A PROJECT REPORT

On

“DEPOSITORY SYSTEM”

in the subject Investment Management

Submitted to University of Mumbai

For IVth semester of M.Com.

BY

SHWETA CHANDRAKANT SAWANT Roll No. 48

Under the guidance of

Prof. SUNIL GUJARAN

2014 – 2015

1

A PROJECT REPORT

On

“DEPOSITORY SYSTEM”

in the subject Investment Management

Submitted to University of Mumbai

For IVth semester of M.Com.

BY

SHWETA CHANDRAKANT SAWANT Roll No. 48

Under the guidance of

Prof. SUNIL GUJARAN

2014 – 2015

2

C E R T I F I C A T E

This is to certify that the project entitled “DEPOSITORY SYSTEM” submitted by Miss.

Shweta Chandrakant Sawant Roll No. 48 student of M.Com. Banking & Finance

(University of Mumbai) (IVth Semester) examination has not been submitted for any other

examination and does not form a part of any other course undergone by the candidate. It is

further certified that he has completed all required phases of the project. This project is original

to the best of our knowledge and has been accepted for Internal Assessment.

Internal Examiner External Examiner

Co-ordinator Principal

College seal

3

DECLARATION BY THE STUDENT

I, Miss. Shweta C Sawant student of M.Com. (Semester – IVth) Banking &

Finance, Roll No. 48 hereby declare that the project for the Subject Investment

Management titled, “Depository System” submitted by me to University of

Mumbai, examination during the academic year 2014-2015, is based on actual

work carried by me under the guidance and supervision of Prof. Sunil Gujaran.

I further state that this work is original and not submitted anywhere else for any

examination.

Shweta Chandrakant Sawant

Signature of student.

4

ACKNOWLEDGEMENT

At the beginning, I would like to thank GOD for his shower of blessing. The desire

of completing this project was given by my guide Prof. Sunil Gujaran. I am very

much thankful to him for the guidance, support and for sparing her / his precious

time from a busy schedule.

I would fail in my duty if I don’t thank my parents who are pillars of my life.

Finally I would express my gratitude to all those who directly and indirectly helped

me in completing this project.

Shweta C Sawant

5

Executive Summary:

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 or

securities. The storage and handling of certificates is hence immediately eliminated which

generates a reduction in costs like back office cost for handling, transporting and storing

certificates. Depositary participant is an institution akin to bank for securities. When an investor

hands over securities to a depository participant, investor’s account is credited. The investor’s

depository system account will show their holdings. His account is updated for his transactions

of sale and purchase but without physical movement of scripts or transfer deeds. In depository

system, share certificates belonging to the investors are dematerialised (demats).

Dematerialisation or “Demat” is a process whereby investors’ securities like shares, debentures

etc., are converted into electronic data and stored in computers by a Depository. Securities

registered in investor’s name are surrendered to depository participant (DP) and these are sent to

the respective companies who will cancel them after “Dematerialization” and credit investor’s

depository account with the DP. The securities on Dematerialization appear as balances in one’s

depository account. These balances are transferable like physical shares. If at a later date,

investors wish to have these “demat” securities converted back into paper certificates, the

Depository does this and their names are entered in the records of depository as beneficial

owners. The beneficial ownership will be with investor but legal ownership will be with the

depository. Consequently, benefits like interest, dividend, and rights: bonus and voting rights

will be with investors. Since depository is to get securities transferred in its name, the depository

name will be registered in the ownership register maintained by the company.

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INDEX:

TABLE NO. PARTICULARS PAGE NO.

1 Introduction8

2 Research Methodology 10

3 Objectives of the Study 11

4 Constituents of Depository System 12

5 Dematerialisation Process 17

6 Demat Account 19

7 Re-materialisation Process 21

8 NSDL 22

9 CDSL 28

10 Bank V/S Depository31

11 Legal Framework33

12 Review of Literature41

13 Conclusion42

14 Bibliography43

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Introduction to Depository:

A significant development of the 20th century particularly in its later part is expansion of

financial market world over which mostly was driven by globalization, technology, innovations

and increasing trade volume. India has not been an exception with probably largest number of

listed companies with a very large investor population and ever increasing volumes of trades.

However, this continuous growth in activities increased problems associated with stock trading.

Most of these problems arose due to the intrinsic nature of paper based trading and settlement,

like theft or loss of share certificates. This system required handling of huge volumes of paper

leading to increased costs and inefficiencies. The process beginning from buying shares through

the stock exchanges till getting the certificates duly endorsed in the buyer’s name was indeed

quite complex and time-consuming and was riddled with a variety of problems. Growing number

of investors participating in the capital market has increased the possibility of being hit by a bad

delivery, The cost and time spent by the brokers for rectification of these bad deliveries tends to

be higher with the geographical spread of the clients.

8

Meaning of depository

A depository is an organisation which holds securities (like shares, debentures, bonds,

government securities, mutual fund units etc.) of investors in electronic form at the request of the

investors through a registered Depository Participant. It also provides services related to

transactions in securities.

