Depositories and Custodial Services

Scripless trading is the transaction of securities through a Central Depository or Electronic

Book Entry settlement system. As against conventional system where share certificates are
sent by investor to brokers who then send them to clearing house of stock exchange who, in
turn, arrange for the delivery to the buyer. Following chart will explain the traditional
system.

SELLER: hands over the share certificate along with the transfer form to the seller’s
broker.
↓
SELLER’S BROKER: hands over these documents to buyer’s broker directly OR through
Clearing House
↓
BUYER’S BROKER: hands over the documents to the buyer / OR after obtaining his
signature on transfer form (as transferee) sends to the company or their Registrar & Transfer
Agents for transfer of shares in the buyer’s name
↓
The company or their Registrars (R & T Agents) note the transfer of ownership in the name
of the buyer in their books and return the share certificates to the buyer, either directly or
through his broker.

This system was fraught with following defects and deficiencies.

• There were occasional cases of wrong or fake delivery of shares.

• Transfer form not adequately stamped, not properly signed and therefore company
refusing to note the transfer.
• Unscrupulous companies deliberately employing delaying tactics in noting the
change in ownership.
• The interminable delay denying the buyer the opportunity of selling the shares when
there was a sharp rally prior to receiving back the shares duly transferred from the
company.
• The delays inevitably led to disputes on entitlement of Rights, Bonus, Dividends etc.
further leading to litigations against all parties involved.

As against above there were number of advantages of scripless trading.

Advantages of Scripless Trading:

• Speedier settlement, greater liquidity and reduction in delay in registration.
• Prompt receipt of dividend and rights and bonus offers.
• Faster transfer at reduced costs.
• Elimination of problems and risks due to loss, forgery or mutilation of securities.
• Immediate trading after allotment/buying of share possible.
For companies too it provides a number of benefits in the form of reduced costs,
better service to the shareholders especially Foreign Institutional Investors and less paper
handling.

There are two basic types of depository models viz. “dematerialization” and
“immobilization”. In dematerialization, physical scrips are non-existent and depository
maintains only the electronic ledger of shares/bonds or any other securities. In
immobilization physical scrips are held in depository vaults, supported by book entry
records kept on the computer. In case of need scrips can be converted into physical form if
desired by the buyer/owner.

The Depository System

Depository 2 Depository 3
Depository 1

Depository Depository Depository

Participants Participants Participants

Investors

There is lot of similarity between Banking system and Depository system.

Banking System

Clearing House

Bank 1 Bank 2

BRANCHES BRANCHES

Account Holders Account Holders

The similarity also extends to transfer of funds by one account holder to another by issue of
cheques.

The functions of depositories are,

• To provide facilities for depositing and withdrawing securities by investors at their
convenience.
• On-line ledger statements and record keeping of securities which are deposited by
the investors.
• On-line pledge of collateral securities.

Benefits of Depositories:
For the country:
• Growing and more liquid capital markets,
• Inflow of international capital to Indian markets,
• Reduced transaction costs,
• Reduced chances of frauds, malpractices,
• Simplification of clearing and settlement procedures,
• Acceptance of global practices and norms.

For the investors:

• Enhanced liquidity due to speedier transfer of funds and liquidity,
• Greater safety in trading in stock market,
• Elimination of chances of financial loss due to reduced delay in transfer of
securities,
• More accurate entitlement of Rights/Bonus /Dividend etc

For issuing company:

• Up-to-date information about the ownership details,
• Reduced cost of printing of share certificates,
• Improved chances of attracting foreign capital.

For intermediaries:
• Faster settlement due to Delivery vs. Payment (DVP) system,
• No bad deliveries and consequent hassles,
• Increase in volumes of transactions and thereby higher earnings

The central Government had to amend following Acts for implementing provisions of
Depositories Act.
 Indian Stamp Act,
 Companies Act,
 Securities Contract (Regulation) Act,
 Income Tax Act,
 Benami Transactions (Prohibition) Act,
  SEBI Act.

SEBI Depositories and Participants Regulations.

• All Depositories have to obtain registration of SEBI by applying for the same with
application money of Rs.50,000/-
• Once registered they to pay registration fee of Rs. 25,000/- within 15 days.
• At least 51% of the capital must be held by the sponsors; remaining by the
participants. No participant would hold more than 5% of the capital.
• No other business is permitted by the D/P except when it is incidental to the
depository.
• All grievances of investors or Depository Participants must be settled within 30
days and SEBI to be informed about the number & nature of redressal.
• An annual fee payable to SEBI is Rs.10,000/-

For Registration of Depository Participant (D/P), application in the prescribed form with
fees of Rs.5,000/- is to be sent to SEBI through the Depository. D/P would be one of the
following:
I. A Public Financial Instt
II. Bank (Indian, Foreign)
III. State Financial Corporation.
IV. Financial Services Instt sponsored by any one of the above individually or
jointly.
V. Custodian of Securities.
VI. Clearing House of Stock Exchange.
VII. Registered Stock Broker with net worth of Rs. 50 lacs or more.
VIII. NBFC (Non-Banking Financial Institution) with a net worth of Rs. 50 lacs or
more.
IX. Registrars and Share Transfer Agents.

D/P will have to have adequate infrastructure, experienced staff with adequate background.

Indian Depository scene

Presently there are 2 Central Depositories in India.

I. National Securities Depository Ltd.(NSDL)
II. Central Depository services (India) Ltd (CDSL)

NSDL was sponsored by UTI, NSE, HDFC and CITI Bank. They perform following
functions.
• Holding investors’ accounts in electronics form,
• Settlement of securities traded on exchanges,
• Settlement of off market deals,
• Creation of charge on securities by way of pledge/hypothecation,
 • Receiving non-corporate benefits like bonus/rights etc in electronic form,
• Stock lending and borrowing.

CDSL was sponsored by BSE, Bank of India, Bank of Baroda and HDFC Bank with
objectives of
• Accelerating growth of scripless trading,
• Making depository participation a habit for investors,
• Creating competitive environment in the market,
• Enhancing liquidity.