1

A Project Work In CORPOARTE FINANCE (HONOURS I)

DEPOSITORIES: ROLE AND FUNCTIONS IN SECURITIES MARKET

SUBMITTED TO: Dr. Y PAPA RAO

FACULTY: - CORPORATE LAW

SUBMITTED BY: PRANAV KHANDELWAL

SEMESTER 9
SECTION A
ROLL NO. 94

SUBMITTED ON:
26th SEPTEMBER, 2016

HIDAYATULLAH NATIONAL LAW UNIVERSITY

Raipur, Chhattisgarh

Depositories: Role and Functions in Securities Market

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ACKNOWLEDGEMENTS

Thanks to the Almighty who gave me the strength to accomplish the project with sheer hard
work and honesty.

I would like to sincerely thank my faculty for Corporate Finance Dr. Y Papa Rao Sir for
giving me this topic and guiding me throughout the project. Through this project I have
learned a lot about the aforesaid topic and this in turn has helped me grow as a student.

My heartfelt gratitude also goes out to the staff and administration of HNLU for the
infrastructure in the form of our library and IT lab that was a source of great help in the
completion of this project.

PRANAV KHANDELWAL

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TABLE OF CONTENTS
Acknowledgements .................................................................................................................... 2

Introduction ................................................................................................................................ 4

Research Methodology .............................................................................................................. 6

Objectives .................................................................................................................................. 6

Chapterisation ............................................................................................................................ 7

CHAPTER 1: DEPOSITORIES - MEANING AND ROLE ................................................. 7

CHAPTER 2: WHAT IS A DEPOSITORY SYSTEM? ....................................................... 9

CHAPTER 3: LEGAL FRAMEWORK OF DEPOSITORY SYSTEM IN INDIA ............ 10

As per the Act .................................................................................................................. 11

CHAPTER 4: DEPOSITORY SYSTEM IN INDIA AND THEIR FUNCTION ............... 12

Key Features of the Depository System in India: ............................................................ 12

Functions of Depositories in Securities Market in India ................................................. 16

Conclusion ............................................................................................................................... 20

References ................................................................................................................................ 21

Acts/Statutes ......................................................................................................................... 21

Books .................................................................................................................................... 21

Articles ................................................................................................................................. 21

Websites ............................................................................................................................... 21

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INTRODUCTION

Securities market is an economic institute within which take place sale and purchase
transactions of securities between subjects of economy on the base of demand and supply.
Also we can say that securities market is a system of interconnection between all participants
(professional and nonprofessional) that provides effective conditions: to buy and sell
securities, and also

To attract new capital by means of issuance new security (securitization of debt),

To transfer real asset into financial asset,
To invest money for short or long term periods with the aim of deriving profit.

Technology is revolutionizing every field of human endeavor and activity. Indian capital
market is barrow meter of Indian economy; one of them is introduced technology into capital
market. A major development in the Indian capital market has been setting up of Depository
system. The rapid growth in number, volume and value of securities in the Indian capital
market exposed the limitations of handling and dealing securities in the physical / paper
mode; the short coming of the market became in the manifest in terms of bad deliveries,
delays in transfer and irregular settlement etc. depository used as elixir, bringing solution for
all those problems.

The main objectives of depository systems are to accelerate scrip less trading, to make trust in
individual investors participation in depository system and to create a competitive
environment and be responsive to users interest and concern.

A depository holds securities in electronics form and provides all services related to
transaction of shares/ debt instruments. A depository interacts with clients through a
depository participant with who the client has to maintain a DMAT account.

Thus an investor who wishes to avail of all depository services has to open a DMAT account.
A depository participant is an agent of depository and is authorized offer depository services
to investors.

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India has adopted the Depository System for securities trading in which book entry is done
electronically and no paper is involved. The physical form of securities is extinguished and
shares or securities are held in an electronic form. Before the introduction of the depository
system through the Depository Act, 1996, the process of sale, purchase and transfer of
securities was a huge problem, and there was no safety at all. The depository system
envisages a deposit of securities by the various investors with the depository. This would take
the form of a transfer by the various investors with the depository. This would take the form
of a transfer by the holder of securities in favour of depository. Once the shares are lodged
with the depository, their transfer would be through book entry transfers in accounts
maintained by the depository. Thus the main functions of a depository are to dematerialize
the securities and enable their transaction in book entry form.

