Вы находитесь на странице: 1из 18


Handbook for NSDL Depository Operations Module Capital Markets and NSDL-Overview National Securities Depository Limited PREFACE In a span of about nine years, investors ave switc ed over to electronic !demat" settlement and National Securities Depository Limited #NSDL$ stands at t e centre of t is c an%e& In order to provide 'uality service to t e users of depository, NSDL launc ed a certification pro%ramme in depository operations in May ()))& * is certification is conducted usin% NC+M infrastructure created by NS, and is called -NSDL - Depository Operations Module-& * e pro%ramme is aimed at certifyin% w et er an individual as ade'uate knowled%e of depository operations, to be able to service investors& Depository .articipants are re'uired to appoint at least one person w o as 'ualified in t e certification pro%ramme at eac of t eir service centres& * is andbook is meant to elp t e candidates in t eir preparation for t e certification pro%ramme& * is andbook as been divided into four volumes for readers/ convenience& * e first volume %ives an overview of t e Indian capital market and NSDL depository system& * e second volume deals wit admission procedure for different business partners of NSDL, t eir obli%ations, practices, systems and procedures to be followed by t em and benefits and safety of depository system& * e t ird volume elps in ac'uirin% a workin% level understandin% of certain basic services offered by NSDL like account openin%, demateriali0ation, and transfer of securities and related operations& * e last volume deals wit special services offered by NSDL like .led%e, Stock Lendin% and 1orrowin%s, Corporate 2ctions, National Savin%s Certificates 3 4isan 5ikas .atra #NSC345.$ in demat form, 6are ouse 7eceipts, Market .articipants and Investor Database #M2.IN$ and *a8 Information Network #*IN$& * e procedures e8plained in t e andbook are based on t e Depositories 2ct, Securities and ,8c an%e 1oard of India #Depositories 9 .articipants$ 7e%ulations and 1yelaws 9 1usiness 7ules of NSDL& * e book contains illustrations, flow c arts and c ecklists for better understandin% of various concepts and procedures& 2 sample test paper is %iven at t e end of t e fourt volume to elp t e candidates appearin% for NC+M test form an assessment of t eir preparedness& 2 t orou% understandin% of t is andbook will form a %ood base for 'ualifyin% t e certification test& 7eaders may like to visit NSDL website www&nsdl&co&in for updates and to know t e new procedures introduced or c an%es brou% t about in t e e8istin% procedures& 2 feedback form is %iven at t e end of t e fourt volume& 7eaders may %ive t eir feedback, w ic will be of %reat elp in en ancin% t e value of t is :andbook in its subse'uent editions& ================================================================================================ = Inde !olu"e # C apter (; Overview of Capital Markets C apter <; Overview of NSDL !olu"e $ C apter =; 1usiness .artners of NSDL C apter >; NSDL 2pplication Software C apter ?; Service Standards C apter @; 1enefits and Safety C apter A; NSDL C ar%e Structure !olu"e % C apter B; 2ccount Openin% C apter ); *ransmission and Nomination C apter (C; Demateriali0ation C apter ((; *radin% and Settlement !olu"e & C apter (<; .led%e and :ypot ecation C apter (=; Stock Lendin% and 1orrowin% C apter (>; Corporate 2ctions C apter (?; .ublic Issues C apter (@; Debt Instruments and Dovernment Securities C apter (A; NSC-45. in Demat +orm C apter (B; 6are ouse 7eceipts C apter (); *a8 Information Network #*IN$ Sa"ple 'est Feedba(k and Co""ents CON'EN'S Volume 1 Capital Markets and NSDL)O*er*ie+ C,apter #- * e Indian Capital Market E 2n Overview &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& ( C,apter $- Overview of NSDL&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& <( C,apter % ) .- 5olume < C,apter / ) ##- 5olume = C,apter #$ ) #0- 5olume >

