Subject – FINANCIAL SERVICES

Class –B.B.A./M.B.A.
Topic – Depository System

 Key-Words – Dematerialization, Rematerialization, DEMAT, NSDL, CDSL

Dr. Dileep Kumar Singh
Institute of Management Studies
Faculty of Commerce and Management Studies
Mahatma Gandhi Kashi Vidyapith Varanasi – 221002
e-mail : [email protected]
DEPOSITORY SYSTEM

Dr. Dileep Kumar Singh

Assistant Professor
Institute of Management Studies
Mahatma Gandhi Kashi Vidyapith
Varanasi

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 DEPOSITORY
The Depositories Act defines a depository as “a company
formed and registered under the Companies Act, 1956 and
which has been granted a certificate of registration under
subsection (1A) of section 12 of Securities and Exchange
Board of India Act, 1992.”
A depository is a firm where in the securities of an
investor are held in an electronic form in the same way as a
bank holds money. It carries out the transactions of securities
by means of book keeping entry, without any physical
movement of securities. Depository system essentially aims at
eliminating the voluminous and cumbersome paper work
involved in the scrip-based system and offers scope for
‘paperless’ trading through state-of-the-art technology. It is an
institution which maintains an electronic record of ownership
of securities.
CONSTITUENTS OF DEPOSITORY
SYSTEM
There are essentially four players in the depository
system:-
•The Depository Participants
•The Beneficial Owner/Investor
•The Issuer
•The Depository
 DEPOSITORY PARTICIPANTS
The DP is the link between the investor and depository. An
investor who opens a DEMAT account with a DP can utilize
the services offered by the depository. While the DP
processes the instructions of the investor, the account and
records thereof is maintained with the depository. A DP is
thus a "service centre" for the investor.
According to SEBI guidelines, financial
institutions, banks, stockbrokers, etc. are eligible to act as
DP's. The investor who is known as beneficial owner (BO)
has to open a DEMAT account through any DP for
dematerialization of his holdings and transferring securities.
BENEFICIAL OWNER:
Beneficial owner is a person whose name is recorded as such
with a depository. It means a person who is engaged in
buying and selling of securities issued by the companies and
is registered his/ her securities with the depository in the
form of book entry. And he/ she has all the rights and
liabilities associated with the securities.
ISSUER:
The issuer is the co. which issues the securities. It maintains
a register for recording the names of the registered owners of
securities and the depositories. The issuer send a list of
shareholders who opt for the depository system. And only
those co.’s can issue the securities which are registered
under stock exchanges.
 DEPOSITORIES

At present there are two depositories in India:

•National Securities Depository Ltd.(NSDL)
•Central Depository Services Ltd.(CDSL)
NATIONAL SECURITIES
DEPOSITORY LTD.
This is the first depository org. promoted by
IDBI,UTI and NSE. The depositories ordinance was
promulgated by the govt. of India in SEP, 1995. The
SEBI issued guidelines for depositories in MAY,
1996.NSDL was set up to provide electronic
depository facilities for securities being traded in
capital market. NSDL has minimum net worth of Rs.
100 crores. It deals with shares in dematerialized
form through depository participants who are agents
of investor banks, stockbrokers and financial
institutions.
CENTRAL DEPOSITORY SERVICES LTD.
CDSL is the second depository in India, set up to meet the objective
the Act & to fulfill the user’s need. It secured “Certificate of
Commencement” of business on FEB. 8, 1999 from SEBI. This was
promoted by Bombay Stock Exchange Limited (BSE) jointly with
leading banks such as State Bank of India, Bank of India, Bank of
Baroda, HDFC Bank, Standard Chartered Bank, and Union Bank of
India.
CDSL aims to retain the entire data of the investors in
the central database of CDSL. The balances in the investors’
account recorded and maintained with CDSL can be obtained
through the DP. The DP is required to provide the investor, at
regular intervals, a statement of account, which gives the details of
the securities holdings and transactions.
 FUNCTIONS OF NSDL & CDSL
•Enables Dematerialization and Rematerialization of
eligible securities.
• Ensuring the safety and soundness of Indian capital
market by developing settlement solutions that increase
efficiency, minimize risk and reduce costs.
•Effect settlement of securities traded on the exchanges as
well as Off-market trades through book entry.
• Enable surrender and withdrawal of securities to and
from the depository.
•Maintain investor holdings in the electronic form.
FUNCTIONING OF DEPOSITORY
SYSTEM
The following are some of important facilities offered by
depository system:
•Dematerialization
•Rematerialization
•Account opening
•Pledging or hypothecation of dematerialized securities
•Freezing of Demat account
•Custody of securities
•Nomination facility
Dematerialization
Dematerialisation (“DEMAT” in short form) signifies
conversion of a share certificate from its physical form
to electronic form for the same number of holdings
which is credited to your DEMAT account which you
open with a Depository Participant (DP).
Dematerialisation 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 in an electronic form at the request
of the investor. An investor will have to first open an
account with a Depository Participant and then request
for the dematerialisation of his share certificates through
the Depository Participant so that the dematerialised
holdings can be credited into that account.
REMATERIALIZATION
Rematerialisation is the exact reverse of Dematerialisation.
It refers to the process of issuing physical securities in place
of the securities held electronically in book-entry form with a
depository. Under this process, the depository account of a
beneficial owner is debited for the securities sought to be Re-
materialised and physical certificates for the equivalent
number of securities are issued. A beneficial owner holding
securities with a depository has a right to get his electronic
holding converted into physical holding at any time. The
beneficial owner desiring to receive physical security
certificates in place of the electronic holding should make a
request to the issuer or its R&T Agent through his DP in the
prescribed re-materialization request form (RRF).
PROCESS OF DEMAT & REMAT
INVESTERS 1 DEPOSITORY
PARTICIPANTS 7
6