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RESEARCH METHODOLOGY

This research is descriptive and analytical in nature. Secondary and Electronic resources have
been largely used to gather information about the topic.

Websites, books, journals, articles and reports have been primarily helpful in giving this
project a firm structure.

Footnotes have been provided wherever needed to acknowledge the source.

OBJECTIVES

1. To discuss about the concept of depository.

2. To analyze the concept of depository system in India.
3. To discuss about the role and functions of depositories in securities market.

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CHAPTERISATION

CHAPTER 1: DEPOSITORIES - MEANING AND ROLE

According to Blacks Law dictionary the word depositary is defined as the party of the
institution receiving a deposit. One with whom anything is lodged in trust, as depository is
the place where it is put. The obligation upon the depositary is that he keeps the thing with
reasonable care and upon request restores it to the depositor. A depository holds securities
(like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic
form. Besides holding securities, a depository also provides services related to transactions in
securities. It acts as a trustee of the owner since the securities are entrusted with him in trust.
He is also the agent of the owner of the securities.

As per the Bank for International Settlements (BIS), depository is a facility for holding
securities transaction to be processed by book entry. Physical Securities may be immobilized
by the depository or the securities may be dematerialized (so that they exist only as electronic
records). A Depository facilitates holding of securities in the electronic form and enables
securities 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 dematerialization of his holdings and transferring securities.

In the absence of depositories, which provide for maintenance of ownership records in a book
entry form, every share transfer is required to be accomplished by physical movement of
share certificates to, and registration with, the company concerned. The process often
involves long delays and a significant portion of transactions end up as bad delivery due to
faulty completion of paperwork. In many cases the process of transfer would take much
longer than the two months stipulated in the Companies Act, and a significant proportion of
transactions would end up as bad delivery due to faulty compliance of paper work. Theft,
forgery, mutilation of certificates and other irregularities were rampant. In addition, the issuer
has the right to refuse the transfer of a security. All this added to costs and delays in
settlement, restricted liquidity and made investor grievance redressal time consuming and, at
times, intractable. To obviate these problems, the Depositories Act, 1996 was enacted with

Depositories: Role and Functions in Securities Market

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the objective of ensuring free transferability of securities with speed, accuracy, and security,
by:
a. Making securities of public companies freely transferable subject to certain exceptions by
restricting companys right to use discretion in effecting the transfer securities and dispensing
with the transfer deed and other procedural requirements under the Companies Act.
b. Dematerializing the securities in the depository mode
c. Providing for maintenance of ownership records in a book entry form.

Electronic revolution has brought about a number of changes in the functioning of Indian
capital market. The most revolutionary change that was brought in the entire history of the
Indian market is the introduction of depository.

The century old Indian market has been vibrant all along but its paper- based settlement of
trades caused problems like bad delivery, delayed transfers etc., until the enhancement of
depository act in 1996. The depository model in India is a competitive multi depository
system in India the system of dematerialization is followed, wherein the securities will be
cancelled as against the system of immobilization in which the securities are kept in custody.
A depository is an organization where the securities of an investor are held in electronic form
and carries out the securities transaction by book entry.1

A depository is a file or set of files in which data is stored for the purpose of safekeeping or
identity authentication. A common example is the set of personal data files at a credit
reporting agency such as Equifax. Another example is the data contained at a state motor
vehicle department. In a biometric security system, a depository contains data about people's
physical characteristics such as iris prints and finger images.

Additional information may be added, including facial characteristics, voice prints, and hand
prints. When a person's identity must be verified, one or more biometric samples is taken in
real time, and this data is compared with the data in the depository. In general information
storage applications, a depository is a physical site where data is kept in the form of hard
copies, magnetic disks, magnetic tapes, compact disks (CDs), and similar media. A good
example is the safe deposit vault in a financial institution. An ideal depository is secure, in
the sense that only authorized persons or institutions can gain access to the data it contains.