CHAP'ER # ',e Indian Capital Market ) An O*er*ie+ * e function of t e financial market is to facilitate t e transfer of funds from surplus sectors #lenders$ to deficit sectors #borrowers$& Normally, ouse olds ave investible funds or savin%s, w ic t ey lend to borrowers in t e corporate and public sectors w ose re'uirement of funds far e8ceeds t eir savin%s& 2 financial market consists of investors or buyers of securities, borrowers or sellers of securities, intermediaries and re%ulatory bodies& +inancial market does not refer to a p ysical location& +ormal tradin% rules, relations ips and communication networks for ori%inatin% and tradin% financial securities link t e participants in t e market& Or1ani2ed "oney "arket- Indian financial system consists of money market and capital market& * e money market as two components - t e or%ani0ed and t e unor%ani0ed& * e or%ani0ed market is dominated by commercial banks& * e ot er maFor participants are t e 7eserve 1ank of India, Life Insurance Corporation, Deneral Insurance Corporation, Gnit *rust of India, Securities *radin% Corporation of India Ltd&, Discount and +inance :ouse of India, ot er primary dealers, commercial banks and mutual funds& * e core of t e money market is t e inter-bank call money market w ereby s ort-term money borrowin%3lendin% is effected to mana%e temporary li'uidity mismatc es& * e 7eserve 1ank of India occupies a strate%ic position of mana%in% market li'uidity t rou% open market operations of %overnment securities, access to its accommodation, cost #interest rates$, availability of credit and ot er monetary mana%ement tools& Normally, monetary assets of s ort-term nature, %enerally less t an one year, are dealt in t is market& 3n)or1ani2ed "oney "arket- Despite rapid e8pansion of t e or%ani0ed money market t rou% a lar%e network of bankin% institutions t at ave e8tended t eir reac even to t e rural areas, t ere is still an active unor%ani0ed market& It consists of indi%enous bankers and moneylenders& In t e unor%ani0ed market, t ere is no clear demarcation between s ort-term and lon%term finance and even between t e purposes of finance& * e unor%ani0ed sector continues to provide finance for trade as well as personal consumption& * e inability of t e poor to meet t e -creditwort iness- re'uirements of t e bankin% sector make t em take recourse to t e institutions t at still remain outside t e re%ulatory framework of bankin%& 1ut t is market is s rinkin%& ',e Capital "arket- * e capital market consists of primary and secondary markets& * e primary market deals wit t e issue of new instruments by t e corporate sector suc as e'uity s ares, preference s ares and debt instruments& Central and State %overnments, various public sector industrial units #.SGs$, statutory and ot er aut orities suc as state electricity boards and port trusts also issue bonds3debt instruments& ',e Indian Capital Market 4 An O*er*ie+ # * e primary market in w ic public issue of securities is made t rou% a prospectus is a retail market and t ere is no p ysical location& Offer for subscription to securities is made to investin% community& * e secondary market or stock e8c an%e is a market for tradin% and settlement of securities t at ave already been issued& * e investors oldin% securities sell securities t rou% re%istered brokers3sub-brokers of t e stock e8c an%e& Investors w o are desirous of buyin% securities purc ase securities t rou% re%istered broker3sub-broker of t e stock e8c an%e& It may ave a p ysical location like a stock e8c an%e or a tradin% floor& Since ())?, tradin% in securities is screen-based and Internet-based tradin% as also made an appearance in India& * e secondary market consists of << stock e8c an%es& * e secondary market provides a tradin% place for t e securities already issued, to be bou% t and sold& It also provides li'uidity to t e initial buyers in t e primary market to re-offer t e securities to any interested buyer at any price, if mutually accepted& 2n active secondary market actually promotes t e %rowt of t e primary market and capital formation because investors in t e primary market are assured of a continuous market and t ey can li'uidate t eir investments& Capital Market Parti(ipants- * ere are several maFor players in t e primary market& * ese include t e merc ant bankers, mutual funds, financial institutions, forei%n institutional investors #+IIs$ and individual investors& In t e secondary market, t ere are t e stock e8c an%es, stock brokers #w o are members of t e stock e8c an%es$, t e mutual funds, financial institutions, forei%n institutional investors #+IIs$, and individual investors& 7e%istrars and *ransfer 2%ents, Custodians and Depositories are capital