PROGRESS OF DEMATERIALIZATION OF SECURITIES IN DEPOSITORY SYSTEM

BY- GAURAV GEHLOT

17RU11007
SCHOOL OF LAW
RAFFLES UNIVERSITY
SESSION- 2017-2022

ABSTRACT:-

Dematerialisation is a process where the physical certificates of the investors are converted
into an equivalent number of securities in an electronic form and credited in the investor's
account with his depositories. The dematerialisation is done due to protect the interest of the
investors as the physical certificates of the investors can be destroyed or lost but once it is
done in an electronic form then the problem of lost and damage can be solved easily. The
foundation of dematerialisation makes concurrent changes in the capital market in India. The
new face of emerging world economy has made it mandatory for each and every national
economy to make it updated in terms of capital market.

The organisation where the securities of an investor are held in an electronic form is called
Depository, which carries out the transaction through the medium of depository participants.
Each depository has its agents, which are known as depository participants. They are the link
between depository and investors. There are two depositories in India, i.e. National Securities
Depository Limited (NSDL) and Central Depository Service Limited (CDSL). In this
research paper an attempt is made achieve the two main objectives that are to study
residential status of depository participants influence in capital market and to study market
segments dealing of select depository participants.

INTRODUCTION
Depository is an organization where the securities of an investor are held in an electronic
form and which carries out the transaction through the medium of depository participants
(Brokers). Each depository has its agents which are known as depository participants (DP’s).
They are the link between depository and investors. Depository System is a system where by
transfer of security takes place by means of book entry on the ledgers of depository without
physical movement of scrip. This system is also known as scrip less trading system. There are
two depositories in India i.e. the National Securities Depository Limited (NSDL) and the
Central Depository Service (India) Limited (CDSL).Indian capital market has been linked to
the International Financial Market, and the standard has been increased in terms of efficiency
and transparency through Dematerialization of the Indian Capital Market. Dematerialization
is the process by which physical certificate of securities of an investor are converted into
electronic form. Investors holding security in electronic form can convert their shares in
physical form through the process of Dematerialization. Although Dematerialization, has
enabled the Indian Capital Market to grow exponentially as measured in terms of amount
raised from the market, number of stock exchanges and intermediaries, the number of listed
stocks, market capitalization, trading volumes, turnover on stock exchanges and investors
population.

Securities Market : In the equity market, major structural reforms included introduction of
rolling settlements on a T + 2 basis w.e.f. April 1, 2003, initiative towards Straight Through
Processing (STP) and introduction of equity derivatives. On the bond market, recent reforms
were settlement of corporate bonds in demat form, controlling of settlement risk, in the
telephone market by setting up Clearing Corporation of India Ltd. (CCIL) and initiating a
new transparent screen based market for trading in Government of India bonds from January
16, 2003.

Analysis of the working of the Depositories: It is indispensable for an institution to fulfill

the objectives for which it is born. NSDL and CDSL have made huge progress in making
available demat facility in almost every corner of the country through their depository
participants spread all over the country and have made scrip less trading possible. Over the
years, NSDL and CDSL have widened their perspectives seeing opportunities to improve
their competencies in the changed scenario and helped the stock market immensely. This is
the operational aspect. To make a gap between its income and expenditure is an important
feature for the survival of an organization, which results in self generation of funds as a result
of operation its is engaged in. To carry on the main activity, an organization needs funds.
How the funds are mobilized and how they are applied is the main concern of an
organization. The proper mix of the funds results in better profitability. Profitability is though
one of the main concerns of a company, it is not the only concern. The more important is the
safety of funds mobilized from various sources. This is the investment pattern aspect, the
object of which is to analyze the balance between mobilization and application of founds
resulting in desired profitability with desired element of risk.

Scope, Relevance and Period of the Study: Dematerialization is the foundation of

concurrent changes in the capital market in India. The new face of emerging world economy
has made it mandatory for each and every national economy to make it updated in terms of
capital market. Therefore, Dematerialization is not a matter of choice but a matter of
compulsion. This study covers the contribution of the depository mode in the promotion of
scrip less trading in securities through dematerialization of securities in India and the
contribution the depository system has made in helping to remove the inherent weaknesses in
the traditional system like loss/theft of certificates, forged/fake certificates, cumbersome and
time consuming procedure for transfer of shares, etc.

DEPOSITORY SYSTEM IN INDIA

India has adopted the Depository System for securities trading in which book entry is done
electronically and no paper is involved. The physical form of securities is extinguished and
securities are held in an electronic form. Before the introduction of the depository system
through the Depository Act, 1996, the process of sale, purchase and transfer of securities was
a big problem, and there was no safety at all.

TYPES OF DEPOSITORIES IN INDIA-

There are two depositories in India:-
1. National Securities Depository Ltd. (NSDL):- NSDL is the first and largest depository
in India which was established in August 1996 and commenced its operation in 1996
promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and
National stock Exchange of India (NSE). Later, State Bank of India (SBI) also became a
shareholder. NSDL aims at ensuring the safety and soundness of Indian marketplaces by
developing settlement solutions that increase efficiency, minimize risk and reduce costs.
Using innovative and flexible technology systems, NSDL works to support the investors and
brokers in the capital market of the country. In the depository system, securities are held in
depository accounts, which is more or less similar to holding funds in bank accounts.
2. Central Depository Services Ltd. (CDSL):- CDSL is the second Indian central
securities depository based in Mumbai. CDSL commenced its operation in 1999 & was
initially promoted by BSE Ltd. Which later has diverted its stake to leading banks as
"Sponsors" of CDSL. The initial capital of the company is 104.50 cores. (INR). CDSL is
promoted by Bombay Stock Exchange Limited (BSE) [4] jointly with State Bank of India,
Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Axis Bank and
Union Bank of India. CDSL was set up with the objective of providing convenient,
dependable and secure depository services at affordable cost to all market participants. Its
main function is the holding securities either in certificated or uncertificated (dematerialized)
form, to enable book entry transfer of securities. All leading stock exchanges like the BSE
Ltd, National Stock Exchange and Metropolitan Stock Exchange of India have established
connectivity with CDSL. CDSL was promoted by BSE Ltd. Over a period of time, BSE Ltd.
has divested its stake to leading Banks as "Sponsors" of CDSL.

