COMPANY LAW

Depositaries Act, 1996

National Securities Depositary Limited
Srinivas Atreya (519) 10/1/2011

Background Indian capital market has seen unprecedented boom in its activity in the last 15 years in terms of number of stock exchanges, listed companies, trade volumes, market intermediaries, investor population, etc. However, this surge in activity has brought with it numerous problems that threaten the very survival of the capital markets in the long run, most of which are due to the large volume of paper work involved and paper based trading, clearing and settlement. Until the late eighties, the common man kept away from capital market and thus the quantum of funds mobilized through the market was meager. A major problem, however, continued to plague the market. The Indian markets were drowned in shares in the form of paper and hence it was problematic to handle them. Fake and stolen shares, fake signatures and signature mismatch, duplication and mutilation of shares, transfer problems, etc. The investors were scared and were under compensated for the risk borne by them. The century old system of trading and settlement requires handling of huge volumes of paper work. This has made the investors, both retail and institutional, wary of entering the capital market. However, lack of modernization become a hindrance to growth and resulted in creation of cumbersome procedures and paper work. However, the real growth and change occurred from mid-eighties in the wake of liberalization initiatives of the Government. The reforms in the financial sector were envisaged in the banking sector, capital market, securities market regulation, mutual funds, foreign investments and Government control. These institutions and stock exchanges experienced that the certificates are the main cause of investors` disputes and arbitration cases. Since the paper work was not matching the rapid growth there was a need for a better system to ensure removal of these impediments. Although India had a vibrant capital market which is more than a century old, the paperbased settlement of trades caused substantial problems such as bad delivery and delayed transfer of title. The Government of India decided to set up a fully automated and high technology based model exchange that could offer screen-based trading and depositories

as the ultimate answer to all such reforms and eliminate various bottlenecks in the capital market, particularly, the clearing and settlement system in stock exchanges. The Securities Transactions in India at present are mainly governed by two Acts. 1. The Securities Contracts (Regulation) Act, 1956 2. The Securities & Exchange Board of India Act, 1992. The other relevant laws which affect the capital market are : The Foreign Exchange Regulations Act, 1973 Arbitration and Conciliation Act, 1996 Companies Act, 1956 Debt Recovery Act (Bank and Financial Institutions Recovery of Dues Act, 1993) Banking Regulation Act Benami Prohibition Act Indian Penal Code Indian Evidence Act, 1872 Indian Telegraph Act, 1885

The Securities Contracts (Regulation) Act, 1956 The Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the "Act"), containing a mere 31 sections, keeps a tight vigil over all the Stock Exchanges of India since 20th February, 1957. The provisions of the Act were formally administered by the Central Government. However, since the enactment of The Securities and Exchange Board of India Act, 1992 the Board established under it (SEBI) is concurrently having powers to administer almost all the provisions of the Act. By virtue of the provisions of the Act, carrying on the business of dealing in securities without a license from SEBI is prohibited. Any Stock Exchange which is desirous of being recognized has to make an application under Section 3 of the Act to SEBI who is empowered to grant recognition and prescribe conditions including that of having SEBI'S representation (maximum three persons) on the Stock Exchange and prohibiting the Stock Exchange from amending its rules without the SEBI's prior approval. The recognition can be withdrawn in the interest of trade or public. SEBI is authorized to call for periodical returns from the recognized Stock Exchanges and to make enquiries in relation to their affairs.

Every Stock Exchange is obliged to furnish annual reports to SEBI. Stock Exchanges are allowed to make rules only with the prior approval of SEBI. The Central Government and SEBI can direct Stock Exchanges to frame rules. Recognized stock exchanges are allowed to make bye-laws for the regulation and control of contracts but subject to the previous approval of SEBI and SEBI has the power to amend these bye-laws. The Central Government and SEBI have the power to supersede the governing body of any recognized stock exchange and to suspend its business. A public limited company in India has no obligation to have its shares listed on a recognized Stock Exchange. But if a company intends to offer its shares or debentures to the public for subscription by issue of a prospectus, it must, before issuing such prospectus apply to one or more of the recognized stock exchanges for permission to have the shares or debentures intended to be so offered to the public to be dealt with in each of such stock exchange in terms of Section 73 of the Companies Act, 1956. SEBI can however under the provisions of Section 21 of the Securities Contracts (Regulation) Act, 1956 compel the listing of securities by public companies if it is of an opinion that it is necessary or expedient in the interest of trade or public. In the event of the Stock Exchange refusing to list the securities of any public company an appeal to SEBI is provided under the Act. A company on the grounds specified in Section 22A of the Act is entitled to refuse to register transfer of any of its securities, notwithstanding anything contained in its articles or Section 82 or Section 111 of the Companies Act, 1956. The Securities and Exchange Board of India Act, 1992. The Securities and Exchange Board of India Act, 1992 (hereinafter referred as "The SEBI Act") is deemed to have come into force on January 30, 1992. Relatively a brief act containing only 35 sections, the SEBI Act governs all the Stock Exchanges and the Securities Transactions in India. A Board by the name of the Securities and Exchange Board of India (SEBI) consisting of one Chairman and five members, two from the department of the Finance and Law of the Central Government, one from the Reserve Bank of India and two other persons and having its head office in Bombay and regional offices in Delhi, Calcutta and Madras has been constituted under the SEBI Act to administer its provisions.

