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

The first depository was set up way back in

1947 in Germany.
In India it is a relatively new concept
introduced in 1996 with the enactment of
Depositories Act 1996
Their operations are carried out in
accordance with the provisions of
Depositories Act and SEBI (Depositories and
Participants) Regulations,1996

The term Depository means a place where a

deposit of money, securities, property etc.
is deposited for safekeeping under the
terms of depository agreement
A depository is an organization, which
assists in the allotment and transfer of
securities and securities lending.
The shares here are held in the form of
electronic accounts i.e. dematerialized form
and the depository system revolves around
the concept of paper-less or scrip-less
trading.

It holds the securities of the investors in the

form of electronic book entries avoiding risks
associated with paper
It is not mandatory and is left to the investor
to decide
Depositories carry out its operations through
various functionaries called business partners

Indias depository system is governed by the

following Acts and provisions
Securities & Exchange Board of India Act
1992
The SEBI (Depositories and Participants)
Regulations, 1996
Bye laws of Depository
Business rules of Depository
The Companies Act 1956

Presently there are two Depositories

working in India:
National Securities Depository Limited
(NSDL)
It was registered by the SEBI on June 1996 as
Indias first Depository to facilitate trading
and settlement of securities in the demat
form. It is promoted by NSE in association
with IDBI & UTI.

Central Depository Services (India) Limited

(CSDL)
It commenced its operations during feb 1999
and was promoted by Stock Exchange
Mumbai (BSE) in association with SBI, Bank of
Baroda, Bank of India, HDFC Bank and others

At present 10 Stock Exchanges are connected to the

Depositories

NSE
BSE
Calcutta Stock Exchange
Delhi SE
Ludhiana SE
Bangalore SE
Over the counter exchange of India
Madras SE
Inter connected SE
Ahmedabad SE

Depository
Depository Participant (DP)
Securities Issuers, and Registrars and Share
Transfer Agents
Stock Exchanges and Stock Brokers
Investors

Depository : it is an organisation where the

securities are held in electronic form and
carries out the securities transaction by book
entry

DP : DP is an agent of the depository and functions

as the interacting medium between the depository
and the investor
He should be registered with the SEBI
Must possess requisite qualifications prescribed by
the concerned depository of which he is a
participant
He is responsible for maintaining the investors
securities a/c with the depository and handles
them as per the investors instructions
He is linked to a broker who trades on behalf of
investors

To avail their services an account similar to a

bank a/c has to be opened with the DP
As per SEBI Regulations, financial institutions,
banks, stock brokers etc can become DPs
However investors may choose DPs of their
choice and also deal with 1 or more DPs at a
time

Securities Issuers, and Registrars and Share

Transfer Agents: eg: an agreement between
the depository, issuer of security and the
designated registrar/ share transfer agents
for the underlying security in the cases of
issues like transfer of securities by their
beneficial owners

Stock Exchanges (SE) and Stock Brokers (SB)

SE is an organized market for dealings in
securities, commonly referred as secondary
market.
SB are members of SE primarily engaged in
2 main activities i.e. buy and sell securities
for their clients charging a commission and
buy and sell on their own a/c for trading
gains

Investors : may be individuals or corporates

who have acquired shares either in primary
market or in secondary market

Opening of depository system

Dematerialisation
Rematerialisation
Settlement of trades in dematerialised securities
Account transfer
Pledge and hypothecation
Stock lending and borrowing
Demat of debt instruments
Dealing in govt securities

Opening of depository system: SEBI has

made compulsory trading of shares of all
the companies listed in stock exchanges in
demat form w.e.f 2nd jan 2002
Hence if the investor wants to trade in
respect of the companies which have
established connectivity with NSDL & CSDL,
he has to open a beneficiary a/c

Beneficiary a/c is an a/c opened by the

investor or a broker with a DP of his choice
to hold shares in demat form and undertake
scripless trading
For opening demat a/c, the following
documents are required:

Demat opening form duly filled

Address proof
Photograph
PAN number
Bank a/c

Once a demat a/c is opened investor must

sign an agreement with the DP and the
investor will be allotted an account no.
called as client identity number
No minimum balance is required
The investor is provided with a transaction
statement by his DP at regular intervals
based on which the investor will know his
security balances

It means conversion of the physical

certificates into dematerialised holdings
at the request of the investor
Only shares registered in the name of the
a/c holder are accepted for
dematerialisation at the depository

Procedure:
First open a demat a/c or security a/c with any DP of
investors choice
Obtain a/c no. from his DP
A dematerialisation request form (DRF) to be submitted to the
DP who intimates depository of the request
DP then submits the certificate along with the DRF to the
registrar who confirms the demat request
Registrar validates the request, updates records, destroys the
certificates and informs depository who in turn credits the DP
a/c
Depository participant updates the investor a/c and informs
the investor

An investor may demat a part of his holdings

and hold the balance in physical mode for the
same security
Demat shares are fungible because they do
not have any distinctive or certificate
numbers

Rematerialization
It means conversion of demat holdings back
into certificates
If the investors wish to get the securities in
physical form, all he has to do is to request
DP for remat

Procedure:
Investor must fill up a remat request form
(RRF)
The DP will forward the request to
depository after verifying that the
shareholder has the necessary balances
Depository will in turn intimate the registrar
RTA (registrar & transfer agent) will print
the certificates and dispatch the same to
the investor

Transfer:
Depository being electronically linked to
DPs, issuer company and registrar &
transfer agent serves as an integrated set
up for maintenance of investor a/cs. It also
facilitates transfer of securities from one
investor to another.
Here transfer of securities occur merely by
passing book entries in the records of the
depository as and when instructed by the
beneficial owners (BO)

Pledge and hypothecation

Depositories allow the securities placed with
them to be used as collateral to secure loans
and other credits
Pledging demat securities is easier and
advantageous than pledging physical
securities

To the nation:
Growing and more liquid markets
Increase in competitiveness in the international
market place attracting many investors
Improved prospects for privatisation of public
sector units by creating a conducive environment
Considerable reduction in delay
Minimises settlement risk and fraud restoring
investors faith in the capital markets
Easy monitoring of market by SEBI

To the investing public

Reduction of risks associated with loss,
mutilation, theft and forgery of physical
scrip
Elimination of financial loss from loss of
physical scrip
Greater liquidity from speedier settlements
Reduction in delays in registration
Faster receipt of corporate benefits
Reduced transaction costs through greater
efficiency
Facilitates e-trading

To issuers:
Up-to-date knowledge of shareholders
names and addresses
Reduction in printing and distribution costs
of new issues
Easy transfer of corporate benefits
Improved ability to attract international
investors without having to incur
expenditure of issuance in overseas
markets