Constituents of Depository System:

Depository

Depository Participants (DPs)

Companies/issuer

Investors

History:

The first depository was set up way back in 1947 in Germany. In India it is a relatively new

concept introduced in 1996 with the enactment of Depositories Act 1996. Their operations are

carried out in accordance with regulations made by SEBI, bye-laws and rules of Depositories Act

and SEBI (Depositories and Participants) Regulations Act 1996.

9

Research Methodology:

Although India adopted multi-depository system model to provide competitive and healthy

depository system for surpass services to Investors. There is a chance to various entities to enter

into Depository system but only two organizations National Securities Depository Ltd (NSDL)

and Central Depository Services Ltd (CDSL) are providing depository services presently.

The data has been collected from the following sources:-

Primary data

Secondary data

Primary data:

In this study the questionnaire method have been used to collect primary data.

Secondary data:

Secondary data is collected from the website of NSDL (www.nsdl.co.in) and CDSL

(www.cdsl.ac.in), website of Indian central depository system (CDS), published reports of NSDL

and Govt. of India, Depository Act-1996, SEBI Act-1992, and Capital Market Services,

published books and printed material on financial services or Intermediaries.

10

Objectives of the Study:

At Present the Indian stock exchanges are following screen based trading and electronic

settlement system. But investors scattered at various distant places from trading and settlement

place. So there are some problems arising in the settlement and transfer system. Thus, there is a

need to evaluate the effectiveness of Indian Depository system.

The Main objectives of the study are:

To evaluate the performance of the Depository system in India with reference to NSDL.

To study the Organizational frame work, Operational policies, Problems and Prospects

and financial performance of NSDL.

To present legislative measures of dematerialization and to understand the present status

of dematerialization in India.

To analyze services rendered and quality among the DPs and opinions of investors with

regard to the functioning of NSDL.

To identify the Investors expectations from the DP companies and to exhibit the

Investor’s perceptions on the services offered by the DP companies.

To make appropriate and relevant recommendations to the management of the

organization under study.

11

Constituents of Depository System:

1. Depository:

Depository functions like a securities bank, where the dematerialized physical securities are

traded and held in custody. This facilitates faster risk free and low cost settlement. Depository is

much like a bank and performs many activities that are similar to a bank depository:

Enables surrender and withdrawal of securities to and from the depository through the

process of ‘demat’ and ‘remat’,

maintains investors’ holdings in electronic form,

Effects settlement of securities traded in depository mode on the stock exchanges,

Carries out settlement of trades not done on the stock exchanges (off market Trades).

In India a depository has to be promoted as a corporate body under Companies Act, 1956. It is

also to be registered as a depository with SEBI. It starts operations after obtaining a certificate of

commencement of business from SEBI. It has to develop automatic data processing systems to

protect against unauthorized access. A network to link up with depository participants, issuers

and issuer’s agent has to be created.

ii) Depository Participants (DP):

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A DP is investors’ representative in the depository system and as per the SEBI guidelines,

financial institutions/banks/custodians/stock brokers etc. can become DPs provided they meet the

necessary requirements prescribed by SEBI. DP is also an agent of depository which functions as

a link between the depository and the beneficial owner of the securities. DP has to get itself

registered as such under the SEBI Act. The relationship between the depository and the DP will

be of a principal and agent and their relation will be governed by the bye-laws of the depository

and the agreement between them. Application for registration as DP is to be submitted to a

depository with which it wants to be associated. The registration granted is valid for five years

and can be renewed. As depository holding the securities shall maintain ownership records in the

name of each DP, DP in return as an agent of depository, shall maintain ownership records of

every beneficial owner (investor) in book entry form.

Eligibility criteria for depository participants:

The following entities are eligible for becoming depository participant in accordance with

Regulation 19 of the SEBI (Depositories and Participants) Regulations, 1996.

A public financial institution as defined in Section 4A of the Companies Act, 1056.

A bank included in the second schedule of the Reserve Bank of India Act, 1934.

A foreign bank, operating in India with the approval of Reserve Bank of India.

A state financial corporation established under the provisions of section 3 of the State

Financial Corporations Act, 1951.

ii) ISSUER / Companies: The issuer is the co. which issues the securities. It maintains a

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register for recording the names of the registered owners of securities and the depositories.

The issuer sends a list of shareholders who opt for the depository system. And only that co.’s

can issue the securities which are registered under stock exchanges

iv) Beneficial Owner/ Investor:

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 have all

the rights and liabilities associated with the securities.

Facilities offered by depository system:

1) Dematerialization: It is a process of conversion of physical share – certificate into

electronic – form. So, when a shareholder uses the dematerialization facility, company

takes back the shares, through depository – system and equal numbers of shares are

credited in his account in e-form.

2) Rematerialization: Rematerialization is the exact reverse of Dematerialization. It refers

to the process of issuing physical securities in place of the securities held electronically in

book-entry form with a depository.