The Central Government has the right to terminate the services of the Chairman or any member of the Board. The Board decides all questions in its meeting by majority vote with the Chairman having a second or casting vote. Section 11 of the SEBI Act provides that it shall the duty of the Board to protect the interest of investors in securities and to promote the development of and to regulate the securities market by such measures as it thinks fit. It empowers the Board to regulate the business in Stock Exchanges, to register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, etc., to register and regulate the working of collective investment schemes including mutual funds, to prohibit fraudulent and unfair trade practices and insider trading, to regulate take-overs, to conduct enquiries and audits of the stock exchanges, etc. As all Stock Exchanges are required to be registered with SEBI under the provisions of the Act, under Section 12 of the SEBI Act all the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediary who may be associated with the Securities Markets are obliged to register with the Board and the Board has the power to suspend or cancel such registration. The Board is bound by the directions given by the Central Government from time to time on questions of policy and the Central Government has the right to supersede the Board. The Board is also obliged to submit a report to the Central Government every year, giving true and full account of its activities, policies and programmes. Any one aggrieved by the Board's decision is entitled to appeal to the Central Government. The Central Government up till now has framed ten Rules by virtue of Section 29 of the SEBI Act. The Board empowered by Section 30 of the SEBI Act has till now with the previous approval of the Central Government made twelve regulations. The Depositories Act, 1996 and Regulations The enactment of Depositories Act in August 1996 paved the way for establishment of National Securities Depository Limited (NSDL), the first depository in India. It went on to

establish infrastructure based on international standards that handles most of the securities held and settled in de-materialized form in the Indian capital markets. A depository in very simple terms is a pool of pre-verified shares held in electronic mode which offers settlement of transactions in an efficient and effective way. National Securities Depository Limited (NSDL) National Securities Depository Limited is a public limited company incorporated under the Companies Act, 1956. Four renowned institutions participate in it: Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), National Stock Exchange of India (NSE), State Bank of India (SBI)

UTI is the largest mutual fund of India and IDBI is the largest development bank, NSE is the largest stock exchange of India and SBI is the largest commercial bank of India having clearing facility. HDFC and Citibank also share in this system. NSDL is managed by Board of directors headed by a managing director. It is governed by its bye-laws and its business operations are regulated by business rules. NSDL interfaces with the investors through players or business partners. Constituents of the depository are clearing corporation, brokers, clearing member, registrar and transfer agents, company or issuer, stock exchange, bank depository participant and investors. All are electronically linked to the main depository for the settlement of trades and to perform a daily reconciliation of all accounts held with NSDL. NSDL has stated it aims are to ensuring the safety and soundness of Indian marketplaces by developing settlement solutions that increase efficiency, minimize risk and reduce costs. NSDL plays a quiet but central role in developing products and services that will continue to nurture the growing needs of the financial services industry. In the depository system, securities are held in depository accounts, which are similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork. Consequently, the cost of transacting in a depository

environment is considerably lower as compared to transacting in certificates. In August 2009, number of Demat accounts held with NSDL crossed one crore. Dematerialized securities (Demat in short) are securities that are not on paper and a certificate to that effect do not exist. They exist in the form of entries in the book of depositories. Essentially, unlike the traditional method of possessing a share certificate to the effect of ownership of shares, in the demat system, the shares are held in a dematerialized form. This system works through a depository who is registered with the Securities and Exchange Board of India (SEBI) to perform the functions of a depository as regulated by SEBI. Under Section 68 B of the Companies Act, inserted by the Companies (Amendment) Act, 2000, it is mandated that every Initial Public Offer (IPO) made by a listed company in the excess of Rs. 10 Crores has to be issued in dematerialized form by complying with the requisite provisions of the Depositories Act, 1996. The Securities & Exchange Board of India (Depositories & Participants) Regulations, 1996 With effect from 20th September 1995 an Act, to provide regulation of Depositories in securities and for matters connected therewith and/or incidental thereto has been enacted in India which is titled as "The Depositories Act, 1996". It extends to the whole of India. As per the definition provided in Section 2(e) of the said Act, a "Depository" means a company formed and registered under the Companies Act, 1956 and which has been granted certificate of registration under sub-Section (1A) of Section 12 of the Securities & Exchange Board of India Act, 1992.The Securities & Exchange Board of India have in exercise of the powers conferred upon it made Regulations which are called "The Securities & Exchange Board of India (Depositories & Participants) Regulations, 1996". Regulation 3 of the said Regulations provides as follows: 3. (1) An application for the grant of a certificate of registration as a Depository shall be made to the Board by the sponsor in Form A, shall be accompanied by the fee specified in Part A of the Second Schedule and be paid in the manner specified in Part B thereof.