market intermediaries t at provide important infrastructure services for bot primary and secondary markets& Market Re1ulation- It is important to ensure smoot workin% of capital market, as it is t e arena for t e players associated wit t e economic %rowt of t e country& 5arious laws ave been passed from time to time to meet t is obFective& * e financial market in India was i% ly se%mented until t e initiation of reforms in ())<-)= on account of a variety of re%ulations and administered prices includin% barriers to entry& * e reform process was initiated wit t e establis ment of Securities and ,8c an%e 1oard of India #S,1I$& * e le%islative framework before S,1I came into bein% consisted of t ree maFor 2cts %overnin% t e capital markets; (& * e Capital Issues Control 2ct ()>A, w ic restricted access to t e securities market and controlled t e pricin% of issues& <& * e Companies 2ct, ()?@, w ic sets out t e code of conduct for t e corporate sector in relation to issue, allotment and transfer of securities and disclosures to be made in public issues& =& * e Securities Contracts #7e%ulation$ 2ct, ()?@, SC#7$ 2 w ic re%ulates transactions in securities t rou% control over stock e8c an%es& In addition, a number of ot er 2cts, e&%&, t e .ublic Debt 2ct, ()><, t e Income *a8 2ct, ()@(, t e 1ankin% 7e%ulation 2ct, ()>), ave substantial bearin% on t e workin% of t e securities market& Capital Issues (Control) Act, 1947 * e 2ct ad its ori%in durin% t e Second 6orld 6ar in ()>= w en t e obFective of t e Dovernment was to pre-empt resources to support t e 6ar effort& Companies were re'uired to take t e Dovernment/s approval for tappin% ouse old savin%s& * e 2ct was retained wit some modifications as a means of controllin% t e raisin% of capital by companies and to ensure t at national resources were c anneled into proper lines, i&e&, for desirable purposes to serve %oals and priorities of t e %overnment and to protect t e interests of investors& Gnder t e 2ct, any firm wis in% to issue securities ad to obtain approval from t e Central

Dovernment, w ic also determined t e amount, type and price of t e issue& * is 2ct was repealed and replaced by S,1I 2ct in ())<& Companies Act, 1956 Companies 2ct, ()?@ is a compre ensive le%islation coverin% all aspects of company form of business entity from formation to windin%-up& * is le%islation #amon%st ot er aspects$ deals wit issue, allotment and transfer of securities and various aspects relatin% to company mana%ement& It provides for standards of disclosure in public issues of capital, particularly in t e fields of company mana%ement and proFects, information about ot er listed companies under t e same mana%ement and mana%ement perception of risk factors& It also re%ulates underwritin%, t e use of premium and discounts on issues, ri% ts and bonus issues, substantial ac'uisitions of s ares, payment of interest and dividends, supply of annual report and ot er information& * is le%al and re%ulatory framework contained many weaknesses& Hurisdiction over t e securities market was split amon% various a%encies and t e relevant provisions were scattered in a number of statutes& * is resulted in confusion, not only in t e minds of t e re%ulated but also amon% re%ulators& It also created inefficiency in t e enforcement of t e re%ulations& It was t e Central Dovernment rat er t an t e market t at allocated resources from t e securities market to competin% issuers and determined t e terms of allocation& * e allocation was not necessarily based on economic criteria, and as a result t e market was not allocatin% t e resources to t e best possible investments, leadin% to a sub-optimal use of resources and low allocational efficiency& Informational efficiency was also low because t e provisions of t e Companies 2ct re%ardin% prospectus did not ensure t e supply of necessary, ade'uate and accurate information, sufficient to enable investors to make an informed decision& * e many formalities associated wit t e issue process under various re%ulations kept t e cost of issue 'uite i% & Gnder t e SC#7$ 2, t e secondary market was fra%mented re%ionally, wit eac stock e8c an%e a self-re%ulatin% or%ani0ation followin% its own policy of listin%, tradin% and settlement& * e listin% a%reement did not ave t e force of law, so issuers could %et away wit