UNIT 2

DEPOSITORY
SYSTEM IN INDIA

What is Depository ?
A depository can be compared to
a bank. A Depository holds
securities of investors in
electronic form.
A system in which securities of an
investor are held by depository
on behalf, and at the request, of
an investor in an Electronic Form.

Features of Depository
system
Transfer of ownership of securities is
done through simple account transfers.
This method saves the investors from
the risks associated with paperwork.
The cost of transacting in a depository
environment is considerably lower than
transacting in certificates.

Need for the Depository

system:
Growth in Securities
transactions: There has

been
considerable growth in securities transactions, especially, in the
post reform period, i.e., since 1991.
2. Limitations of Physical Transfer: There were several
limitations relating to physical transfer of shares. The limitations
were
Delay in transfer of shares.
Problem of bad deliveries
High cost of handling and transfer
Chances of loss of certificates in transit.
Chances of theft of certificates, etc
3. To comply with global standards: Almost all the developed
markets had introduced the depository system ensuring efficient
transfer and settlement of securities. Due to reforms in capital
markets, the government also introduced the depository Act,
1996.
1.

4. To enhance liquidity in stock markets: There was a need to

enhance liquidity in Indian Stock Markets. The seller of
securities to get immediate cash payment for their
transactions. As the process of transferring the physical
certificate was time consuming.
5. Centralised Systems in Securities Dealings: There was a
need to adopt a central system for handling all the securities
dealings.

Discuss

the

different

functions

performed by the Depository system.

Account Opening / Modification /Closure: An
investor wishing to avail depository services must first
open an account with a depository participant
registered with a depository.
Dematerialisation: One of the primary functions of a
depository is to eliminate or minimise the movement
of physical securities in the market. Dematerialisation
is the process of converting securities held in physical
form into holdings in book entry form.

Account Transfer: The depository gives effects

to all transfers resulting from the settlement of
trades and other transactions by recording entries
in the accounts.

 Transfer and Registration: A transfer is the

legal change of ownership of a security in the
records of the issuer. For effecting a transfer,
certain legal steps have to be taken like
execution and payment of stamp duty.
Pledge and Hypothecation: The securities held
with the depository may be used as collateral to
get the loans. Use of depository services for
pledging/ hypothecating the securities makes the
process very simple and cost effective.
Linkages with Clearing System: the clearing
system performs the functions of finding out the
pay-in (sell) or pay-out (buy) of brokers. Actual
delivery of securities is done through the
depository.

Who is a depository participant?

A depository participant (DP) is
an agent of the depository who
is authorised to offer depository
services to all the investors.
DP is the intermediary between
the investor and the
depository.
A DP has to be registered with
SEBI.

Depository
Central
Depositories
Services Limited
(CDSL)
National
Securities
Depositories
Limited
(NSDL)

Depository
Participants
SBI
HDFC Bank
ICICI Direct
Others

The Customer

Dematerialization

The process of
converting share
certificates or other
securities held in
physical form into
electronic form is called
dematerialisation.

Dematerialization Process

Dematerialization process

Rematerialisation
The process of
conversion of
dematerialised holdings
back to physical
certificates is called
rematerialisation.

Rematerialisation Process

Explain

the

process

of

Rematerialisation.

Step1: Beneficiary Owner (BO) has to open a demat

account with a Depository participant (DP) and obtain
an account number.
Step 2: A BO who wishes to rematerialize balance in his
demat account has to fill up a Remat Request Form
(RRF).

Step3: DP would verify that the Remat Request Form

has been filled correctly.
Step 4: DP would send an electronic communication to
the
depository and courier the Remat request form
and the other dcuments to the Registrar of the
company by courier.

Step 5: Thereafter Depository will make a

Remat request to the Registrar. Later the
Registrar will convert the securities from
electronic format to physical certificates and
completes the Rematerialisation process.
Step 6: On completion of Rematerialisation
process Registrar sends the confirmation to
the Depository.
Step 7: On receiving confirmation from the
Registrar, depository will Debit an equivalent
number of securities in the demat account of
the BO maintained with the Depository.
Step 8: Later the Registrar of the company will
send through post, the physical share
certificate to the Beneficiary owner.