1
Shah, Mahesh (1996), "A Care for Depositories in India", The Management Accountant, April, pp. 259-261.

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However, experience has shown that many depositories, no matter how secure they claim to
be, can be compromised by a determined hacker or thief.

CHAPTER 2: WHAT IS A DEPOSITORY SYSTEM?

The erstwhile settlement system on Indian stock exchanges was also inefficient and increased
risk, due to the time that elapsed before trades were settled. The transfer was by physical
movement of papers. There had to be a physical delivery of securities -a process fraught with
delays and resultant risks. The second aspect of the settlement relates to transfer of shares in
favour of the purchaser by the company. The system of transfer of ownership was grossly
inefficient as every transfer involves physical movement of paper securities to the issuer for
registration, with the change of ownership being evidenced by an endorsement on the security
certificate. In many cases the process of transfer would take much longer than the two months
stipulated in the Companies Act, and a significant proportion of transactions would end up as
bad delivery due to faulty compliance of paper work. Theft, forgery, mutilation of certificates
and other irregularities were rampant. In addition, the issuer has the right to refuse the
transfer of a security. All this added to costs and delays in settlement, restricted liquidity and
made investor grievance redressal time consuming and, at times, intractable.2

To obviate these problems, the Depositories Act, 1996 was passed. It provides for the
establishment of depositories in securities with the objective of ensuring free transferability
of securities with speed, accuracy and security. It does so by (a) making securities of public
limited companies freely transferable, subject to certain exceptions; (b) dematerialising the
securities in the depository mode; and (c) providing for maintenance of ownership records in
a book entry form. In order to streamline both the stages of settlement process, the Act
envisages transfer ownership of securities electronically by book entry without making the
securities move from person to person. The Act has made the securities of all public limited
companies freely transferable, restricting the company's right to use discretion in effecting the
transfer of securities, and the transfer deed and other procedural requirements under the
Companies Act have been dispensed with. Two depositories, viz., NSDL and CDSL, have
come up to provide instantaneous electronic transfer of securities.

2
Kanko, Karlo (2004), "The Links between Securities Settlement Systems: An Oligopoly Theoretic Approach",
International Review of Financial Analysis, Vol.13, Issue-5, pp. 585-600.

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In any stock exchange, trades or transactions have to be settled by either squaring up the
carrying forward positions or settling by payment of net cash or net delivery of securities.
This account settlement period, if it is long leads to several price distortions and allows for
market manipulation. It increases the chances of speculation resulting in volatility, which
hurts the small investors. With the application of IT in the securities market - screen-based
trading and trading through the Internet - it has been possible to reduce this settlement period.

CHAPTER 3: LEGAL FRAMEWORK OF DEPOSITORY SYSTEM IN INDIA

The operations of the depositories are primarily governed by the Depositories Act, 1996,
Securities and Exchange Board of India (Depositories & Participants) Regulations, 1996,
Bye- Laws approved by SEBI, and Business Rules framed in accordance with the
Regulations and Bye-Laws.3

The Depositories Act passed by Parliament received the President's assent on August 10,
1996. It was notified in a Gazette on August 12 of the same year. The Act enables the setting
up of multiple depositories in the country. This was to see that there is competition in the
service and there is more than one depository in operation. At present, two depositories are
registered with SEBI - The National Securities Depository Limited (NSDL) and Central
Depository Services (India) Limited (CDSL).4

Only a company registered under the Companies Act, 1956 and sponsored by the specified
category of institutions can set up a depository in India. Before commencing operations,
depositories should obtain a certificate of registration and a certificate of commencement of
business from SEBI.5 Depository System in India

3
Sarkar, A. K. (1996), "Implications of Depositories Ordinance, 1995," The Management Accountant, June-
July, pp. 473-477.
4
Aggarwal, V. K. and Dixit, S. K. (1996), The Depositories Legislation: A Critical Evaluation," Chartered
Secretary, April, pp. 367-376.
5
Raju, M. T. and Patil (2007), Dematerialization of Equity Shares in India, Liquidity, Returns and Volatility,
The management Accountant, Vol. 4.

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The rights, functions and obligations of depositories, depository participants, issuers and
beneficial owners are spelt out clearly in the Depositories Act 1996.