(2) The application shall be accompanied by draft bye-laws of the Depository that is proposed to be set up. Regulation 6 provides that the Board shall not consider an application under Regulation 3 for grant of a certificate for registration as a Depository unless the sponsor belongs to one of the categories mentioned in Regulation 6. Regulation 7 provides that after considering the application under Section 3 with regard to the clarification specified in Regulation 6 if the Board is satisfied with the company established by the sponsor being eligible to act as Depository, it may grant a certificate of registration subject to the conditions mentioned in Regulation 7. A Depository which has been granted a certificate of registration under Regulation 7 is obliged to make an application to the Board within one year from the date of issue of the certificate of registration for commencement of business in a prescribed form. Regulation 12 empowers the Board to ask the Depository to furnish further information and/or clarification regarding the matters relevant for the grant of certificate of commencement of business and Regulation 13 lays down the matters which are relevant for considering grant of certificate for commencement of business. The rights and obligations of Depository are provided in Chapter V of the said Regulations. They inter alia provide for securities eligible for dematerialization, Agreement between Depository and Issuer, internal and external monitoring, review and evaluation of systems and controls, insurance against risks, manner of keeping records, records to be maintained, prohibition of assignment, agreement by participant, opening of separate accounts, transfer or withdrawal by beneficial owner, reconciliation, manner of surrender of certificate of security, manner of creating pledge or hypothecation, etc. Facilities offered by NSDL Dematerialization i.e. converting physical certificates into their electronic form Rematerialization i.e. converting securities in DeMat form into physical certificates Assisting in repurchase / redemption of mutual fund units Electronic settlement of trades in stock exchanges connected to NSDL Pledging or hypothecation of the dematerialized securities against loan

Electronic credit of securities allotted in public issue, rights issue Receipt of non-cash corporate benefits such as bonus, in electronic form Freezing of DeMat account to avoid debits from the account Nomination facilities for DeMat accounts Services related to change of address Effective transmission of securities Other facilities such as holding debt instruments in the same account or availing stock lending / borrowing facility

Benefits of the Depository System The Depository system has the following benefits to different groups: Benefit to the Country:

The depository system helps the capital market to be more liquid, attracting more foreign investors and is in compliance with international standards, as it creates efficient and riskfree trading environment. It minimizes the settlement risks and frauds in carrying out transactions in capital markets and thus can restore faith of investors in capital markets. It helps to reduce delay in trading practices creating investor friendly atmosphere in the capital markets. Benefit to the Company

The depository system helps in reducing the cost of new issues due to less printing and distribution cost. It increases the efficiency of the registrars and transfer agents and the Secretarial Department of the company. It provides better facilities for communication and timely services with shareholders, investor etc. Benefit to the Investor

The depository system reduces risks involved in holding physical certificated, e.g., loss, theft, mutilation, forgery, etc. It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors. It helps avoid bad

delivery problem due to signature differences, etc. It ensures faster payment on sale of shares. No stamp duty is paid on transfer of shares. It provides more acceptability and liquidity of securities. Benefit to Brokers

The depository system reduces risk of delayed settlement. It ensures greater profit due to increase in volume of trading. It eliminates chances of forgery bad delivery. It increases overall of trading and profitability. It increases confidence in investors.

References: Books: 1. Avatar Singh, Company Law, 15th Edn., Eastern Book Company, Lucknow, 2001 2. Ramaiya A., Guide to Company Law, 16th Edn., Wadhwa Publication 3. C.R.Datta, Company Law, 2009 Reprint, Wadhwa Publication 4. Taxman,Company Law & Practice, Majumdar A K. & Dr. Kapoor G. K.,Taxman Publication Pvt. Ltd., (2003) Acts:

1. Depositories Act, 1996 2. SEBI (Depositories and Participants) Regulations, 1996 3. Depository Act passed by Parliament in August, 1996 4. SEBI (Depositories and Participants) Regulations, 1996