place of dematerialised portions from the Depository through a Beneficial Position statement called BENPOS, and so publish Corporate Benefits to stockholders on that footing.
Rematerialisation is a procedure of change overing electronic portion keeping back into the physical retention. The Depository Participant should be given a petition for Rematerialisation in a specified signifier who in bend will send on the same to the Depository. The Depository after verifying that the investor has necessary securities balance, will adumbrate the company or its Registrar consequently, who in bend, will publish the relevant certification and dispatch the same to the investor.
The full procedure of Rematerialisation has to be completed within a period of 30 yearss from the day of the month of reception of Remat petition.
The DPs charge for certain points like
Account gap charges
Transaction charges, etc.
Investors should carefully take a DP after measuring assorted factors like
Quantum of charges
Quality of services offered
Convenience of covering
Their overall repute etc.
A company or a registrar and reassign agent shall do known the depositary of the corporate actions such as day of the month for books closing, salvation or adulthood of security, transition of warrants and name money from clip to clip. The depositary will so electronically provide the list of the retentions of the client as on the cut off day of the month. The company can so administer dividend, involvement and the pecuniary benefits straight to the client on the footing of the list. if the benefit are from the securities, the company or its registrar and the transportation agent may administer these provided the freshly created securities in the eligible security and the client has consented to recover the benefits through depositary.
Closing an history
A client waiting to shut an history shall do the application in the format specified to consequence to the participant. The client can shut his history if no balances are outstanding in his recognition in the history. If any balances exist, so the history may be closed.
Function of NSDL and CDSL
National securities depositary limited is the first depositary to be set up in India. It was incorporated on December 12, 1995. The industrial development bank in india, unit trust of india- the largest development bank in india, unit trust of india- the largest Indian common fund and NSE, sponsored the puting up of NSDL and subscribed the initial capital
Function of NSDL
NSDL performs the undermentioned maps through depositary participants.
Enables the resignation and backdown of securities to and from the depositary.
Maintains investor retentions in the electronic signifier.
Effect colonies of securities traded on the exchanges.
Carriers out colonies of trade non done on the stock exchange
Transportation of securities.
Pledging / hypothecation of dematerialization securities.
Electronic recognition I public offerings of companies or corporate actions.
Receipt of non hard currency corporate benefits like fillip rights, etc in electronic signifiers.
Stock loaning and adoption.
A depositary facilitates keeping of securities in the electronic signifier and enables securities minutess to be processed by book entry by a DP, who as an agent of the depositary, offers depositary services to investors. Harmonizing to SEBI guidelines, fiscal establishments, bank, etc are eligible to move as DPs. The investor who is known as an good proprietor for dematerialization of his retentions and reassigning securities.
The balances in the investors account recorded and maintained with CDSL can be obtained through the DP. The DP is required to supply the investor, at regular intervals, a statement of history which gives the inside informations of the securities retentions and minutess. The depositary system has efficaciously eliminated paper-based certifications which were prone to be bogus, forged, forgery ensuing in bad bringings. CDSL offers the efficient and instantaneous transportation of the securities.
CDSL was promoted by Bombay Stock Exchange Limited ( BSE ) jointly with taking Bankss such as SBI, BOB, HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion Bank
CDSL was set up with the aim of supplying convenient, reliable and unafraid depositary services at low-cost cost to all market participants. Some of the of import mileposts of CDSL system are:
CDSL received the certification of beginning of concern from SEBI in February, 1999.
Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of CDSL on July 15, 1999.
Colony of trades in the demat manner through BOI Shareholding Limited, the glade house of BSE, started in July 1999.
All taking stock exchanges like the National Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc have established connectivity with CDSL.
As at the terminal of Dec 2007, over 5000 issuers have admitted their securities ( equities, bonds, unsecured bonds, commercial documents ) , units of common financess, certification of sedimentations etc. into the CDSL system.