The terms used in The Depositories Act, 1996 are defined as under:

(1) Beneficial owner means a person whose name is recorded as such with a depository.

(2) Depository means a company, formed and registered under the Companies Act, 1956
and which has been granted a certificate of registration under sub-section (1A) of section 12
of the SEBI Act, 1992.

(3) Issuer means any person making an issue of securities.

(4) Participant means a person registered as such under sub-section (1A) of section 12 of
the SEBI Act, 1992.

(5) Registered owner means a depository whose name is entered as such in the register of
the issuer.

As per the Act

Section 4: DP is an agent of the Depository: A DP is an agent of the depository, who
provides various services of the depository to investors. The DP has to enter into an
agreement with the depository to this effect. Any investor who would like to avail the
services of a depository has to enter into an agreement with any DP of his choice. The DP
will then make the depository services available to the investor.

Section 7: Free Transferability: The securities held by an investor in the depository are
freely transferable from one beneficial owner to another.

Section 8: Option to hold securities in demat form : In the depository system, every investor
subscribing to securities offered by an issuer has an option to receive the same in physical
form or dematerialised form. If an investor opts for receiving the securities in dematerialised
form, the issuer intimates the depository the details of allotment of security. On receipt of this
information, the depository enters the name of the allottee as the beneficial owner of that
security in its record.

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Section 9: Securities held in a depository are fungible: All securities held by the depository
are in dematerialised and fungible form.

Section 10: Registered Owner and Beneficial Owner: The depository is deemed to be the
registered owner for the purpose of effecting transfer of ownership of security on behalf of a
beneficial owner. But as a registered owner, it does not have any voting rights or any other
rights in respect of those securities. The beneficial owner is entitled to all rights and benefits
as well as subject to all liabilities in respect of his securities held in the depository.

Section 14: Option to opt out of depository: A beneficial owner may opt out of a depository
in respect of any security by requisite intimation to the depository.

Section 16: Depository to indemnify losses: A depository shall indemnify a beneficial

owner, any loss caused due to negligence of the depository or its participant.6

CHAPTER 4: DEPOSITORY SYSTEM IN INDIA AND THEIR FUNCTION

India has adopted the Depository System for securities trading in which book entry is done
electronically and no paper is involved. The physical form of securities is extinguished and shares
or securities are held in an electronic form. Before the introduction of the depository system
through the Depository Act, 1996, the process of sale, purchase and transfer of securities was a
huge problem, and there was no safety at all.

Key Features of the Depository System in India:

1. Multi-Depository System: The depository model adopted in India provides for a
competitive multi-depository system. There can be various entities providing depository
services. A depository should be a company formed under the Company Act, 1956 and
should have been granted a certificate of registration under the Securities and Exchange
Board of India Act, 1992. Presently, there are two depositories registered with SEBI, namely:

1. National Securities Depository Limited (NSDL), and

2. Central Depository Service Limited (CDSL)

6
Depositories Act, 1996.

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At present there are two depositories in India, National Securities Depository Limited
(NSDL) and Central Depository Services (CDS). NSDL is the first Indian depository; it was
inaugurated in November 1996. NSDL was set up with an initial capital of US$28mn,
promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and
National Stock Exchange of India Ltd. (NSEIL). Later, State Bank of India (SBI) also
became a shareholder.

The other depository is Central Depository Services (CDS). It had received a certificate of
commencement of business from SEBI on February 8, 1999.

These depositories have appointed different Depository Participants (DP) for them. An
investor can open an account with any of the depositories DP. But transfers arising out of
trades on the stock exchanges can take place only amongst account-holders with NSDLs
DPs. This is because only NSDL is linked to the stock exchanges (nine of them including the
main ones-National Stock Exchange and Bombay Stock Exchange)
.
In order to facilitate transfers between investors having accounts in the two existing
depositories in the country the Securities and Exchange Board of India has asked all stock
exchanges to link up with the depositories. SEBI has also directed the companies registrar
and transfer agents to effect change of registered ownership in its books within two hours of
receiving a transfer request from the depositories. Once connected to both the depositories the
stock exchanges have also to ensure that inter-depository transfers take place smoothly. It
also involves the two depositories connecting with each other. The NSDL and CDS have
signed an agreement for inter-depository connectivity.