 Depositories in India:
At present there are two depositories in
India,National
Securities
Depository
Limited
(NSDL)andCentral
Depository
Services (CDSL).
1. National Securities Depository Limited
(NSDL)
NSDL is the first Indian depository, it was
inaugurated in November 1996. It has
established a national infrastructure using
international standards that handles most
of
thesecuritiesheld
and
settled
in
dematerialisedform
in
the
Indian
capital market.
It is promoted by Industrial Development
Bank of India (IDBI), Unit Trust of India (UTI)

2. Central Depository Services

(CDSL).
Central Depository Services Limited (CDSL), is the
second Indian central securities depository based in
Mumbai.[3] Its main function is the holding securities
either in certificated or uncertificated (dematerialized
) form, to enable book entry transfer of securities. It
was eastablished in the year 1999.

CDSL
is
promoted
by
Bombay Stock ExchangeLimited
(BSE)jointly withState Bank of India,
Bank of India,Bank of Baroda,
HDFC Bank,Standard Chartered Bank
,Axis BankandUnion Bank of India

International Securities Identification Number

Each security issued bears a unique ISIN issued by the
International Standards Organization (ISO). It is a number
which uniquely identifies the securities. Securities for which
ISINs are issued includebonds,commercial paper,stocks
andwarrants. The ISIN code is a 12-character alphanumerical code.
lets take an example:
ISIN INE 475C 01 012
IN - India
E - Company
475C - Company serial number
01 - Equity
01 - Issue number
2 - Check digit

1. Type of company
A - Central government security
B - State government security
C - Municipal corporation
D - Union Territories
E - Company, Statutory Corporation,
Banking Company
F - Mutual funds including UTI

2. Security Type Code

Equity 01
Non Voting Equity 02
Convertible Preference Shares 03
Non Convertible Preference Shares 04
Mutual Fund Units Close ended 05
Mutual Fund Units Open ended 06
Secured Debentures 07
Unsecured Debentures 08
Regular Return Bonds Promissory Notes
Floating Rate Bonds 10
Deep Discount Bonds 11
Step Discount Bonds 12
Warrants 13

09

The need for depository arose mainly due

the following reasons:
1. Growth in Securities transactions:
2. Limitations of Physical Transfer: There were
several limitations relating to physical
transfer of shares. The limitations were
Delay in transfer of shares.
Problem of bad deliveries
High cost of handling and transfer
Chances of loss of certificates in transit.
Chances of theft of certificates, etc
3. To comply with global standards
4. To enhance liquidity in stock markets
5. Centralized Systems in Securities Dealings:

Functions of the
Depository
Account Opening /
Modification /Closure:
Dematerialization
Rematerialization
Account Transfer
Transfer and Registration
Linkages with the clearing
system

Explain the process of Dematerialization.

Step1: Beneficiary Owner (BO) has to open a demat
account
with a
Depository participant (DP) and
obtain an account number.
Step 2: BO need to fll in a Demat Request Form (DRF)
and submit the same with the physical certificates
to the depository participants for dematerialization.
Step3: DP would verify that the DRF has been filled
correctly.
Step 4: DP would send an electronic communication to
the depository and courier the DRF and the share
certificates to the Registrar of the company by
courier.
.

Step 5: Thereafter Depository will make a

Demat request to the Registrar. Later the
Registrar will convert the securities in the
electronic format and dispose the securities
in the physical format.
Step 6: On receiving confirmation from the
Registrar, depository will credit an equivalent
number of securities in the demat account of
the BO maintained with the Depository.
Step 7: The depository will electronically
download the details of the demat request
and DP will send the statement of holdings to
the Investor.

Constituents of depository
system
There are basically four
participant:
The Depository
The Depository
Participant
The Issuing Company
The Investor

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.
NSDL & CDSIL

NATIONAL SECURITIES DEPOSITORIES

LIMITED
(NSDL)
NSDL is the first
and
largest
depository
in
India,
and
established
in
August 1996
It
has
288
depository
Participants
(as
on 20.12.12)

Address:
Trade World, a
Wing, 4th &5th
Floors
Kamala Mills
Compound
Lower Parel
Mumbai 400013
website: nsdl.co.in

PROMOTERS OF NSDL
1. Industrial Development Bank of India
Limited
2. Unit Trust of India
3. National Stock Exchange of India
Limited .

SHAREHOLDERS OF NSDL

State Bank of India

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

Banking

CENTRAL DEPOSITORY
SERVICES (INDIA) LIMITED
(CDSIL)
This
is
the Address:
second
Phiroz Jeejeebhoy
depository
in
Towers
India.
16th Floor, Dalal
Street
This was formed
Mumbai website:
and registered in
www.cdslindia.co
1999.
m
It has 455 DPs as
on 4.08.08

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

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

Thank u