Other Services:

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a) Pledging Dematerialized Shares: Dematerialized shares could be pledged; in fact, this

is more advantageous as compared to pledging share certificates. After loan is repaid one

can request for a closure of pledge by instructing one’s DP through a standard format.

The pledgee on receiving the repayment as well as the request for closure of pledge will

instruct his DP accordingly. Even the locked-in securities can be pledged. The pledger

continues to remain the beneficiary holder of those securities even after the securities are

pledged.

b) Initial Public Offerings: Credits for public offers can be directly received into demat

account. In the public issue application form of depository eligible companies, there will

be a provision to indicate the manner in which securities should be allotted to the

applicant. One is to mention one’s client account number and the name and identification

number of DP. All allotment due to investor will be credited into required account.

c) Receipt of Cash/non-cash Benefits: When any corporate event such as rights or bonus

or dividend is announced for a particular security, depository will give the details of all

the clients having electronic holdings in that security as of the record date to the registrar.

The registrar will then calculate the corporate benefits due to all the shareholders. The

disbursement of cash benefits such as dividend/ interest will be done directly by the

registrar. In case of non-cash benefits, depository will directly credit the securities

entitlements in the depository accounts of all those clients who have opted for electronic

allotment based on the information provided by the registrar.

d) Stock Lending and Borrowing: Through the depository account securities in the demat

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form can be easily lent/ borrowed. Securities can be lent or borrowed in electronic form

through an approved intermediary, who has opened a special ‘intermediary’ account with

a DP. Instructions are to be given to DP through a standard format (which is available

with DP) to deposit securities with the intermediary.

e) Transmission of Securities: Transmission of securities due to death, lunacy, bankruptcy,

insolvency or by any other lawful means other than transfer is also possible in the

depository system. In the case of transmission, the claimant will have to fill in a

transmission request form, (which is available with the DP) supported by valid

documents.

f) Freezing Account with DP: If at any time as a security measure one wishes that no

transaction should be effected in one’s account, one may advise one’s DP accordingly.

DP will ensure that account of such investor is totally frozen until further instructions

from him.

Benefits of Depository System:

1) This system will eliminate paper work as the book entry system does not need physical

movement of certificates for transfer process.

2) The risk of bad deliveries, fraud and misplaced, mutilated and lost share certificates will

not exist.

3) The electronic media will shorten settlement time and hence the investor can save time

and increase the velocity of security movement.

4) Investors will be able to change portfolio more frequently.

DEMATERIALISATION PROCESS:

16

NSDL Depository

Participant

REGISTRAR INVESTOR

1. Appointing DP:

Any investor who intends to transact through depository system has to engage one depository

participant (DP). He can approach a DP of his choice and open an account with him just like

one opens an account with a bank. Investor gets an identification number called Client ID

(just as one gets ones bank account number) which serves as a reference point for all his

transactions with D.P.

Every investor before getting his holding dematerialised has to enter into an agreement with

the depository through a participant. This step is necessary whether investor already has

securities or securities are yet to be issued in a fresh issue. The investor contracts only with

that depository which accepts his security in ‘depository mode’ since it is not necessary that

all eligible securities must be in depository mode and with all the depositories.

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2. Request for ‘Demat’:

After any agreement is entered for getting securities dematerialised and his account is opened,

the investor makes an application to depository participants in form called ‘Dematerialisation

Request Form’ (DRF) to be provided by the DP and hands over his share certificates duly

cancelled by writing’ surrendered for dematerialisation’ to them for demat. The DP will accept

certificates registered only in investor’s name.

The request for dematerialisation with the depository participants is sent to the depository

through depository network with which DP is connected.

3. Approach the Company or Registrar of Transfer

The depository will electronically intimate the issuer or its ‘Registrar and transfer agent’ of the

dematerialisation request. The issuer or the ‘Registrar and transfer Agent’ has to verify the

validity of the security certificates as well as the fact that the DRF has been made by the person

recorded as a member in its Register of Members. If the issuer or its Registrar is satisfied, it

dematerialises the scrip and updates its record.

4. Confirmation of Demat

The Registrar to transfer or the concerned company when satisfied with the case of demat has to

inform the depository of the completion of dematerialisation authorising an electronic credit for

that security in favour of the investor.

18

Demat Account:

Demat account is a safe and convenient means of holding securities just like a bank account is

for funds. Today, practically 99.9% settlement (of shares) takes place on demat mode only. Thus,

it is advisable to have a Beneficiary Owner (BO) account to trade at the exchanges.

Benefits Of Demat Account:

A safe and convenient way of holding securities (equity and debt instruments both).

Transactions involving physical securities are costlier than those involving dematerialised

securities (just like the transactions through a bank teller are costlier than ATM

transactions). Therefore, charges applicable to an investor are lesser for each transaction.

Securities can be transferred at an instruction immediately.

Increased liquidity, as securities can be sold at any time during the trading hours

(between 9:55 AM to 3:30 PM on all working days), and payment can be received in a

very short period of time.

