PROJECT SYNOPSIS FOR CORPORATE LAW

Dr. SHAKUNTALA MISRA NATIONAL REHABILITATION UNIVERSITY

Lucknow

Faculty of Law

PROJECT ON

Working of Depository system

For

COURSE ON ‘CORPORATE LAW – I’

Submitted by

RAJAT PANDEY

154140040

Academic Session: 2017-18

Under the Guidance of

Mr. Shail Shakya

Asst. Prof. in Law & Faculty for Corporate Law-1
Faculty of Law
Dr. Shakuntala Misra National Rehabilitation University
 PROJECT SYNOPSIS FOR CORPORATE LAW

DRAFT TABLE OF CONTENTS

ABSTRACT
ACKNOWLEDGEMENT
1. INTRODUCTION
1.1 DEPOSITORY
1.2 DEPOSITORY SYSTEM
1.3 LEGAL FRAMEWORK OF DS
1.4 FUNCTIONS OF DS
1.5 BENEFITS OF DS
1.6 SAFETY FEATURE IN DS
1.7 DIFFERENCE BETWEEN BANK AND DEPOSITORY
2. NATIONAL SECURITIES DEPOSITORY SYSTEM
2.1 ABOUT NSDL
2.2 MANAGEMENT OF NSDL
2.3 FEE STRUCTURE OF NSDL
2.4 COMMON SOFTWARE USE IN NSDL
3. CENTRAL SECURITIES DEPOSITORY SYSTEM
4. CASES
4.1 NAWALKISHORE KEJRIWAL, KOLKATA v. DEPARTMENT OF INCOME
TAX 14 MAY 2009.
4.2 KARVY STOCK BROKING LTD. V SECURITIES AND EXCHANGE BOARD
OF INDIAN ACT 8 JANVARY 2007.
5. CONCLUSION

6. BIBLIOGRAPHY
 PROJECT SYNOPSIS FOR CORPORATE LAW

EXPLANATION TO TABLE OF CONTENTS

1. INTRODUCTION

One of the biggest problem faced by the indian capital market has been the manual and

paper based settlement system. Under this system, the clearing and settlement of

transaction take place only with the use of paper work. The system of physical delivery

of scrip’s poses many problems for the purchaser as well as the seller in the form of

delayed settlements, long settlement periods, high level of failed trade, high cost of

transaction, bad deliveries etc. In many cases transfer process takes much longer time

then two month as stipulated in section 113 of companies Act, 1956 or section 22 A of the

securities Contracts (Regulations) Act, 1956. Moreover, a large number of transactions

end up as bad deliveries due to faulty compliance of paper work, mismatch of signatures

on transfer deeds with specimen record of the issuer or other procedural reasons. Besides,

theft, forgery, multination of certificates and other irregularities have also become

rampant.

However, as a consequence of implementation of reforms measures, the

Indian capital market has shown rapid growth in the recent past with foreign investors,

more stock exchanges and increased market intermediaries. The old manual system of

settlement and transfer has almost failed to handle the growing volume of paper that has

loaded the market. Thus, to eliminate paperwork, facilitate scrip less trading and

electronic book entry of the transfer of securities, shorten settlement periods, and to

improve liquidity in the stock market, it was found necessary to replace the old system

of transfer and settlement with the new and modern system of depositories. Accordingly

the government of India enacted the depositories Act in 1996 for the orderly growth and

development of the Indian capital market.

 PROJECT SYNOPSIS FOR CORPORATE LAW

It is a system whereby the transfer and settlement of scrip’s take place not

through the traditional method of transfer deeds and physical delivery of scrip’s but

through the modern system of effecting transfer of ownership of securities by means of

book entry on the ledgers or the depositary without the physical movement of scrip’s.

The new system, thus , eliminates paper work, facilities automatic and transparent

trading in scrip’s, shortens the settlement period and ultimately contributes to the

liquidity of investment in securities. The system is also known as ‘scriples trading

system’.

There are essentially four player in the depository system:

 The Depositary participant

 The Beneficial owner/investor

 The issuer

 The depositary

A depositary is a firm wherein the securities of an investor are held in electonic

form in the same way a bank holds money. It crries out the transactions of securities by

means of book entry, without any physical movement of securities. The depositary based

settelment system is also called ‘book entry transfer settelment’. The depositary acts as a

defecto owner of the securities lodged with it forn the limited purpose of transfer of

ownership. It functions as a custodian of securities of its clients. The name of the

depositary appears in the records. With increase in the number of transactions in the stock

market, it had become difficult for the investors to hold share certificates and debt

instruments in bulk. But now, depositary institutions handle this job. At present there are

two depositories in India.

