Depository system

Depository is defined as a central location for keeping securities on deposit. It is a place where securities are stored, recorded in the books on behalf of the investors. Therefore, a depository can be defined as, an institution which transfers the ownership of securities in electronic mode on behalf of its members.

This system is also know as Scrip Less Trading system.

ACTIVITIES OF THE DEPOSITORY:

Accepting

deposit of securities for custody. Making computerised book entry deliveries of securities which are immobilised in its custody. Providing for withdrawal of securities. Undertaking corporate actions like distribution of dividend and interest. Redemption of securities on maturity.

OBJECTIVES OF A DEPOSITORY:
Reduce

the time for transfer of securities. Avoid the risk of settlement of securities. Enhance liquidity and efficiency. Reduce cost of transaction for the investor. Create a system for the central handling of all securities. Promote the countrys competitiveness by complying with global standards. Provide service infrastructure in a capital market.

INTERACTING INSTITUTIONS
There are three institutions that are interacting in a depository system. The Central Depository. Share Registrar and Transfer Agent. Clearing and Settlement corporation.

CENTRAL DEPOSITORY: Is a nominee who holds the securities on behalf of the investors and maintains records related to that in an electronic mode. SHARE REGISTRAR AND TRANSFER AGENT: The registrar is an institution that controls the issuance of securities. The transfer agent is one who retains the names and addresses of registered securities owners and reregister traded securities in the names of new owners. CLEARING AND SETTLEMENT CORPORATION: It is a centre to trade matching and settle the funds and exchange securities.

DEPOSITORY PROCESS:
IMMOBILISATION OF SHARES: This is the first step in the depository process. In this process the share certificates are submitted to the depository which converts the physical certificates into electronic data and starts issuing statement of accounts for holdings of the investors or shareholders. 2. WITHDRAWAL OF SHARES: The shares which are held in the depository can be withdrawn by the investor.
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CONSTITUENTS OF DEPOSITORY SYSTEM

There are basically four participant: The Depository The Depository Participant The Issuing Company The Investor

WHO IS DEPOSITORY?

Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a Depository Participant (DP), who as an agent of the depository, offers depository services to investors

WHO CAN BE A DEPOSITORY:

Depository Act, 1996 provides that Depository means: A company formed and registered under the companies Act, 1956, and Which has got a Certificate of Registration from the SEBI.

DEPOSITORIES IN INDIA
The depository model adopted in India provides for a competitive multidepository system. There can be various entities providing depository services. Such system is known as MultiDepository System. At present two Depositories are registered with SEBI.

NATIONAL SECURITIES DEPOSITORIES LIMITED

NSDL is the first and largest depository in India, and established in August 1996 It has 267 depository Participants (as on 13.12.08) PROMOTERS OF NSDL: Industrial Development Bank of India Limited Unit Trust of India National Stock Exchange of India Limited

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SHAREHOLDERS OF NSDL

State Bank of India Oriental Bank of Commerce Citibank Standard Chartered Bank HDFC Bank Limited The Hongkong and Shanghai Banking Corporation Limited Deutsche Bank Dena Bank Canara Bank Union Bank of India

CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED

This is the second depository in India. This was formed and registered in 1999. It has 455 DPs as on 4.08.08

NSDL performs a wide range of securities related functions through the DPs: 1. Maintenance of individual investors beneficial holdings in an electronic form. Dematerialisation (usually known as demat) is converting physical certificates to electronic form Rematerialisation, known as remat, is reverse of demat, i.e. getting physical certificates from the electronic securities

PROMOTERS OF CDSL
Bombay Stock Exchange Limited Bank of India, Bank of Baroda, State Bank of India and HDFC Bank

SHAREHOLDERS OF CDSL

Standard Chartered Bank Centurion Bank of Punjab Ltd Canara Bank Union Bank of India Bank of Maharashtra Jammu and Kashmir Bank Limited The Calcutta Stock Exchange Association Limited Others

A BANK-DEPOSITORY ANALOGY
Bank
1.Holds funds in an account on behalf of a customer 2.Transfer funds between accounts on the instruction of the account holder. 3.Physical handling of funds is avoided. 4.Provides safe custody of fund

Depository
1.Holds securities in an account on behalf of an investor. 2.Transfer securities between accounts on the instruction of the account holder. 3.Physical handling of securities is avoided. 4.Provides safe custody of securities.

WHO IS DEPOSITORY PARTICIPANT:

A Depository Participant (DP) is an agent of the depository through which it interfaces with an investor. A DP can offer depository services only after it gets proper registration from SEBI. A DP is just like a Branch of a Bank.

WHO CAN BE DEPOSITORY PARTICIPANT?

In terms of the Depositories Act, 1996, SEBI (Depositories & Participants) Regulations,1996, only the following entities are eligible to become a Depository Participant: Financial Institutions, Banks, including approved foreign bank Custodians, Stockbrokers, A clearing corporation or a clearing house of a stock exchange A non-banking finance company, A registrar to an issue or share transfer agent

TYPES OF OWNERSHIP
In the depository system, the ownership of securities dematerialized is bifurcated in to:

REGISTERED OWNER

BENEFICIAL OWNER

WHO IS REGISTERED OWNER

The registered owner is that person whose name is registered in the register of members of the company (issuer) For the securities dematerialized, NSDL/CDSL is the Registered Owner in the books of the issuer. But Registered Owner does not enjoy any right and liability attached with the security.