No stamp duty charges.

Risks like forgery, thefts, bad delivery, delays in transfer etc., associated with physical

certificates, are eliminated.

Pledging of securities in a short period of time.

Reduced paper work and transaction cost.

Opening a Demat Account:

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To start dealing in securities in electronic form, one needs to open a demat account with a DP

of his choice. An investor already having shares in physical form should ensure that he gets the

account opened in the same set of names as appearing on the share certificate; otherwise a new

account can be opened in any desired pattern by the investor.

Opening a Demat Account Documents to be attached

Getting started

1. Choose a DP 1. Passport size photographs

2. Fill up an account opening form 2. Proof of residence (POR) - Any one

provided by DP, and sign an of Photo Ration Card with DOB /

agreement with DP in a standard Photo Driving License with DOB /

format prescribed by the depository. Passport copy / Electricity bill /

3. DP provides the investor with a Telephone bill

copy of the agreement and schedule 3. Proof of identity (POI) - Any one of

Of charges for his future reference. Passport copy / Photo Driving

4. DP opens the account and provides License with DOB / Voters ID Card

the investor with a unique account / PAN Card / Photo Ration Card

number, also known as Beneficiary with DOB

Owner Identification Number (BO 4. PAN card

ID).

Note:

The agreement required to be signed by the investor details the rights and duties of the

investor and DP.

DP may revise the charges by giving a 30 days prior notice. SEBI has rationalized the

cost structure for isation by removing account opening charges, transaction charges for

credit of securities and custody charges, effective from January 28, 2005.

Re-materialisation Process:

20

NSDL Depository

Participant

REGISTRAR INVESTORRematerialisation is a process of converting electronic holdings of investor back into share

certificates in paper form. The process of rematerialisation is also carried out through DP and the

process has to be completed within a period of 30 days. Thus, once security is dematerialised it is

not necessary that investor is to continue in depository mode for all times to come. He can switch

over to remat whereby he gets back physical possession of security scripts. The client of DP has

to submit a request for remat. This request is forwarded for necessary action to depository. The

depository confirms the rematerialisation request to the Registrar and Transfer Agents. The

Registrar updates the accounts and prints the desired certificate. The depository is informed by

Registrar and certificate is sent to the investor. The depository updates its records and

communicates to DP to incorporate necessary changes in the account of the client.

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National Securities Depository Limited:

In a span of about nine years, investors have switched over to electronic [demat] settlement and

National Securities Depository Limited (NSDL) stands at the centre of this change. In order to

provide quality service to the users of depository, NSDL launched a certification programme in

depository operations in May 1999. This certification is conducted using NCFM infrastructure

created by NSE and is called "NSDL - Depository Operations Module". The programme is

aimed at certifying whether an individual has adequate knowledge of depository operations, to be

able to service investors. Depository Participants are required to appoint at least one person who

has qualified in the certification programme at each of their service centres. This handbook is

meant to help the candidates in their preparation for the certification programme.

National Securities Depository Limited is the first depository to be set-up in India. It was

incorporated on December 12, 1995. The Industrial Development Bank of India (IDBI) - the

largest development bank in India, Unit Trust of India (UTI) - the largest Indian mutual fund and

the National Stock Exchange (NSE) - the largest stock exchange in India, sponsored the setting

up of NSDL and subscribed to the initial capital. NSDL commenced operations on November 8,

1996.

Ownership:

NSDL is a public limited company incorporated under the Companies Act, 1956. NSDL had a

paid-up equity capital of Rs. 105 crore. The paid up capital has been reduced to Rs. 80 crore

since NSDL has bought back its shares of the face value of Rs. 25 crore in the year 2000.

However, its net worth is above the Rs. 100 crore, as required by SEBI regulations.

22

The following organisations are shareholders of NSDL as on March 31, 2005.

Industrial Development Bank of India

Administrator of the Specified Undertaking of the Unit Trust of India - DRF

National Stock Exchange

State Bank of India

Oriental Bank of Commerce

Citibank N.A.

HDFC Bank Limited

The Hongkong and Shanghai Banking Corporation Limited

Deutsche Bank A.G.

Dena Bank

Management of NSDL:

NSDL is a public limited company managed by a professional Board of Directors. The

day-today operations are conducted by the Chairman & Managing Director (CMD). To

assist the CMD in his functions, the Board appoints an Executive Committee (EC) of not

more than 15 members. The eligibility criteria and period of nomination, etc. are

governed by the Bye-Laws of NSDL in this regard.

Bye-Laws of NSDL:

Bye-Laws of National Securities Depository Limited have been framed under powers

conferred under section 26 of the Depositories Act, 1996 and approved by Securities and

Exchange Board of India.

The Bye-Laws contain fourteen chapters and pertain to the areas listed below:

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1. Short title and commencement

2. Definitions

3. Board of Directors

4. Executive Committee

5. Business Rules

6. Participants

7. Safeguards to protect interest of clients and participants.

8. Securities

9. Accounts/transactions by book entry

10. Reconciliation, accounts and audit

11. Disciplinary action

12. Appeals

13. Conciliation

Arbitration Amendments to NSDL Bye-Laws require the approval of the Board of Directors of

NSDL and SEBI.

