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An effective and fully developed depository system is essential for maintaining and enhancing the effeciency of a mature capital market

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Before introduction of Depository system, the problems faced by investors and corporates in handling large volume of paper were as follows:

Bad deliveries Fake certificates Loss of certificates in transit Mutilation of certificates Delays in transfer Long settlement cycles Mismatch of signatures Delay in refund and remission of dividend etc

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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

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The term Depository means a place where a deposit of money, securities, property etc is deposited for safekeeping under the terms of depository agreement

A depository is an organisation, which assists in the allotment and transfer of securities and securities lending.

The shares here are held in the form of electronic accounts i.e dematerialised form and the depository system revolves around the concept of paper-less or scrip-less trading.

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It holds the securities of the investors in the form of electronic book entries avoiding risks associated with paper

It is not mandatory and is left to the investor to decide

Depositories carry out its operations through various functionaries called business partners

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A depository system is governed by the following acts

Securities & Exchange Board of India Act 1992

The SEBI(Depositories and Participants) Regulations, 1996

Bye –laws of depository Business rules of depository The Companies Act 1956

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Presently there are two Depositories working in India:

National Securities Depository Limited(NSDL) It was registered by the SEBI on june 7 1996

as India’s first Depository to facilitate trading and settlement of securities in the demat form. It is promoted by IDBI, UTI, NSE

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Central Depository Services (India) Limited (CSDL)

It commenced its operations during feb 1999 and was promoted by Stock Exchange Mumbai in association with Bank of Baroda, Bank of India, SBI and HDFC Bank

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At present 10 Stock Exchanges are connected to the Depositories

NSE The SE , mumbai Calcutta Stock Exchange Delhi SE Ludhiana SE Bangalore SE Over the counter exchange of India Madras SE Inter connected SE Ahmedabad SE

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Market trade: trade done settled through a SE and clearing corporation.

Off market trades: trades done privately without involvement of stock brokers and SE

Again investor may either choose to invest privately, through SB or DP

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Depository Depository Participant (DP) Securities, Issuers and Registrars and

Share Transfer Agents Stock Exchanges and Stock Brokers Clearing Corporation/ Clearing House and

Clearing Members Banking system Investors

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Depository : it is an organisation where the securities are held in electronic form and carries out the securities transaction by book entry

DP : DP is an agent of the depository and functions as the interacting medium between the depository and the investor

He should be registered with the SEBI

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Must possess requisite qualifications prescribed by the concerned depository of which he is a participant

He is responsible for maintaining the investors’ securities a/c with the depository and handles them as per the investors written instructions

He is linked to a broker who trades on behalf of investors

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To avail their services an account similar to a bank a/c has to be opened with the DP

As per SEBI Regulations , financial institutions, banks, custodians, stock brokers etc can become DP’s

However investors may choose DP’s of their choice and also deal with 1 or more DP;s at a time

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Securities, Issuers and Registrars and Share Transfer Agents: eg: an agreement between the depository , issuer of security and the designated registrar/ share transfer agents for the underlying security in the cases of issues like transfer of securities by their beneficial owners

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Stock Exchanges and Stock Brokers SE is an organised market for dealings in

securities commonly referred as secondary market.one of its main functions is price discovery i.e to cause prices to reflect currently avalable information about a security

SB are members of SE primarily engaged in 2 main activities i.e buy and sell securities for their clients charging a comm and as dealers or traders and dealers they buy and sell on their own a/c for trading gains

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Clearing Corporation/ Clearing House and Clearing Members

A clearing corporation is a central organisation created to facilitate efficient , fast and economical settlement of transactions at a SE . it being an internal department of a SE is an independent entity

The members of Clearing Corporation brokerage firms, banks or other financial institutions who are called as clearing members.