3 2

4
R&T AGENTS 5 NSDL
 OPEN A DEMAT ACCOUNT
•First an investor has to approach a DP and fill up an account
opening form. The account opening form must be supported by
copies of any one of the approved documents to serve as Proof of
identity(POI) and proof of address (POA) as specified by SEBI.
Besides, production of PAN card, photograph and proof of bank
statement is also mandatory at the time of opening of account.
•All applicants should carry original documents for verification by
an authorized official of the depository participant, under his
signature.
•Further, the investor has to sign an agreement with DP in a
depository prescribed standard format, which details rights and
duties of investor and DP.
• DP should provide the investor with a copy of the agreement and
schedule of charges for their future reference.
•The DP will open the account in the system and give an account
number, which is also called BO ID (Beneficiary Owner
Identification number).
 PLEDGING OR HYPOTHECATION OF
DEMAT SECURITIES
The investor can also borrow against securities placed with
depositories by creating a pledge on his share portfolio in his Demat
account. The procedure of pledging is as follows:-
Both the investor(pledger) and lender(pledgee) must have
depository accounts.
The investor has to initiate the pledge by submitting the details of
securities to be pledged in a standard form to his DP.
The pledgee has to conform the request through his DP.
Once this done, the investors securities are pledged.
All transactions between the pledger and pledgee are handled as per
the usual practice followed outside the depository system.
FREEZING OF DEMAT ACCONT

An account holder may freeze the account for debits as well

as credits. If such instruction is issued, the status of the
account will change to `Suspended for All' after the
execution of the instruction. Further, no debits and credits
can be made in the account unless the account holder issues
unfreeze instructions.
This facility is beneficial to clients who do not use their
account for long periods. By freezing their account for
debits and credits, they can avoid undue credits to their
accounts in addition to preventing debits.
CUSTODY OF SECURITIES:
The act of maintaining share portfolio of investors in the
electronic form is the custody service. The investors get
additional services such as regular statement of accounts,
which shows its various balances, maintainance of details
of his account like address, bank account number etc.

NOMINATION FACILITY:
when an investor opens a DEMAT account, he has to fill up
a demat request form(DRF). The form also asks the
investor to fill up the name of nominee. Thus after his
death, the shares will automatically transferred in the
nominee’s name provided he is also maintaining a DEMAT
account.
 ADVANTAGES OF DEPOSITORY
SYSTEM
1. Quick transfer of funds and securities
2. Elimination of all risk associated with physical
certificates.
3. No stamp duty
4. Minimized chances of fraud, theft of securities
5. Statement of accounts
6. Provides more acceptability and liquidity of securities
7. Reduction of paperwork
8. Direct disbursement of non cash benefits
 DISADVANTAGES
1. Lack of control
2. Need for greater supervision
3. Complexity of the system
Short Answer Question:-
1.Define Depository systemServices.
2. “Rematerialisation is the exact reverse of Dematerialization”. Comment

Long Answer Question:-

1.Exlain Depository system in India.
2.What are the advantage and disadvantage of Depository system .
3. Describe process of Dematerialization and Rematerialisation.

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 References
1. Harold Koontz, and Heinz Weihrich, Essentials of Management:An
International Perspective, New Delhi, McGraw-Hill, 2010.
2. 2. Stephen P Robbins, Mary Coulter and NeharikaVohra, Management, New
Delhi, Pearsons, 2011
3. 3. Aswathappa, K.,“HumanResource Management”,Text and Cases. New Delhi,
Tata McGraw–Hill.
4. 4. Kotler, Philip; Keller, Kevin; Koshey,Abraham; and Jha, Mithileshwar;
Marketing Management: South Asian Perspective.13th Edition. Pearson
Education, New Delhi, 2009.
5. 5. Kaul,Vijay K.,“Business Organization and Management”, New Delhi,
Pearsons. 2012.

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