Similarity between depository System & banking system.

1. Bank transfer funds between the accounts and depository transfer securities
2. Bank hold funds of investors and depository hold securities of securities.
3. In both the system transfer of funds and securities takes place without actually handling
of funds.
4. Banks are accountable for safe keeping of funds and Depositories are accountable for safe
keeping of securities.

DEMATERIALIZATION
Dematerialization is the process by which physical certificate of securities of an investor gets
converted into electronic form. In order to dematerialize the physical securities the
Depository participants will provide dematerialization request form to investor (DRF),
separately for each company. Depository participants intimates the request of investor to
depository and surrender the share of an investor to the depository. The company on the
guidance of depository will cancel the physical share certificate and issues the shares in
electronic form. The ownership of securities in the depository system is bifurcated between
registered owner and beneficial owner. For the securities to be dematerialized, the depository
is registered as owner in the books of Issuer Company and the investor as beneficial owner in
the books of depository.
PROCEDURE FOR SELLING AND BUYING DEMATERILSED SHARES
The investor can buy and sell shares only through a stock broker and not through a depository
participants. In case of sale, the client has to send delivery instruction slip (DIS) duly signed,
containing the details of the security sold. In case of purchase, the client has to send to
Receipt instruction slip, duly signed, containing the details of security purchased. The
Depository participants will convey the information to the depository regarding the transfer
and will also provide the statement of accounts to its clients at regular intervals. It may be
noted that transfer of a security is to be affected only after payment. In case of any complaint
the client must report to depository participants, then to depository and may also approach to
SEBI, if the query is not resolved.

ROLE/ SPECIAL FEATURES OF DEPOSITORY SYSTEM

1. No stamp duty is payable on transfer of security
2. Risk of bad delivery is eliminated.
3. Security can be transfer immediately without any delay.
4. Bonus or right shares will be credited by the company directly to the shareholder
depository account.
5. Securities cannot be lost or stolen since how there is no postage work.
6. Account holding statement is received from DP’s periodically which eliminates the
need to keep manual accounts.
7. The concept of “odd – lot” in respect of dematerialized form is abolished.

8. Dematerialization of securities is not compulsory since it is upto to the choice of

investor. Investors holding security in electronic form can convert their shares in physical
form through the process of Rematerialization.
9. The securities held with depository would be deemed to have no distinctive
identifiable numbers and the security will become inter chargeable.
10. Securities would become freely transferable.

Conclusion
Dematerialization, has enabled the Indian Capital Market to grow exponentially as
measured in terms of amount raised from the market, number of stock exchanges and
intermediaries, the number of listed stocks, market capitalization, trading volumes,
 turnover on stock exchanges and investors population. The analysis of the progress of
National Securities Depository Limited (NSDL) and Central Depository Services (India)
Limited (CDSL) in economic terms clearly reveals that both the depositories have shown
a remarkable progress in terms of Demat Accounts and quantity, Settlement value and
quantity and the number of Depository Participants. In spite of its late emergence, the
growth at CDSL is almost at par with that of NSDL. This study reveals that both the
depositories have been working financially smoothly over a period of few financial years.
To sum up, the benefit of the depository system is very significant in Indian economy.
Introduction of depositories has improved the market efficiency through adopting
criterion for describing scripts depositories’ eligibility. The paper management
substantially reduced which helps in saving in time for allotment transfers of scripts. This
improves internal system effectively.

References-
1. Gopal, B. V., & Rao, C. R. P. A Comparative Study on Depository and Depository
Participants with Reference ROI and ROA. MIJBR, 7.
2. Bhatt, D., & Bhatt, K. (2012). Financial Performance Evaluation of Depositories in
India (A Comparative Study of NSDL and CDSL). International Journal of Scientific and
Research Publication, 2(2).
3. Rao, B. S. P., & Babu, B. H. (2013). Role and Growth of NSDL in Indian Depository
System. International Journal, 1(7).
4. Gopal, B. V., & Naik, C. K. (2014). A Study on Role of Depository Participants in
Capital Market. International Journal of Research, 1(11), 671-678.
5. SINGH, D. S. (2011). DEPOSITORY SYSTEM IN INDIA-A COMPARATIVE
STUDYOFNSDLANDCDSL.IINNTTEERRNNAATTIIOONNAALL
JJOOUURRNNAALLOOFFRREESSEEAARRCCHHIINN
CCOOMMMMEERRCCEE, EECCOONNOOMMIICCSS AANNDD
MMAANNAAGGEEMMEENNTT.
6. Shah, Mahesh (1996), "A Care for Depositories in India", The Management
Accountant, April, pp. 259-261.
7. S. Kanan (2008), “Market Comparable Approach”, Journal of Financial Services
Research, Vol. 24, No.2-3, pp. 121-148.
8. Prof. Sultan Sing and Sakshi Goyal (July 2011), “Analysis Factor Affecting the decision
making of the investors in Depository system”, Journal of Banking, Financial

Services and Insurance Research, Vol. 1, pp. 13-38

9. https://www.cdslindia.com