Eg:all trades done at NSE & OTCEI are settled through National Securities Clearing Corporation Limited (NSCCL)

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It acts as a central mechanism for consolidating and settling transactions instead of the member firms settling each trade individually amongst themselves

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Banking system Depository essentially plays a dual role i.e

of a depository and a limited bank It maintains current a/c’s for participants

and executes fund transactions relating to securities transactions for participants

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Investors :may be individuals or corporates who have acquired shares either in primary market or in secondary market

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Opening of depository system Dematerialisation Rematerialisation Settlement of trades in dematerialised

securities Account transfer Transfer ,transmission and transposition

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Pledge and hypothecation Redemption or repurchase Stock lending and borrowing Corporate action Account freezing Nomination Demat of debt instruments Dealing in govt securities

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Opening of depository system: SEBI has made compulsory trading of shares of all the companies listed in stock exchanges in demat form w.e.f 2nd jan 2002

Hence if the investor wants to trade in respect of the companies which have established connectivity with NSDL & CSDL, he may have to open a beneficiary a/c

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Beneficiary a/c is an a/c opened by the investor or a broker with a DP of his choice to hold shares in demat form and undertake scripless trading

For opening demat a/c, the following documents are required:

Demat opening form duly filled Address proof photograph

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Once a demat a/c is opened investor must sign an agreement with the DP and the investor will be allotted an account no. called as client identity

No minimum balance is required The investor is provided with a transaction

statement by his DP at regular intervals based on which the investor will know his security balances

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Dematerialisation It means conversion of the physical

certificates into dematerialised holdings at the request of the investor

Only shares registered in the name of the a/c holder are accepted for dematerialisation at the depository

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Procedure:

First open a demat a/c or security a/c with any DP of investor’s choice

Obtain a/c no. from his DP A dematerialisation request form (DRF) to be submitted to

the DP who intimates depository of the request DP then submits the certificate along with the DRF to the

registrar who confirms the demat request Registrar validates the request, updates records ,destroys

the certificates and informs depository who in turn credits the DP a/c

Depository participant updates the investor a/c and informs the investor

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Once the company is admitted into depository system, an ISIN (international securities identifiction number) is allotted by the depository. This no. is unique for each security of the company that is admitted in the depository

The entire process takes about 15 days time.

However when large no. of certificates are submitted from institutions, it takes upto 30 days for demat

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An investor may demat a part of his holdings and hold the balance in physical mode for the same security

Demat shares are fungible because they do not have any distinctive or certificate numbers

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Rematerialisation It means conversion of demat holdings back

into certificates If the investors wish to get the securities in

physical form ,all he has to do is to request DP for remat

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Procedure : Investor must fill up a remat request form

(RRF) The DP will forward the request to

depository after verifying that the shareholder has the necessary balances

Depository will in turn intimate the registrar

RTA (registrar & transfer agent) will print the certificates and dispatch the same to the investor

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Settlement of trades in dematerialised securities The following stock exchanges have been admitted on the

depository to conduct this activity

NSE The SE , mumbai Calcutta Stock Exchange Delhi SE Ludhiana SE Bangalore SE Over the counter exchange of India Madras SE Inter connected SE Ahmedabad SE

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Account transfer Depository gives effect to all transfers

resulting from the settlement of trades and other transactions that take place between various beneficial owners.

Buying of securities: It is similar to buying of physical securities

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Procedure: Investor purchases securities in any of the

SE connected to Depository through a broker

Investor pays broker Broker pays clearing corporation On the pay – out day broker receives credit

for securities

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He gives instructions to DP to debit clearing a/c and credit clients a/c

Investor receives shares into his a/c Investor has to make sure that the broker

transfers the securities into his a/c before the book closure

Or else the company may hive corporate benefits to the broker

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Selling of securities: procedure Investor sells securities in any SE linked to

depository through a broker Investor gives instruction to DP to debit his

a/c and credit broker’ a/c Before the pay-in day, investor’s broker

transfers the securities to clearing corporation

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Broker receives payment from SE Investor receives payment from broker Sale in demat form is similar to sale under

physical mode

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Transfer: Depository being electronically linked to

DP’s, issuer company or registrar & transfer agent and the clearing corporation of the SE, serves as an integrated set up for maintenance of investor a/c’s