Business Rules of NSDL

Amendments to NSDL Business Rules require the approval of NSDL Executive Committee and

filing of the same with SEBI at least a day before the effective date for the amendments.

Functions:

NSDL performs the following functions through depository participants:

Enables the surrender and withdrawal of securities to and from the depository

(dematerialisation and rematerialisation).

Maintains investor holdings in the electronic form.

Effects settlement of securities traded on the exchanges.

Carries out settlement of trades not done on the stock exchange (off-market trades).

Transfer of securities.

Pledging/hypothecation of dematerialised securities.

Electronic credit in public offerings of companies or corporate actions.

Services Offered by NSDL:

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NSDL offers a host of services to the investors through its network of DPs:

Maintenance of beneficiary holdings through DPs

Dematerializations

Off-market Trades

Settlement in dematerialised securities

Receipt of allotment in the dematerialised form

Distribution of corporate benefits

Rematerialisation

Pledging and hypothecation facilities

Freezing/locking of investor's account

Stock lending and borrowing facilities

Technology and Connectivity in NSDL

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System View of NSDL Depository System:

Account holders (investors) open account with the DPs. The account details, entered in a

computer system maintained by Depository Participants called DPM, are electronically conveyed

to the central system of NSDL called DM. Companies who have agreed to offer demat facility to

their shareholders use a computer system called DPM (SHR) to connect to the NSDL central

system. DPM (SHR) may be installed by the company itself or through its R&T Agent.

Maintenance of Accounts at the Central System:

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The NSDL central system known as DM maintains accounts of all account holders in the

depository system. All the transactions entered at any point in the computer system connected to

it are first effected in the central system and subsequently at these computers. Thus, the central

system of NSDL has the records of all details of every transaction conducted in the depository

system.

Distributed Database:

Each of the computer systems connected to NSDL system has its own database relating to its

clients. This helps in giving prompt and accurate service to the clients. However each of the

databases is reconciled with the data at the central system everyday in order to ensure that the

data in the distributed database tallies with the central database.

Common Software:

NSDL develops software required by depository participants, companies, R&T Agents and

clearing corporations for conducting depository operations. Thus, the computer systems used by

all the entities will have common software given by NSDL. However, depending on the business

potential, branch networks and any other specific features, DPs may develop software of their

own for co-ordination, communication and control and provide service to their clients. Such

exclusive software is called "back office software". DPM system given by NSDL gives "export

and import" facility to take out the transaction details to be used by back office software and to

feed in transaction details generated from the back office software.

Central Depositary Securities Limited:

A Depository facilitates holding of securities in the electronic form and enables securities

27

transactions to be processed by book entry by a Depository Participant (DP), who as an agent of

the depository, offers depository services to investors. According to SEBI guidelines, financial

institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is

known as beneficial owner (BO) has to open a demat account through any DP for

dematerialisation of his holdings and transferring securities.

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. The depository

system has effectively eliminated paper-based certificates which were prone to be fake, forged,

counterfeit resulting in bad deliveries. CDSL offers an efficient and instantaneous transfer of

securities.

CDSL 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,

Union Bank of India and Centurion Bank.

CDSL was set up with the objective of providing convenient, dependable and secure depository

services at affordable cost to all market participants. Some of the important milestones of CDSL

system are:

CDSL received the certificate of commencement of business from SEBI in February, 1999

Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of

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CDSL on july 15,1999.

Settlement of trades in the demat mode through BOI Shareholding Limited, the clearing

house of BSE, started in july 1999.

All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange,

Delhi stock Exchange, The Stock Exchange, Ahmedabad, etc have established

connectivity with CDSL.

As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities,

bonds, debentures, commercial papers), units of mutual funds, certificate of deposits etc.

into the CDSL system.

Tariff for Clearing Members

CDSL collects only 500 (INR) per month from its DPs for a CM account per exchange.Further, a fee of 5.50 (INR) will be payable per credit transaction into CM Principal account that originates from the Clearing Corporation.

The following tariff structure will be effective from Thursday, April 01, 2010.