WHO IS THE BENEFICIAL OWNER

Beneficial owner is that person who enjoys all rights, duties, and liabilities attached with the security. It means voting right, dividend right, bonus share right , right share right etc are all exercised by the Beneficial owner.

BENEFITS OF DEPOSITORY SYSTEM/HOLDING SECURITIES IN DEMATERIALIZED FORM Depository system provides benefits to: The investors, and The issuers.

BENEFITS TO INVESTORS:
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The transactions in electronic mode eliminated the risk and problems of delays. The risk of bad deliveries is totally eliminated. There is no requisite of filling up the transfer deeds, payment of transfer stamp duty and a lot of other paper work at the end of the investor. It totally eliminates the risk associated with fraudulent interception of certificates in postages or transits.. Transfer of ownership of securities is immediate in case of depository mode. The investment, automatically, becomes more liquid.

CONTD.
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The problem of odd lot is also eliminated, as the depository mode does not have any concept of market lot. Holding investments in equity and debt in a single account. Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately. Transmission of securities is done by DP eliminating correspondence with companies. Nomination facility.

BENEFITS TO THE ISSUING COMPANY:

The company saves a lot of paper work which otherwise is required in the physical mode. The company saves a postal cost for the dispatch of right shares, bonus shares or share certificates after affecting the transfer. By offering depository services to its shareholders, a company may send a positive sign to its shareholders about its concern for their welfare. Depository services adds liquidity to the security thus fund raising capacity of the

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HOW CAN SERVICES OF DEPOSITORY AVAILED BY AN INVESTOR?

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ACCOUNT OPENING:
In order to avail of depository facilities, an investor has to open a beneficiary account with a depository participant of his choice.This is similar to opening a bank account to use the banking services. Just as one can hold funds in a bank account and transfer funds across accounts without actually handling cash;one can hold securities in a depository account and transfer securities across depository accounts without actually handling share certificates.

contd.

CONTD.

The account holder is called 'beneficial owner' in a depository system and the account is known as 'beneficiary account'.

FEATURES OF BENEFICIARY ACCOUNT

Features of Beneficiary Account No minimum balance is required to be retained in a beneficiary account. An investor can close a beneficiary account with one DP and open an account with another DP. To dematerialise existing physical holdings, the beneficiary account must be opened in the same ownership pattern in which the securities are held in the physical form e.g: If one certificate is in individual name and another certificate is jointly held by X & Y, two different accounts should be opened

PROCEDURE OF OPENING AN ACCOUNT:

Investor will choose a DP for the purposes of opening beneficiary account. The choice of the investor may be based on convenience, comfort, services offered, cost or any other reason.
The investor will obtain the relevant account opening form from the chosen DP. contd.

CONTD.

For the purpose of verification, investor has to submit the following documents along with the prescribed account opening form.

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Proof of Identity(POI) (voter card, pan card, driving license etc.) Proof of Address (POA) (ration card, bank pass book copy voter id card etc.) Passport-size photograph

CONTD.
Copy of PAN card The DP will also provide a copy of the DP-Client agreement.

SOME OTHER ASPECTS:

The demat account cannot be operated on "either or survivor" basis like the bank account. In case of the joint account for the beneficial owners, all the joint holders have to sign the account opening form. The investor will submit to his DP the duly filled in account opening form & DP-client agreement along with the documents. On successful opening of the account, the DP will give: Client Id - an eight digit number to be used along with DP Id for any future transactions. Delivery Instruction slip book.

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CONTD. More than one demat account can be opened in the similar / identical name and order with the same DP or different DPs. A periodical statement of holdings and transactions is provided by DP. This can also be asked for from the DP

WHAT IS DEMATERIALISATION?

Dematerialisation is the process by which physical certificates of securities of an investor are converted to an equivalent number of securities in electronic form and credited into the investors account with his/her DP. It is to be noted that an investor can hold shares in physical form but for the purpose of trading in stock exchanges shares should be in electronic form.

PROCESS OF DEMATERIALISATION

An investor intending to dematerialise its securities needs to have an account with a DP. The client (registered owner) will submit a request to the DP in the Dematerialisation Request Form for dematerialisation, along with the certificates of securities to be dematerialised. Before submission, the client has to deface the certificates by writing "SURRENDERED FOR DEMATERIALISATION". The DP will verify that the form is duly filled in and the number of certificates, number of securities and the security type (equity, debenture etc.) are as given in the DRF. If the form and security count is in order, the DP will issue an acknowledgement slip duly signed and stamped, to the client.

CONTD.

After intimating NSDL electronically, the DP sends the securities to the concerned Issuer/ R&T agent. NSDL in turn informs the Issuer/ R&T agent electronically, using NSDL Depository system, about the request for dematerialization. If the Issuer/ R&T agent finds the certificates in order, it registers NSDL as the holder of the securities (the investor will be the beneficial owner) and communicates to NSDL the confirmation of request electronically. On receiving such confirmation, NSDL credits the securities in the depository account of the investor with the DP. This procedure takes 15to 30 days.