Hence , here transfer of securities occur merely by passing book entries in the records of the depository as and when instructed by the beneficial owners

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Transmission: the claimant will have to fill a TRF i.e a transmission request form supported by documents like death certificate, succession certificate etc

The DP after verifying that the application is genuine, will transfer securities to demat a/c of claimant

Demat transmission all the formalities can be completed in one go

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Transposition Security certificates for this purpose must

be submitted along with TRF and DRF to the DP

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Pledge and hypothecation Depositories allow the securities placed with

them to be used as collateral to secure loans and other credits

Pledging demat securities is easier and advantageous than pledging physical securities

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Procedure: Both borrower (pledger) and lender (pledgee)

must have depository a/c’s Details of securities to be pledged should be

submitted by the pledger to his DP in a standard format

Pledgee should confirm the request through his DP

Once this is done, securities are pledged.then the financial transactions between pledger and pledgee are handled outside the depository system

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After the loan is repaid, the borrower can request for a closure of pledge by instructing his DP

If the pledgee agrees , the investor may change the securities offered in a pledge.

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Redemption or repurchase This occurs when the securities are

surrendered to the issuer either on maturity or in pursuance of an option given by the issuer , in lieu of agreed consideration.

The consideration may be in cash or new securities in lieu of existing securities

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Procedure: RRF (repurchase request form) is used

instead of remat RF Client may be paid in cash or new securities

in lieu of existing securities

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Stock lending and borrowing It involves lending and borrowing of

securities under an approved scheme It is executed through approved

intermediaries duly registered with SEBI under the securities lending act 1997

Intermediaries may deal in a depository system only through a special a/c known as intermediary a/c opened with a participant

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Corporate action

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Nomination Like shares in physical form, shares in

electronic form also can be nominated Nomination can be made only by

individuals holding beneficiary a/c Minor can nominate only through guardian It can be made demat a/c wise and not

security wise

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Demat of debt instruments Debt instruments can also be held in

demat form Instruments like bonds, debentures, CP’s,

CD’s From oct 31st 2001, RBI has mentioned

that banks and financial institutions shall make investment in deb and bonds only in demat form

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Investor need not open separate demat a/c for demat of debt or instruments

Procedure for demat of debt instruments is same as that of equity shares

The investor has to ensure that before the certificates are handed over to the DP for demat, he marks ‘surrendered for dematerialisation’ on the face of the certificates

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Dealing in govt securities A subscriber to govt securities who opts for

SGL securities may open an SGL a/c with RBI or any other approved entity on its own a/c are held in SGL 1 a/c and investments held on a/c of other clients are held in SGL 2 a/c

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To ensure safety to the investors the following measures are existing:

DP cannot effect any debit or credit in the demat a/c of the investor the valid authorisation of the investor

Regular reconciliation between DP and depositories

Periodic inspection by depositories of the office of DP and registrar ( RTA)

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All investors have a right to receive their statement of a/c’s periodically from the DP

If the depository goes bankrupt, the creditors of the DP will have no access to the holdings in the name of the clients of the DP. Such investors may however transfer their holdings to another DP

Compulsory internal audit of operations of DP by practicing Chartered Accountant every quarter

Steps to be taken for safe keeping and back up of data at all levels

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To the nation: Growing and more liquid markets Increase in competitiveness in the international

market place attracting many investors Improved prospects for privatisation of public

sector units by creating a conducive environment Considerable reduction in delay Minimises settlement risk and fraud restoring

investors’ faith in the capital markets

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To the investing public Reduction of risks associated with loss,

mutilation, theft and forgery of physical scrip

Elimination of financial loss from loss of physical scrip

Greater liquidity from speedier settlements

Reduction in delays in registration Faster receipt of corporate benefits Reduced transaction costs through greater

efficiency

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To issuers: Up-to-date knowledge of shareholders’

names and addresses Reduction in printing and distribution costs

of new issues Easy transfer of corporate benefits Improved ability to attract international

investors without having to incur expenditure of issuance in overseas markets

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