Monthly Transaction bill amount Rate per Debit Transaction(in INR)

More than 15 lakhs (INR) 4.25

More than 4 lakhs (INR) and upto 15 lakhs (INR)

4.50

More than 1 lakh (INR) and upto 4 lakhs (INR)

5.00

Upto 1 lakh (INR) 5.50

CDSL tariff structure to its depository participants is as follows:

Details of Charges CDSL

29

Account Opening Charges NIL

Account Maintenance Charges NIL for individuals 500 (INR) p.a. to Corporates (prorated monthly)

Transaction Charges Market & Off-Market

5.50 (INR)**

Transaction Charges for Clearing Member Accounts

Flat charge of 500 (INR) per month on CM accounts(per CM per exchange) for pay-in and pay-outs received from CH

Custody Charges NIL

Demat Charges NIL

Remat / Restat Charges RematFee of Rs.10/- for every 100 securities or part thereof; subject to maximum fee of Rs. 5,00,000 or a flat fee of Rs.10/- per certificate, whichever is higher 

Restat - SOA/ RedemptionA flat fee of Rs. 5.50 per transaction for conversion of MF units into SOA (Statement of Account) and Redemption of MF units

Pledge/Hypothecation Charges Pledge acceptance - 12 (INR) per request (payable by pledgor).Unpledge acceptance - 12 (INR) per request (payable by pledgor).Pledge Invocation Acceptance -Nil

Internet Facility 'easiest' 50,000 (INR) one time for registration and 2,250 (INR) for obtaining Digital Signature Certificate from CDSL

For Main DPs: 5,000 (INR) per month or the amount of the actual bill for a given month whichever is higher.For DP-Branches: 5,000 (INR) per month or the amount of the actual bill for a given month whichever is higher.

Comparison between banks and depository:

Similarity:

Promoted by reputed persons and institutions: Both bank and depository are Promoted by

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persons and institutions of repute and good standing. For e.g.-HDFC bank was promoted

by housing Development Corporation Ltd. and similarly NSDL is promoted by Industrial

Development Bank of India Limited (IDBI), Unit Trust of India (UTI) and National

Stock Exchange of India Limited (NSE).

Renders safe keeping services: Both banks and depository provide safe keeping services.

Banks provides safe custody of cash and locker facility for keeping valuable articles to its

clients. Depositories also provide safe keeping of shares, debentures, bonds, government

securities, mutual fund units to its clients.

Central office and branches: Like bank every depository has one central office which is

the main office and other branch offices which are situated in different cities and follow

the guidelines of central office.

Charge of fees- banks charge fees for locker facilities to its clients, similarly depository

charges fees for safe keep of share certificates in electronic form.

Transfer of funds and securities : Funds/securities are transferred only at the instruction

of the account holder

Written confirmation of transfer (of shares and currencies )

Account is operated by power of attorney: a person under power of attorney can operate

the account.

Customers are entitled to get statement s of accounts

Nomination facility: in case of bank accounts customer can nominate any person to

whom account will be transferred in case of death of the person similarly in case of

depository, a customer can nominate a person to whom the shares will be transferred.

Currencies (in case of banks ) and shares (in case of depositories) when held do not have

any distinctive number

Differentiation:

Bank Account Vs. Demat Account

A Bank A Depository (like CDSL)

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For opening a bank account, such as a A demat account is opened by an investor

savings bank account, a minimum without any securities, i.e. with zero balance.

balance has to be deposited along with the

account

A customer having an account with a An account holder of the depository is called

bank is called as an Account Holder. As Beneficial Owner (of the securities).

A bank is entitled to use funds lying in A depository is not entitled to use the

the savings or current deposit accounts of securities lying in the demat accounts of the

the customers in the normal course of customers and hence does not pay any

business and pays interest to them for the interest to them.

use.

A bank account can be operated upon A demat account can be opened, operated

“jointly”, or, by “either or survivor” of upon only by ALL the account holders

the account holders or by “any JOINTLY, at present.

one/two/three of", the joint account

holders.

In the bank account, addition or deletion In the demat account, addition or deletion of

of name(s) of one or more of the account name(s) of one or more of the account

holders are permitted. holders (beneficial owners) is NOT

permitted.

In the bank account, there is no In demat account, the beneficial owners is

requirement of execution of an agreement required to sign a DP-BO agreement before

between the bank and account holder at opening the demat account.

the time of opening the account

LEGAL FRAMEWORK:

The depositories in India are regulated under the following legal framework:

The Depositories Act, 1996

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SEBI (Depositories and Participants) Regulations, 1996

Companies Act, 1956

Securities and Exchange Board of India Act, 1992

Prevention of Money Laundering Act, 2002

Apart from the above-mentioned Acts and Regulations, following govern the business and

operations of a depository.

Bye Laws of the depository

Operating Instructions of the depository

The Depositories Act, 1996 gives power to depositories to make bye-laws but such bye laws

should be consistent with the provisions of this Act and the SEBI Regulations. Such bye-laws

shall provide for:

The eligibility criteria for admission and removal of securities in the depository;

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The conditions subject to which the securities shall be dealt with;

The eligibility criteria for admission of any person as a participant;

The manner and procedure for dematerialisation of securities;

The procedure for transactions within the depository;

The manner in which securities shall be dealt with or withdrawn from a depository;

The procedure for ensuring safeguards to protect the interests of participants and

beneficial owners;

The conditions of admission into and withdrawal from a participant by beneficial owner;

The procedure for conveying information to the participants and beneficial owners on

dividend declaration, shareholder meetings and other matters of interest to the beneficial

owners;

The manner of distribution of dividends, interest and monetary benefits received from the

company among beneficial owners;