violations& * e interests of t e brokers, w o were market players and dominated t e %overnin% boards of stock e8c an%es, took priority over t e interest of investors& * e market was narrow and investors did not ave an opportunity to ave balanced portfolios& * e settlement of trades took a lon% time, because it re'uired p ysical movement of securities, and t e transfer of securities was very cumbersome under t e Companies 2ct and SC#7$ 2 2ct, t us deprivin% t e investor of li'uidity& Law e8pressly forbade options and futures& * ese weaknesses were corrected by passin% S,1I 2ct and %ivin% overall re%ulatory Furisdiction on capital market to S,1I& S,1I framed re%ulations and %uidelines to improve efficiency of t e market, en ance transparency, c eck unfair trade practices and ensure international standards in market practices necessitated by t e lar%e entry of forei%n financial institutions& Securities Contracts (Regulation) Act, 1956 * e previously self-re%ulated stock e8c an%es were brou% t under statutory re%ulation t rou% t e passa%e of t e SC#7$ 2, w ic provides for direct and indirect control of virtually all aspects of securities tradin% and t e runnin% of stock e8c an%es& * is %ives t e Central Dovernment re%ulatory Furisdiction over #a$ stock e8c an%es, t rou% a process of reco%nition and continued supervision, #b$ contracts in securities, and #c$ listin% of securities on stock e8c an%es& 2s a condition of reco%nition, a stock e8c an%e complies wit conditions prescribed by Central Dovernment& Or%ani0ed tradin% activity in securities in an area takes place on a specified reco%ni0ed stock e8c an%e& * e stock e8c an%es determine t eir own listin% re%ulations w ic ave to conform wit t e minimum listin% criteria set out in t e 7ules& * e re%ulatory Furisdiction on stock e8c an%es was passed over to S,1I on enactment of S,1I 2ct in ())< from Central Dovernment by amendin% SC#7$ 2ct& Se(urities and E (,an1e 5oard of India 6it t e obFectives of improvin% market efficiency, en ancin% transparency, c eckin% unfair trade practices and brin%in% t e Indian market upto international standards, a packa%e of reforms consistin% of measures to liberali0e, re%ulate and develop t e securities market was introduced durin% t e ())Cs& * is as c an%ed corporate securities market beyond reco%nition in t is decade& * e practice of allocation of resources amon% different competin% entities as well as its terms by a central aut ority was discontinued& * e secondary market overcame t e %eo%rap ical barriers by movin% to screen-based tradin%& *rades enFoy counterparty %uarantee& . ysical security certificates ave almost disappeared& * e settlement period as s ortened to two days& * e followin% para%rap s discuss t e principal reform measures undertaken since ())<& 2 maFor step in t e liberali0ation process was t e repeal of t e Capital Issues #Control$ 2ct, ()>A in May ())<& 6it t is, Dovernment/s control over issue of capital, pricin% of t e issues, fi8in% of premium and rates of interest on debentures, etc&, ceased& * e office, w ic administered t e 2ct, was abolis ed and t e market was allowed to allocate resources to competin% uses and users& Indian companies were allowed access to international capital market t rou% issue of 2merican Depository 7eceipts #2D7s$ and Dlobal Depository 7eceipts #DD7s$& :owever, to ensure effective re%ulation of t e market, S,1I 2ct, ())< was enacted to empower S,1I wit statutory powers for #a$ protectin% t e interests of investors in securities #b$ promotin% t e development of t e securities market and #c$ re%ulatin% t e securities market& Its re%ulatory Furisdiction e8tends over corporates in t e issuance of capital and transfer of securities, in addition to all intermediaries and persons associated wit securities market& S,1I can specify t e matters to be disclosed and t e standards of disclosure re'uired for t e protection of investors in respect of issues& It can issue directions to all intermediaries and ot er persons associated wit t e securities market in t e interest of investors or of orderly development of t e securities marketI and can conduct in'uiries, audits and inspection of all concerned and adFudicate offences under t e 2ct& In s ort, it as been %iven necessary autonomy and aut ority to re%ulate and develop an orderly