 An effective and fully developed depository

system is essential for maintaining and

enhancing the efficiency of a mature capital
market
 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.

 Depositories carry out its operations through various

functionaries called business partners
 A depository system is governed by the following acts:

 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)

Central Depository Services (India) Limited (CSDL)

 Depository
 Depository Participant (DP)
 Securities, Issuers and Registrars and Share

Transfer Agents
 Stock Exchanges and Stock Brokers
 Clearing Corporation/ Clearing House and

Clearing Members
 Banking system
 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

To avail their services an account similar to a
bank a/c has to be opened with the DP

Asper SEBI Regulations , financial institutions,

banks, custodians, stock brokers etc can
become DP’s

National Securities Clearing Corporation

Limited (NSCCL)
 Banking system

 Depository essentially plays a dual role i.e of

a depository and a limited bank

 It maintains current a/c’s for participants and

executes fund transactions relating to
securities transactions for participants
 Opening of depository system

 Dematerialization

 Re-materialization

 Settlement of trades in dematerialized

securities

 Account transfer
 Pledge
 Redemption or repurchase
 Stock lending and borrowing
 Corporate action
 Account freezing
 Nomination
 D-Mat 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
D-Mat form.
 Hence if the investor wants to trade in

respect of the companies which have

established connectivity with NSDL & CSDL,
he may have 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
 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
 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
 Dematerialisation
 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

investor’s 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
 Once the company is admitted into
depository system, an ISIN (international
securities identifiction number) is allotted
by the depository. This no. is unique for
each security of the company that is
admitted in the depository
 The entire process takes about 15 days
time.
 However when large no. of certificates are
submitted from institutions, it takes upto
30 days for demat
 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

 Rematerialisation
 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
 Settlement of trades in dematerialised securities
 The following stock exchanges have been admitted on the
depository to conduct this activity

 NSE
 The SE , mumbai
 Calcutta Stock Exchange
 Delhi SE
 Ludhiana SE
 Bangalore SE
 Over the counter exchange of India
 Madras SE
 Inter connected SE
 Ahmedabad SE
 Account transfer
 Depository gives effect to all transfers
resulting from the settlement of trades and
other transactions that take place between
various beneficial owners.
 Buying of securities:
 It is similar to buying of physical securities
 Procedure:
 Investor purchases securities in any of the SE
connected to Depository through a broker
 Investor pays broker
 Broker pays clearing corporation
 On the pay – out day broker receives credit
for securities
 He gives instructions to DP to debit clearing
a/c and credit clients a/c
 Investor receives shares into his a/c
 Investor has to make sure that the broker
transfers the securities into his a/c before the
book closure
 Or else the company may hive corporate
benefits to the broker
 Selling of securities: procedure
 Investor sells securities in any SE linked to
depository through a broker
 Investor gives instruction to DP to debit his
a/c and credit broker’ a/c
 Before the pay-in day, investor’s broker
transfers the securities to clearing
corporation
 Broker receives payment from SE
 Investor receives payment from broker
 Sale in demat form is similar to sale under

physical mode
 Transfer:
 Depository being electronically linked to
DP’s, issuer company or registrar & transfer
agent and the clearing corporation of the
SE, serves as an integrated set up for
maintenance of investor a/c’s
 Hence , here transfer of securities occur
merely by passing book entries in the
records of the depository as and when
instructed by the beneficial owners
 Transmission: the claimant will have to fill a
TRF i.e a transmission request form
supported by documents like death
certificate, succession certificate etc
 The DP after verifying that the application is

genuine, will transfer securities to demat

a/c of claimant
 Demat transmission all the formalities can

be completed in one go
 Transposition
 Security certificates for this purpose must be

submitted along with TRF and DRF to the DP

 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
 Procedure:
 Both borrower (pledger) and lender (pledgee) must
have depository a/c’s
 Details of securities to be pledged should be
submitted by the pledger to his DP in a standard
format
 Pledgee should confirm the request through his DP
 Once this is done, securities are pledged.then the
financial transactions between pledger and pledgee
are handled outside the depository system
 After the loan is repaid, the borrower can
request for a closure of pledge by instructing
his DP
 If the pledgee agrees , the investor may

change the securities offered in a pledge.

 Redemption or repurchase
 This occurs when the securities are

surrendered to the issuer either on maturity

or in pursuance of an option given by the
issuer , in lieu of agreed consideration.
 The consideration may be in cash or new

securities in lieu of existing securities

 Procedure:
 RRF (repurchase request form) is used instead

of remat RF
 Client may be paid in cash or new securities

in lieu of existing securities

 Stock lending and borrowing
 It involves lending and borrowing of
securities under an approved scheme
 It is executed through approved
intermediaries duly registered with SEBI
under the securities lending act 1997
 Intermediaries may deal in a depository
system only through a special a/c known as
intermediary a/c opened with a participant
 Corporate action
 Nomination
 Like shares in physical form, shares in

electronic form also can be nominated

 Nomination can be made only by individuals

holding beneficiary a/c

 Minor can nominate only through guardian
 It can be made demat a/c wise and not

security wise
 Demat of debt instruments
 Debt instruments can also be held in demat
form
 Instruments like bonds, debentures, CP’s,
CD’s
 From oct 31st 2001, RBI has mentioned that
banks and financial institutions shall make
investment in deb and bonds only in demat
form
 Investor need not open separate demat a/c
for demat of debt or instruments
 Procedure for demat of debt instruments is

same as that of equity shares

 The investor has to ensure that before the

certificates are handed over to the DP for

demat, he marks ‘surrendered for
dematerialisation’ on the face of the
certificates
 Dealing in govt securities
 A subscriber to govt securities who opts for

SGL securities may open an SGL a/c with RBI

or any other approved entity on its own a/c
are held in SGL 1 a/c and investments held on
a/c of other clients are held in SGL 2 a/c
To ensure safety to the investors the
following measures are existing:
DP cannot effect any debit or credit in the
demat a/c of the investor the valid
authorisation of the investor
Regular reconciliation between DP and
depositories
Periodic inspection by depositories of the
office of DP and registrar ( RTA)
All investors have a right to receive their statement
of a/c’s periodically from the DP
If the depository goes bankrupt, the creditors of the
DP will have no access to the holdings in the name
of the clients of the DP. Such investors may
however transfer their holdings to another DP
Compulsory internal audit of operations of DP by
practicing Chartered Accountant every quarter
Steps to be taken for safe keeping and back up of
data at all levels
 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
 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
 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