The manner of creating pledge or hypothecation in respect of securities held with a

depository;

Inter se rights and obligations among the depository, issuer, participants, and beneficial

owners;

The manner and the periodicity of furnishing information to the Board, issuer and other

persons;

The procedure for resolving disputes involving depository, issuer, company or a

beneficial owner;

The procedure for proceeding against the participant committing breach of the

regulations and provisions for suspension and expulsion of participants from the

depository and cancellation of agreements entered with the depository;

SEBI (Depositories and Participants) Regulations, 1996:

Board (SEBI) grants a certificate of registration to a depository subject to the following

Conditions, namely:

The depository shall pay the registration fee specified within fifteen days of receipt of

intimation from the Board;

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The depository shall comply with the provisions of the Act, the Depositories Ordinance,

the bye-laws, agreements and these regulations;

The depository shall not carryon any activity other than that of a depository unless the

activity is incidental to the activity of the depository;

the sponsor shall, at all times, hold at least fifty one per cent of the equity capital of the

depository and the balance of the equity capital of the depository shall be held by its

participants;

No participant shall at any time, hold more than five per cent of the equity capital of the

depository;

If any information previously submitted by the depository or the sponsor to the Board is

found to be false or misleading in any material particular, or if there is any change in such

information, the depository shall forthwith inform the Board in writing;

The depository shall redress the grievances of the participants and the beneficial owners

within thirty days of the date of receipt of any complaint from a

Participant or a beneficial owner and keep the Board informed about the number and the

nature of redressals:

The depository shall make an application for commencement of business under

regulation 14 within one year from the date of grant of certificate of registration under

this regulation; and

The depository shall amend its bye-laws as directed by SEBI.

Certificate of Commencement of Business:

The Board shall take into account for considering grant of certificate of commencement

of business, the following points, namely, whether

The depository has a net worth of not less than rupees one hundred crore;

The bye-laws of the depository have been approved by the Board;

The automatic data processing systems of the depository have been protected against

unauthorized access, alteration, destruction, disclosure or dissemination of records and

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data:

the network through which continuous electronic means of communications are

established between the depository, participants, issuers and issuer’s agents is secure

against unauthorized entry or access;

The depository has established standard transmission and encryption formats for

electronic communications of data between the depository, participants, issuers and

issuers’ agents;

the physical or electronic access to the premises, facilities, automatic data processing

systems, data storage sites and facilities including back up sites and facilities and to the

electronic data communication network connecting the depository, participants, issuers

and issuer’s agents is controlled, monitored and recorded;

the depository has a detailed operations manual explaining all aspects of its functioning,

including the interface and method of transmission of information between the

depository,- issuers, issuers’ agents, participants and beneficial owners;

the depository has established adequate procedures and facilities to ensure that its records

are protected against loss or destruction and arrangements have been made for

maintaining back up facilities at a location different from that of the depository;

the depository has made adequate arrangements including insurance for indemnifying the

beneficial owners for any loss that may be caused to suchbeneficial owners by the

wrongful act, negligence or default of the depository orits participants or of any employee

of the depository or participant; and

The grant of certificate of commencement of business is in the interest of investors in the

securities market.

The Board shall, before granting a certificate of commencement of business makes a

Depository.

Record of Services by Depository Participant (DP):

I. Types of records:

Every participant shall maintain the following records and documents, namely:

Records of all the transactions entered into with a depository and with a beneficial owner;

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Details of securities dematerialised, rematerialised on behalf of beneficial owners with

whom it has entered into an agreement;

Records of instructions received from beneficial owners and statements of account

provided to beneficial owners; and

Records of approval, notice, entry and cancellation of pledge or hypothecation, as

the case may be.

Every participant shall make available for the inspection of the depository in which it is a

participant all records referred above. Every participant shall allow persons authorised by the

depository in which it is a participant to enter its premises during normal office hours and inspect

its records.

Every participant shall intimate the Board the place where the records and documents are

maintained.

The participant shall preserve records and documents for a minimum period of five years.

Where records are kept electronically by the participant, it shall ensure that the integrity

of the data processing systems is maintained at all times and take all precautions

necessary to ensure that the records are not lost.

If a participant enters into an agreement with more than one depository, it shall maintain

the specified records separately in respect of each depository.

Agreement by Issuer:

Every issuer whose securities have been declared as eligible to be held in dematerialised form in

a depository shall enter into an agreement with the depository.

Records to be maintained by Depository:

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Every depository shall maintain the following records and documents, namely:

Records of securities dematerialised and rematerialized;

The names of the transferor, transferee, and the dates of transfer of securities;

A register and an index of beneficial owners;

Records of instructions received from and sent to participants, Issuers, issuers’ agents and

beneficial owners;

Records of approval, notice, entry and cancellation or pledge or hypothecation, as the

case may be;

SEBI committee to review depository system

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Market regulator SEBI is looking to overhaul its norms for depository systems with an

aim to strengthen its oversight mechanism and to safeguard against any systemic risks

posed by single-point failures.