2. Depository services through depository participants: The depositories can provide their
services to investors through their agents called depository participants. These agents are
appointed subject to the conditions prescribed under Securities and Exchange Board of India
(Depositories and Participants) Regulations, 1996 and other applicable conditions.

NSDL carries out its activities through various functionaries called business partners who
include Depository Participants (DPs), Issuing corporates and their Registrars and Transfer
Agents, Clearing corporations/ Clearing Houses etc. NSDL is electronically linked to each of
these business partners via a satellite link through Very Small Aperture Terminals (VSATs).

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The entire integrated system (including the VSAT linkups and the software at NSDL and
each business partners end) has been named as the NEST [National Electronic Settlement
& Transfer] system. The investor interacts with the depository through a depository
participant of NSDL. A DP can be a bank, financial institution, a custodian or a broker. Just
as one opens a bank account in order to avail of the services of a bank, an investor opens a
depository account with a depository participant in order to avail of depository facilities.

3. Dematerialisation: The model adopted in India provides for dematerialisation of

securities. This is a significant step in the direction of achieving a completely paper-free
securities market. Dematerialization is a process by which physical certificates of an investor
are converted into electronic form and credited to the account of the depository participant.
Indian investor community has undergone sea changes in the past few years. India now has a
very large investor population and ever increasing volumes of trades. However, this
continuous growth in activities has also increased problems associated with stock trading.
Most of these problems arise due to the intrinsic nature of paper based trading and settlement,
like theft or loss of share certificates. This system requires handling of huge volumes of paper
leading to increased costs and inefficiencies. Risk exposure of the investor also increases due
to this trading in paper.
Some of these risks are:

Delay in transfer of shares.

Possibility of forgery on various documents leading to bad deliveries, legal disputes
etc.
Possibility of theft of share certificates.
Prevalence of fake certificates in the market.
Mutilation or loss of share certificates in transit.
The physical form of holding and trading in securities also acts as a bottleneck for
broking community in capital market operations.

The introduction of NSE and BOLT has increased the reach of capital market manifolds. The
increase in 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. The increase in trade volumes lead to exponential rise in the back office operations

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thus limiting the growth potential of the broking members. The inconvenience faced by
investors (in areas that are far flung and away from the main metros) in settlement of trade
also limits the opportunity for such investors, especially in participating in auction trading.
This has made the investors as well as broker wary of Indian capital market. In this scenario
dematerialized trading is certainly a welcome move.

Dematerialization or Demat is a process whereby your securities like shares, debentures

etc, are converted into electronic data and stored in computers by a Depository. Securities
registered in your name are surrendered to depository participant (DP) and these are sent to
the respective companies who will cancel them after Dematerialization and credit your
depository account with the DP. The securities on Dematerialization appear as balances in
your depository account. These balances are transferable like physical shares. If at a later
date, you wish to have these demat securities converted back into paper certificates, the
Depository helps you to do this.

4. Fungibility: The securities held in dematerialized form do not bear any notable feature
like distinctive number, folio number or certificate number. Once shares get dematerialized,
they lose their identity in terms of share certificate distinctive numbers and folio numbers.
Thus all securities in the same class are identical and interchangeable. For example, all equity
shares in the class of fully paid up shares are interchangeable.

5. Registered Owner/ Beneficial Owner: In the depository system, the ownership of

securities dematerialized is bifurcated between Registered Owner and Beneficial Owner.
According to the Depositories Act, Registered Owner means a depository whose name is
entered as such in the register of the issuer. A Beneficial Owner means a person whose
name is recorded as such with the depository. Though the securities are registered in the
name of the depository actually holding them, the rights, benefits and liabilities in respect of
the securities held by the depository remain with the beneficial owner. For the securities
dematerialized, NSDL/CDSL is the Registered Owner in the books of the issuer; but
ownership rights and liabilities rest with Beneficial Owner. All the rights, duties and
liabilities underlying the security are on the beneficial owner of the security.