 PROJECT SYNOPSIS FOR CORPORATE LAW

Number of Depositories in India

 National securities depositary Ltd. (NSDL)

 Central depositary services (India) Ltd. (CDSL)

NSDL was formed and registered under the companies’ act 1956 during December

1995 and commenced operations during november1996. NSDL was promoted by

Industrial Development Bank of India (IDBI)-the largest development bank in India, Unit

trust of India (UTI)-the largest mutual fund in India and National stock exchange (NSE)-

the largest stock exchange in India. Some of the prominent banks in the country also have

a stake in NSDL.

Central Depository services (India) limited which commenced operations during

February 1999.CSDL was promoted by stock exchange, Mumbai in association with Bank

of Baroda, Bank of India, State Bank of India and HDFC Bank.

 PROJECT SYNOPSIS FOR CORPORATE LAW

1.1 DEPOSITORY

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.

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
 PROJECT SYNOPSIS FOR CORPORATE LAW

gain access to the data it contains. However, experience has shown that many

depositories, no matter how secure they claim to be, can be compromised by a

determined hacker or thief.

1.2 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.

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

 PROJECT SYNOPSIS FOR CORPORATE LAW

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.

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.

 PROJECT SYNOPSIS FOR CORPORATE LAW

LEGAL FRAMEWORK OF depositary system

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.

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).

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.

The rights and obligations of depositories, depository participants, issuers and

beneficial owners are spelt out clearly in the Depositories Act 1996.

1.3 SAFETY FEATURE IN DS

SEBI has made compulsory trading of shares of all the companies listed in Stock Exchange in
demat form w.e.f 2 January 2002. Hence, if the investor wants to trade in respect of the companies,
 PROJECT SYNOPSIS FOR CORPORATE LAW

which have established connectivity with NSDL & CDSL, he may have to open a beneficiary
account.

2. NATIONAL SECURITIES DEPOSITORY SYSTEM

1.1 ABOUT
2. In a span of about nine years, investors have switched over to electronic [demat]

settlement and National Securities Depository Limited (NSDL) stands at the centre

of this change. In order to provide quality service to the users of depository, NSDL

launched a certification programme in depository operations in May 1999. This

certification is conducted using NCFM infrastructure created by NSE and is called

"NSDL - Depository Operations Module". The programme is aimed at certifying

whether an individual has adequate knowledge of depository operations, to be

able to service investors. Depository Participants are required to appoint at least

one person who has qualified in the certification programme at each of their

service centres. This handbook is meant to help the candidates in their preparation

for the certification programme.

3. This handbook has been divided into four volumes for readers' convenience. The

first volumegives an overview of the Indian capital market and NSDL depository

system. The second volume deals with admission procedure for different business

partners of NSDL, their obligations, practices, systems and procedures to be

followed by them and benefits and safety of depository system. The third volume

helps in acquiring a working level understanding of certain basic services offered

by NSDL like account opening, dematerialisation, and transfer of securities and

related operations. The last volume deals with special services offered by NSDL

like Pledge, Stock Lending and Borrowings, Corporate Actions, National Savings

Certificates / Kisan Vikas Patra (NSC/KVP) in demat form, Warehouse Receipts,

Market Participants and Investor Database (MAPIN) and Tax Information

Network (TIN).
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4. The procedures explained in the handbook are based on the Depositories Act,

Securities and Exchange Board of India (Depositories & Participants) Regulations

and Byelaws & Business

5. Rules of NSDL. The book contains illustrations, flow charts and checklists for

better understanding of various concepts and procedures. A sample test paper is

given at the end of the fourth volume to help the candidates appearing for NCFM

test form an assessment of their preparedness. A thorough understanding of this

handbook will form a good base for qualifying the certification test.

6. Readers may like to visit NSDL website www.nsdl.co.in for updates and to know

the new procedures introduced or changes brought about in the existing

procedures. A feedback form is given at the end of the fourth volume. Readers

may give their feedback, which will be of great help in enhancing the value of this

Handbook in its subsequent editions.

7. National Securities Depository Limited

8. National Securities Depository Limited is the first depository to be set-up in India.

It was incorporated on December 12, 1995. The Industrial Development Bank of

India (IDBI) - the largest development bank in India, Unit Trust of India (UTI) -

the largest Indian mutual fund and the National Stock Exchange (NSE) - the largest

stock exchange in India, sponsored the setting up of NSDL and subscribed to the

initial capital. NSDL commenced operations on November 8, 1996.