The depositories work as safe-keepers of various kinds of securities issued by the

companies as well as other entities and these entities are regulated by the Securities

and Exchange Board of India (SEBI).

The depositories have the mandate to help the companies convert their physical shares

or securities into dematerialised or demat form and thereafter maintain those shares,

and also supervise proper conversion and reconciliation of their total share capital by

the companies.

A ‘Depository System Review Committee’ constituted by SEBI has been asked to

conduct an overall assessment/adequacy of existing depository framework and identify

potential areas for review, a senior official said.

The move comes at a time when efforts are on to expand the ambit of depositories by

allowing them to hold new asset classes in demat format.

SEBI has received suggestions from the government to expand the list of asset classes

to be held by a depository.

It has been suggested that there are many assets/records such as warehouse receipts,

fixed deposits with banks and corporates, insurance policies, Post Office investments

and University degree certificates that can be held in demat form.

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To begin with, depositories may be be first allowed to hold only those financial assets

for which there exists a sectoral regulator, as it might require legal amendments in

relevant Acts before SEBI might notify records such as degree certificates as

securities, the official said.

SEBI’s Depository System Review Committee, which comprises outside experts as also

a member secretary from the regulator, would assess the existing depository system to

benchmark it against the global best practices.

Besides, it will also identify the areas for continuous improvement of systems,

procedures and practices and make the required recommendations.

The mandate to the SEBI panel also includes identifying “systemically important

market infrastructure providers/ institutions/depository participants and their inter-

linkages and identify areas and suggest safeguards to prevent single point failures and

denial of depository service.

It would also review the existing system of inspection by depositories and suggest

changes for strengthening monitoring and oversight of depository participants, the

official added.

SEBI’s Depository System Review Committee would also study the relevant principles

of IOSCO, a global body of market regulators from across the world, and European

Central Bank recommendations for Central Securities Depositories.

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Review of Literature:

M.T. Raja and Varsha marathe conducted study on Transaction cost for equity shares in

India .The main objectives of the study was to analyse the cost of equity shares transaction in

physical mode and demat mode. He found that the average cost for the FII in India is lower than

stock market like Singapore, china, and Thailand. Due to dematerialization the transaction cost

of FII have comedown by 60 % and for mutual funds by 75%.

Malabika deo conducted a study on depository ordinance: a new dimension of capital market

reform. The objective of the study deals with operations, functions and benefits of depository

system. She concluded that introduction of depository system would take away of the ailments

facing the present style, making the trading in scrip’s fool proof, would serve as a panacea and

will ultimately pave the way for emergence of highly efficient capital market. However

improved banking system, adequate infrastructure and fast information technology are all going

to play a crucial role in the success of depository system in India.

Chikodikar studies undertaking dematerialization and the objectives framed was demat process

and have detailed discussion on demat system-its meaning advantages, demat charges (price)

depository and depository participants. He found that the electronic trading and trading of

securities is a step in the right direction, paperless trading will prove to be boon to the stock

market in the years to come.

C.R. Ramana conducted study on join in band of electronic trading in securities .He puts vision

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at the electronic system of security demat and remat its features and protocol. He explained the

procedure to sell and buy technique of securities in the demat form.

Conclusion:

Since dematerialization has a great bearing on the creation and protection of wealth and

investment earnings of an investor, DPs must increase their efforts in promoting enhanced

services in general, and in those involving security and safety in particular to encourage the

existing and prospective shareholders, all efforts should be made to ensure good returns, in

addition to providing greater security and safety. Since the investors expect better service form

depository participants, it should provide them value-added services. The processing of the

DEMAT account opening should be made fast and non-tedious. The DEMAT a/c holder should

be given basic information about NSDL, CDSL and Depositaries Act 1996. Clear picture of the

deductions made by depository participant or the charges levied on the customers should be

provided in black and white. Bank should expand its network by opening its more branches and

franchise and there should be easy accessibility of services rendered by this system. The

processing of the demat account opening should be made fast.

To conclude, it can be said that the demat account opening is same as bank account, i.e, single or

joint accounts or with nominee. The growth rates of demat account holder in increasing over

years. The Indian system of capital market is a two tire system. Indian government allows

holding securities in any form i.e either in physical securities or in demat form. The transaction

of securities is completely done through electronic form. Investors are not aware of the services

offered by depositories. Most of the speculators do no utilize demat account in day-to-day online

trading. They trade through broker pool account. Dematerialization process can be done through

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online trading by utilizing computers.

BIBLIOGRAPHY

1 BOOKS

Dematerialisation in the Indian Capital Market

By P.V Nishanth

Security analysis and portfolio management

By Prasanna Chandra

Securities Laws and Compliances

By Institute of Company Secretaries of India

2 WEBSITES

www.indiabulls.com

www.moneycontrol.com

www.nseindia.com

www.bseindia.com

www.wikipedia.com

www.sebi.com

www.google.com

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