6. Free Transferability of shares: Transfer of shares held in dematerialized form takes place
freely through electronic book-entry system.

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Functions of Depositories in Securities Market in India

One of the main function of the Depository is to transfer the ownership of shares from one
investor`s account to another investor`s account whenever the trade takes place. It helps in
reducing the paper work involved in trade, expedites the transfer and reduces the risk
associated with physical shares such as damaged, theft, interceptions and subsequent misuse
of the certificates or fake securities.
Another important function of depository is that it eliminate the risk associated with holding
the securities in a physical form like loss, damage, theft or delay in deliveries etc.

Both NSDL and CDSL, facilitate dematerialization of shares i.e. held the shares in electronic
form. So, in a way depository is held accountable for safekeeping of ones portfolio of
securities.

On instruction of the account holder, depositories also facilitate transfer of securities from
one account to the other. So, transfer of ownership of securities is effected by depositories.

With all the details concerning your personal details, scrips as well the number of units of
each scrip held by the individual, several corporate actions or transactions such as the issue of
bonus shares or annual dividend are executed via depositories acting as an important
intermediary in the entire process.

So, the depository other than acting as a safe keeper of ones securities provides services
pertaining to the transaction in securities.

Depositories provide investor services through Depository Participant

The two depositories in India provide their services to large investor base through depository
participants. As per SEBI rules, banks, financial institutions as well as trading members
registered with SEBI are eligible to act as depository participants (DP).

Services offered by depositories

Providing their services through depository participants, the depositories offer the major
service of dematerialization of shares. With dematerialization is eliminated the risk of false or
fake securities, bad delivery etc.

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Facilitates share transfer from one DP account to the other on an immediate basis without
levy of stamp duty.

Nomination facility is made easy.

Any change in address of correspondence that is registered with the DP automatically gets
registered with all the companies in which an individual holds share.

Facilitates holding of different securities such as debt, equity or government securities in a

single account.

So, depositories hence provide a convenient and easy way of consolidation of accounts/folios.

In India, deposotiory functions are undertaken by two depositories National Securities

Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) that
are registered with SEBI.

NSDL carries out its operations through various functionaries called Business Partners.
NSDL electronically linked its Business Partners viz., depository participants, Registrar and
Transfer Agents, Clearing Corporations / Clearing Houses. They are National Stock Clearing
Corporation Limited (NSCCL) and Bank of India Stock Limited (BOISL).

This is done on order to facilitate settlement of trades and to perform a daily reconciliation of
all account balances held with a NSDL/CDSL. The entire system is called NEST (National
Electronic Settlement & Trading) system. Thus, a highly integrated set up for maintenance of
investor accounts have been developed and implemented.

Depositories and its Business Partners are regulated by SEBI and Governed by SEBI
(Depositories & Participants) Regulations, 1996. The functioning and operations of NSDL
are governed by provisions of NSDL /CDSL byelaws and business rules framed in
accordance with the regulations.

The main functions of Depositories (NSDL) are:

Dematerialization
Re materialization

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1. Dematerialization
It is the process by which a client can get physical certificates converted into electronic
balances maintained in its account with the agent called Depository Participant. In simple
terms the conversion of holding from physical to electronic form.

The securities held in dematerialized from are fungible. They do not bear any distinguishable
features like distinctive numbers, folio numbers or certificate numbers. The process is as
follows:
The investors submit the Demat Request From (DRF) duly filled to his Depository
Participant along with physical certificate.
The Depository Participant informs depository (NSDL) of the investors request for
dematerialization.
The Depository Participant sends the physical certificates to the Registrars of the
company.
The NSDL confirms the request to the Registrars.
After sufficient scrutiny, the Registrars accept the request by giving electronic credit.
This is conveyed to the NSDL.
The Registrar updates to the NSDL of the Electronic credit
The NSDL apprises of the credit to Depository Participant.
Subsequently, the investor is apprised of his credit in his account.

2. Rematerialization

Rematerialization is the exact reverse of dematerialization. It refers to the process of issuing

physical securities in the place of the securities held electronically in book-entry form with a
Depository. Under this process, depository account of a beneficial owner is debited for the
Depository System in India securities sought to be rematerialized and physical certificates for
the equitant number of securities are issued.