9. Ownership

10. NSDL is a public limited company incorporated under the Companies Act, 1956.

NSDL had a paidup equity capital of Rs. 105 crore. The paid up capital has been

reduced to Rs. 80 crore since NSDL has bought back its shares of the face value of

Rs. 25 crore in the year 2000. However, its net worth is above the Rs. 100 crore, as

required by SEBI regulations.

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11. Management of NSDL

12. NSDL is a public limited company managed by a professional Board of Directors.

The day-today operations are conducted by the Chairman & Managing Director

(CMD). To assist the CMD in his functions, the Board appoints an Executive

Committee (EC) of not more than 15 members. The eligibility criteria and period

of nomination, etc. are governed by the Bye-Laws of NSDL in this regard.

13. Bye-Laws of NSDL

Bye-Laws of National Securities Depository Limited have been framed under

powers conferred under section 26 of the Depositories Act, 1996 and approved by

Securities and Exchange Board of India. The Bye-Laws contain fourteen chapters

and pertain to the areas listed.

Amendments to NSDL Bye-Laws require the approval of the Board of Directors of

NSDL and SEBI.

Fee Structure of NSDL

NSDL charges the DPs and not the investors directly. These charges are fixed. The

DPs in turn, are free to charge their clients, i.e., the investors for their services. Thus, there

is a twotier fee structure.

Inspection, Accounting and Internal Audit

NSDL obtains audited financial reports from all its DPs once every year. NSDL

also carries out periodic visits to the offices of its constituents - R&T agents, DPs and
 PROJECT SYNOPSIS FOR CORPORATE LAW

clearing corporations – to review the operating procedures, systems maintenance and

compliance with the Bye-Laws, Business Rules and SEBI Regulations.

Additionally, DPs are required to submit to NSDL, internal audit reports every

quarter. Internal audit has to be conducted by a chartered accountant or a company

secretary in practice.

The Board of Directors appoints a Disciplinary Action Committee (DAC) to deal with any

matter relating to DPs clients, Issuers and R&T agents. The DAC is empowered to

suspend or expel a DP, declare a security as ineligible on the NSDL system, freeze a DP

account and conduct inspection or call for records and issue notices.

If a DP is aggrieved by the action of the DAC, it has the right to appeal to the EC

against the action of the DAC. This has to be done within 30 days of the action by DAC.

The EC has to hear the appeal within two months from the date of filing the appeal. The

EC has the power to stay the operation of the orders passed by the DAC. The information

on all such actions has to be furnished to SEBI.

Settlement of Disputes

All disputes, differences and claims arising out of any dealings on the NSDL,

irrespective of whether NSDL is a party to it or not, have to be settled under the

Arbitration and Conciliation Act 1996.

13.1 COMMON SOFTWARE USE IN NSDL

DPs may develop software of their own for co-ordination, communication and control and provide
service to their clients. Such exclusive software is called "back office software". DPM system
given by NSDL gives "export and import" facility to take out the transaction details to be used by
back office software and to feed in transaction details generated from the back office software.
 PROJECT SYNOPSIS FOR CORPORATE LAW

Central Depositary Securities Limited

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 dematerialisation
of his holdings and transferring securities.

The balances in the investors account recorded and maintained with CDSL can be obtained
through the DP. The DP is required to provide the investor, at regular intervals, a statement of
account which gives the details of the securities holdings and transactions. The depository system
has effectively eliminated paper-based certificates which were prone to be fake, forged, counterfeit
resulting in bad deliveries. CDSL offers an efficient and instantaneous transfer of securities.

CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading
banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard
Chartered Bank, Union Bank of India and Centurion Bank.

CDSL was set up with the objective of providing convenient, dependable and secure

depository services at affordable cost to all market participants. Some of the important

milestones of CDSL system are:

CDSL received the certificate of commencement of business from SEBI in February, 1999

1) Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the

operations of CDSL on july 15,1999.

2) Settlement of trades in the demat mode through BOI Shareholding Limited, the

clearing house of BSE, started in july 1999.

 PROJECT SYNOPSIS FOR CORPORATE LAW

3) All leading stock exchanges like the National Stock Exchange, Calcutta Stock

Exchange, Delhi stock Exchange, The Stock Exchange, Ahmedabad, etc have

established connectivity with CDSL.

4) As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities,

bonds, debentures, commercial papers), units of mutual funds, certificate of

deposits etc. into the CDSL system.

Shareholders of CDSL

CDSL was promoted by Bombay Stock Exchange Limited (BSE) in association with

Bank of India, Bank of Baroda, State Bank of India and HDFC Bank. BSE has been

involved with this venture right from the inception and has contributed overwhelmingly

to the fruition of the project. The initial capital of the company is Rs.104.50 crores. The list

of shareholders with effect from 11th December, 2008 is as under.

