Post on 06-Apr-2018
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Depository Services.
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Depositories : An Introduction
The erstwhile settlement system in the capital markets ,
was inefficient and increased risk , due to great timeelapsing, by the time the trade was settled.
The transfer was through the physical movement ofcertificates, a process fraught with delays and resultant
risks. Transfer of ownership also inefficient, as it involved the
movement of papers to the issuing co. for registration.
This process could take more than 2 months, at the end
of which most of the transfers would be bad deliverycases, because of faulty paper work.
Plus theft, forgery and mutilation of certificates was alsocommon.
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Depositories : An Introduction
To obviate these problems, the Depositories Act, 1996
was passed, It provides for the setting up of Depositories with the
objective of free transferability of securities, with speedaccuracy and security.
It does so by : making securities of public ltd companiesfreely transferable, dematerializing the securities in thedepository mode, and providing for maintenance ofownership records in the book entry form.
Thus companies right to use discretion in transferringsecurities , executing the transfer deed etc dispensedwith, making securities freely transferable.
Two depositories NSDL AND CDSL have come up , toprovide instantaneous electronic transfer of securities
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Scrip Based System.
Scrip based system of securities transactions involves
enormous paper work involving certificates and transfer
deeds.
Simply, securities are held in physical form.
There is physical movement of securities certificates
along with transfer deeds.
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Scrip Based System - Problems
Time consuming (processing time by co.)
Bad deliveries due to signature difference
Mistakes in completion of transfer deeds
Tearing and mutilation of certificates
Fake certificates
Postal delays and charges etc.
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Depository System.
A system in which securities of an investor are held by
depository on behalf, and at the request, of an investor inan Electronic Form.
This system is also known as Scrip Less Trading system.
In the depository system, securities are held in
depository accounts, which is more or less similar toholding funds in bank accounts.
Transfer of ownership of securities is done throughsimple account transfers.
This method does away with all the risks and hasslesnormally associated with paperwork.
Consequently, the cost of transacting in a depositoryenvironment is considerably lower as compared totransacting in certificates.
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Depository System.
The Depositories Act 1996, defines depositories as :
Any company registered under Companys Act1956,& which has been granted registration under
Sub Section12(1A) of SEBI Act,1992
Their principal function is to dematerialize securities and
enable transfer through the book entry form.
There are basically four participants:
1. The Depository,2. The Depository Participant,
3. The Issuing Company and
4. The Investor.
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Depository System.
The depository model adopted in India provides for a
competitive multi-depository system. There can be various entities providing depository
services. Such system is known as Multi-Depository
System.
At present two Depositories are registered with SEBI.
NSDL CDSL
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NSDL.
NSDL promoted by IDBI, UTI, National Stock Exchange of
India Limited.,SBI, in 1996. It is a public limited company, which performs a wide
range of functions through DPs, viz,
1. Maintenance of individuals holdings in electronic form
2. Dematerialization and Rematerialization
3. Transfers relating to settlement of trades.
4. Distribution of non cash corporate actions
5. Facility of freezing/locking investor accounts
6. Facility of pledging/hypothecation of securities.
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Business Partners of NSDL
The DPs are the important link between the investors
and NSDL.
Other business partners include the issuing companies,
their share transfer agents , clearing houses, and clearingmembers.
NSDL facilitates the settlement of trades carried out in
the book entry segment of the stock exchanges.
The actual settlement is performed by the clearingcorporation/houses.
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CDSL
CDSL is the second depository set up by the Bombay
Stock Exchange and co sponsored by SBI, BOI, BOB andHDFC Bank, in the year 1999.
BSE has 45% stake in it , while the banks have 55% stake.
CDSL has more than 163 DPs in 91 cities across 168
locations covering 320 cities.
CDSL has been the preferred platform for the Govt. of
India for PSU disinvestments .
Has also attained the membership of the Asia PacificCentral Depository Group(ACG). ACG has 22 member
organizations including the depositories of Japan,
Hongkong, Singapore etc.
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A Bank-Depository Analogy
Bank Depository1.Holds funds in an account
on behalf of a customer
1.Holds securities in an
account on behalf of an
investor.
2.Transfer funds between
accounts on the instructionof the account holder.
2.Transfer securities between
accounts on the instructionof the account holder.
3.Physical handling of funds
is avoided.
3.Physical handling of
securities is avoided.
4.Provides safe custody of
fund
4.Provides safe custody of
securities.
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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 getsproper registration from SEBI.
A DP is just like a Branch of a Bank.
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Who Can become a 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
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
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Types of Ownership.
The registered owner is that person whose name isregistered 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.
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 ,
etc are all exercised by the Beneficial owner.
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Benefits of depository system
Depository system provides benefits to:
The investors, and
The issuers.
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Benefits to Investors
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 paperwork 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 caseof depository mode.
The investment, automatically, becomes more liquid.
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Benefits to Investors
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.
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Benefits to Issuers
The company saves a lot of paper work whichotherwise 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 company.
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ACCOUNT OPENING
In order to avail of depository facilities, an investor has
to open a beneficiary account with a depositoryparticipant 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
The account holder is called 'beneficial owner' in a
depository system and the account is known as
'beneficiary account'.
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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 dematerialize existing physical holdings, the
beneficiary account must be opened in the same
ownership pattern in which the securities are held inthe 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
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What is dematerialization?
Dematerialization is the process by which physicalcertificates 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.
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Process of dematerialization
An investor intending to dematerialize its securities
needs to have an account with a DP. The client (registered owner) will submit a request to
the DP in the Dematerialization Request Form for
dematerialization, along with the certificates of
securities to be dematerialized. Before submission, theclient 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 thesecurity 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. .
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Process of dematerialization
After intimating NSDL electronically, the DP sends the
securities to the concerned Issuer/ R&T agent. NSDL inturn 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 ofthe 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 ofthe investor with the DP.
This procedure takes 15to 30 days.
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Rematerialisation
Rematerialisation is the process by which a client canget his electronic holdings converted into physical
certificates.
A client can rematerialise his dematerialized holdings
at any point of time.
The rematerialisation process is completed within 30
days.
The securities sent for rematerialisation cannot betraded.
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Procedure of Rematerialisation
The client has to submit the rematerialisation requestto the DP with whom he has an account.
The DP enters the request in its system which blocks
the client's holdings to that extent automatically.
The DP releases the request to NSDL and sends therequest form to the Issuer/ R&T agent.
The Issuer/ R&T agent then prints the certificates,
dispatches the same to the client and simultaneously
electronically confirms the acceptance of the request toNSDL.
Thereafter, the clients blocked balance are debited.