The process is as follows:

The investors request for Rematerialized Request Form (RRF) to its Depository
Participant.

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If RRF is found in order, the Depository Participant should accept RRF and issue an
acknowledgement to the client.
The Depository Participant in turn will also apprise the Registrar & Transfer Agent.
The depository will appraise the Registrar/Transfer Agents.
The Issuer or its Registrar & Transfer Agent should verify that RRF and after that
printing the physical certificates will update the Depository Participant.
The Issuer or its Registrar & Transfer Agent should then proceed to issue the physical
security certificates and dispatch them to the Beneficial Owner.
The Depository Participant, on receiving conformation of debit entry in DPM, should
inform the client accordingly. This entire process takes a maximum of 30 days.

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CONCLUSION

Indian economy is now globalized and the capital markets have been linked to the
international financial market. Foreign individuals and institutional investors have
encouraged to participate in it. So there, is a need for raising the Indian Capital Market into
the international standards in terms of efficiency and transparency. One such measure was the
passing out the depository Act during the year 1996. The depository system envisages a
deposit of securities by the various investors with the depository. This would take the form of
a transfer by the various investors with the depository. This would take the form of a transfer
by the holder of securities in favour of depository. Once the shares are lodged with the
depository, their transfer would be through book entry transfers in accounts maintained by the
depository. Thus the main functions of a depository are to dematerialize the securities and
enable their transaction in book entry form. Dematerialization of securities and under the
Depository system is one of the major steps aimed at improving and modernizing the capital
market and entrancing the level of investors protection measured which aims at eliminating
the bad deliveries and forgery of shares and expediting the transfer of shares.
Dematerialization of shares was a major change in the Indian securities markets and it has
wide ramifications on various sectors of the capital markets. Dematerialization definitely
increased volumes traded thus providing higher liquidity. In the absence of depositories,
which provide for maintenance of ownership records in a book entry form, every share
transfer is required to be accomplished by physical movement of share certificates to, and
registration with, the company concerned. The Depository Act which provides for the
establishment of depositories like NSDL and CDSL to curb the irregularities in the capital
market and protect the interests of the investors and paved a way for an orderly conduct of
the financial markets through the free transferability of securities with speed, accuracy and
transparency.

The beginning of the Depository System was rather a modest one with doubts being raised
about its capability. However, it solved many problems that confronted the investors and
removed all such misconceptions. The growth of the Depository participants has seen a sea
change both in the size of DPs and in the number of locations. The growth rates of demat
account holder in increasing over years.

Depositories: Role and Functions in Securities Market

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REFERENCES

Acts/Statutes

1. Depositories Act, 1996

Books

1. A. RAMAIYA, GUIDE TO COMPANIES ACT, (VOL. 1) 46TH ED., 2008, LEXIS

NEXIS BUTTERWORTHS WADHWA
2. DR. G.K. KAPOOR, COMPANY LAW AND PRACTICE, 20TH ED., 2015,
TAXMANN PUBLICATION.

Articles

1. Aggarwal, V. K. and Dixit, S. K., The Depositories Legislation: A Critical

Evaluation," Chartered Secretary, (1996).
2. Kanko, Karlo, "The Links between Securities Settlement Systems: An Oligopoly
Theoretic Approach", International Review of Financial Analysis, Vol.13, Issue-5,
(2004)
3. Raju, M. T. and Patil (2007), Dematerialization of Equity Shares in India, Liquidity,
Returns and Volatility, The management Accountant, Vol. 4.
4. Shah, Mahesh (1996), "A Care for Depositories in India", The Management
Accountant, April
5. Sarkar, A. K., "Implications of Depositories Ordinance, 1995," The Management
Accountant, (1996)

Websites

www.jstor.org
www.nsdl.com
www.sebi.gov.in
http://www.financialgyaan.com/dictionary/depository/ 1/3
http://www.goodreturns.in/classroom/2013/11/depositoriestheirroletheindiancapitalma
rket227610.html
http://www.mbaknol.com/investmentmanagement/depositoriesinindia/

Depositories: Role and Functions in Securities Market