 PROJECT SYNOPSIS FOR CORPORATE LAW

CASE

In Nawal Kishore Kejriwal, Kolkata vs Department Of Income Tax1, under the new system,
the movement of the scripts physically from one person to another is totally done away with by
introducing certain intermediaries, chief among them being a Depository and a Participant. In order
to implement the system of holding and transferring securities through the electronic media, firstly
the Depositories Act, 1996, has been enacted. The object of this Act is to regulate the working of
the Depositories in securities and matters incidental thereto. A depository is an organization where

the securities of a shareholder are held in the electronic form on the request of the shareholder,
through the medium of a Depository Participant. The Depository is comparable to a bank where
an investor who desires to utilise its services can open an account with it through a Depository
Participant. However, a Depository is not merely a custodian but is in fact the registered owner of
the security and it is the Depository whose name is entered as such in the register of the issuer.
The person actually entitled to the security becomes the beneficial owner, whose name is recorded
as such in the books of the Depository.

In Karvy Stock Broking Ltd. vs Securities And Exchange Board Of Indian Act 2,KSBL is
directed not to act as a depository participant, pending enquiry and passing of final orders, except
for acting on the instructions of existing beneficial owners, so that the interests of existing BOs
remain unaffected. It shall transfer the demat account of an existing BO to another SEBI registered
DP, on request. It is clarified that KSBL shall continue to be governed by the SEBI (Depositories
and Participants) Regulations, 1996 and other applicable legal provisions. KSBL, as a stock broker
is directed not to undertake any proprietary trades in securities, either off-market or on market,
pending enquiry and passing of final orders.

1 14 may,2009 para 2
2 8 January, 2007 para 9
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CONCLUSION

On the simplest level, depository is used to refer to any place where something is deposited for
storage or security purposes. More specifically, it can refer to a company, bank or an institution
that holds and facilitates the exchange of securities. Or a depository can refer to a depository
institution that is allowed to accept monetary deposits from customers. Depository is an institution
or a kind of organization which holds securities with it, in which trading is done among shares,
debentures, mutual funds, derivatives, F&O and commodities. Indian capital market has been
witnessing rapid growth in recent past. However, this growth has not watched with supporting
infrastructure to handle the growing volume of paper that has flooded the market, choking our
existing system. This has caused problems like delay in transfers, long settlement period, high
levels of failed trade and bad deliveries, high-risk exposure etc. These characteristics were
normally the attributes of an under developed market. To overcome delay in forgerly certificates ,
mutilation of certificates , settlement, loss in transit, , stolen certificates, litigation etc. a new
system of trading, viz. Depository system was introduced, which facilitates investor to hold
securities in electronic form and to trade in these securities. The capital market provides a means
for issuers to raise capital from investors. (Who have surplus money available from savings for
investments). Thus savings normally flow from household sector to business or government
sectors that normally invest more than they save.

The first depository in the world was set up way back in 1947 in Germany. Then the total number
of depositories in the world was 22 only and the number had crossed 250 by the end of 2004 and
310 by the end of 2014. The move on depository in India was initiated by the Stock Holding
Corporation of India Limited (SHCIL) in July 1992 when it prepared a concept paper on “National
Clearance and Depository System” in collaboration with Price Waterhouse under a programme
sponsored by the U.S. Agency for International Development. Thereafter, the Government of India
constituted a Technical Group under the Chairmanship of Shri R. Chandrashekharan, Managing
Director, SHCIL, which submitted its Report in December, 1993. The Securities and Exchange
Board of India (SEBI) constituted a seven member action squad subsequently to discuss the
various structural and operational parameters of Depository System. Considering the various
problems and issues, the Government of India promulgated the Depositories Ordinance in
September 1995, thus paving the way for setting up of depositories in the country.
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BIBLIOGRAPHY

SOURCES

PRIMARY SOURCES

STATUTES

1. The Depositories Act,1996.

From the above mentioned primary source various necessary law and provisions shall be taken in
order to understand the permits some copying and distribution without permission of the copyright
holder or payment to same.
SECONDARY SOURCES

JOURNALS & MANUALS

 MR. B.HARI BABU, PROF.B.K.SURYA PRAKASHA RAO, ROLE OF

DESPOSITORIES IN INDIAN CAPITAL MARKET.VOLUME 6

BOOKS

 FINANCIAL INSTITURIONS AND MARKETS-L.M.BHALE

 INVESTMENT MANAGEMENT- V.K.BHALLA

WEBSITES

 www.reliamcemoney.com
 www.icicidirect.com
 www.indiabulls.com