Role of Depositories and Depository

Participants

Sai Surya Teja Maddikonda

I will cover in this presentation:

What is a Depository? Necessity of a Depository Services offered by Depository Depository Participant Depository System: How it works Benefits of Depository System What are the costs involved?

Overview

A depository can be defined as an institution where the investors can keep their financial assets such as equities, bonds, mutual fund units etc in the dematerialised form and transactions could be effected on it.

Examples:

National Securities Depository Limited Central Depository Services Limited

What is a Depository?

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

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

Necessity of Depository

Through a system of paperless securities, depositories have made the going easier to other institutions as well such as Stock Exchanges and its clearing houses, stock broking firms, equity issuing companies, share transfer agents etc.

Dematerialisation is a process where in securities certificates held in physical form converted into electronic form and credited to demat account of an investor opened with a depository participants.

Services offered by Depository

Maintenance of accounts of investors. Dematerialisation and re-materialisation of shares. Settlement of market transaction through the release and receipt

of securities in the investor's account. Off market transfers. Inter-depository transfers. Distribution of non-financial benefits from corporates to its

shareholders. Nomination facilities. Transmission of shares. Hypothecation of dematerialised securities for a bank loan. Freezing of account to protect one's holdings when he is

temporarily out of the scene etc.

Services (cont’d)

A Depository Participant (DP) is a registered agent of the depository concerned and it is through the DP that an investor gets the services of a depository.

To avail this service, one has to open a Depository Account (or Beneficial Owner Account) with the DP and shares for Dematerialisation have to be surrendered.

Banks, Non Banking Financial Companies (NBFC) and Stock Brokers can act as Depository Participants after obtaining the required approval from SEBI and also complying with other statutory requirements.

Depository Participant

The DP account links the investor to the Depository which in turn has electronic links with the Stock Exchanges, corporates and their Transfer agents etc as stated above.

This interface of the depository with various associates opens up a lot of services to the investor through the DP account.

Examples: Payment or receipt of shares towards his transactions via

Stock Exchanges,. Receipt of bonus or right shares from the corporates in which

he/she is a share holder. Registering of share transfer. Dematerialisation etc.

 

Depository Participant (cont’d)

A depository system carries out its activities through various associates that include depository participants (DP), issuing companies and their share transfer agents, clearing corporation of Stock Exchanges etc.

The depository is electronically linked to each of these business partners via satellite links or through leased lines.

This integrated system including the electronic links as stated above and the software at NSDL and each business partners end is called the National Electronic Settlement and Transfer System. (NEST)

Depository System: How it works

In the depository system, the ownership and transfer of securities takes place by means of electronic book entries.

Bad deliveries could be eliminated since shares are registered in the electronic form that can not be mutilated easily.

Elimination of all risks associated with physical certificates.

Dealing in physical securities has associated security risks of theft of stocks, mutilation of certificates, and loss of certificates during movements through and from the registrars etc. Such problems do not arise in the depository environment.

Benefits of Depository System

No stamp duty for transfer of any kind of securities in the depository.

This waiver extends to equity shares, debt instruments and units of mutual funds etc in the depository. Thus, cost can be reduced.

Immediate transfer and registration of securities: In the depository environment, once the securities are credited to the investors account on pay out, he becomes the legal owner of the securities. There is no further need to send it to the company's registrar for registration. Else, having purchased securities in the physical environment, the investor has to send it to the company's registrar so that the change of ownership can be registered and this usually takes many months.

Benefits of Depository System (cont’d)

Faster settlement cycle: The exclusive demat segments follow rolling settlement cycle of T+2 i.e. the settlement of trades will be on the 5th working day from the trade day. This will enable faster turnover of stock and more liquidity with the investor.

Faster disbursement of non cash corporate benefits: NSDL provides for direct credit of non cash corporate entitlements like rights, bonus etc to an investor's account, thereby ensuring faster disbursement and avoiding risk of loss of certificates in transit.

Low brokerage for trading in dematerialised securities: Brokers provide this benefit to investors as dealing in dematerialised securities reduces their back office cost of handling paper and also

Benefits of Depository System (cont’d)

Eliminates the risk of being the introducing broker: Elimination of problems related to address Change, Transmission etc.

In case of change of address or transmission of demat shares, investors are saved from undergoing the entire change procedure with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the database of all the companies, where the investor is a registered holder of securities.

Elimination of problems related to selling securities on behalf of a minor. A natural guardian is not required to take court approval for selling demat securities on behalf of a minor.

Benefits of Depository System (cont’d)

There are 3 operations that can be done to the securities in the depository: Debit: Securities (such as shares) are debited to the Depository. (Similar

to selling off the securities) Credit: Securities are credited to the Depository. (Similar to buying of

securities). Custody: The securities idly reside in the depository.

The Depository charges the Depository participant only for the debit transactions.

No matter how much is the volume of the transaction, the charge per transaction is the same. (i.e. For a transaction of 10 shares or 1 million shares, the transaction cost is the same)

What are the costs involved?

But the Depository does not charge anything for the credit or custody of securities.

The Depository Participant in turn levies some add-ons to the amount charged by the Depository and charges this cumulative amount from the Individual.

The individuals have to select their Depository Participant to open a demat account with, by considering various cost factors as mentioned above.

What are the costs involved? (cont’d)

Thank You