securities market& * ere were several statutes re%ulatin% different aspects of t e securities market and Furisdiction over t e securities market was split amon% various a%encies, w ose roles overlapped and w ic at times worked at cross-purposes& 2s a result, t ere was no co erent policy direction for market participants to follow and no sin%le supervisory a%ency ad an overview of t e securities business& ,nactment of S,1I 2ct was t e first suc attempt towards inte%rated re%ulation of t e securities market& S,1I was %iven full aut ority and Furisdiction over t e securities market under t e 2ct, and was %iven concurrent3dele%ated powers for various provisions under t e Companies 2ct and t e SC#7$ 2& * e Depositories 2ct, ())@ is also administered by S,1I& 2 i% level committee on capital markets as been set up to ensure co-ordination amon% t e re%ulatory a%encies in financial markets& In t e interest of investors, S,1I issued Disclosure and Investor .rotection #DI.$ Duidelines& Issuers are now re'uired to comply wit t ese Duidelines before accessin% t e market& * e %uidelines contain a substantial body of re'uirements for issuers3intermediaries& * e main obFective is to ensure t at all concerned observe i% standards of

inte%rity and fair dealin%, comply wit all t e re'uirements wit due skill, dili%ence and care, and disclose t e trut , t e w ole trut and not in% but t e trut & * e Duidelines aim to secure fuller disclosure of relevant information about t e issuer and t e nature of t e securities to be issued so t at investor can take an informed decision& +or e8ample, issuers are re'uired to disclose any material /risk factors/ in t eir prospectus and t e Fustification for t e pricin% of t e securities as to be %iven& S,1I as placed a responsibility on t e lead mana%ers to %ive a due dili%ence certificate, statin% t at t ey ave e8amined t e prospectus, t at t ey find it in order and t at it brin%s out all t e facts and does not contain anyt in% wron% or misleadin%& * ou% t e re'uirement of vettin% as now been dispensed wit , S,1I as raised standards of disclosures in public issues to en ance t e level of investor protection& Impro e! !isclosures "# liste! companies$ * e norms for continued disclosure by listed companies ave also improved t e availability of timely information& * e information tec nolo%y elped in easy dissemination of information about listed companies and market intermediaries& ,'uity researc and analysis and credit ratin% ave improved t e 'uality of information& S,1I as recently started a system for ,lectronic Data Information +ilin% and 7etrieval System #,DI+27$ to facilitate electronic filin% of public domain information by companies& Introdu(tion of deri*ati*es- *o assist market participants to mana%e risks better t rou% ed%in%, speculation and arbitra%e, SC#7$ 2 was amended in ())? to lift t e ban on options in securities& :owever, tradin% in derivatives did not take off, as t ere was no suitable le%al and re%ulatory framework to %overn t ese trades& 1esides, it needed a lot of preparatory work E t e underlyin% cas markets needed to be stren%t ened wit t e assistance of t e automation of tradin% and settlement systemI t e e8c an%es developed ade'uate infrastructure and t e information systems re'uired to implement tradin% discipline in derivative instruments& * e SC#7$ 2 was amended furt er in December ())) to e8pand t e definition of securities to include derivatives so t at t e w ole re%ulatory framework %overnin% tradin% of securities could apply to tradin% of derivatives also& 2 t ree-decade old ban on forward tradin%, w ic ad lost its relevance and was inderin% introduction of derivatives tradin%, was wit drawn& Derivative tradin% took off in Hune <CCC on two e8c an%es& Now different types of derivative contracts i&e& inde8 future, inde8 options, sin%le stock futures and sin%le stock options are available in t e market& * e %overnin% bodies of stock e8c an%es used to be dominated by brokers, leadin% inevitably to conflicts of interest& *o discipline brokers and cure typical stock market ills suc as price ri%%in%, it was considered necessary for stock e8c an%es to ave a professionally mana%ed environment& NS, started wit t e concept of an independent %overnin% body wit out any broker representation& It was specified in ())= t at t e %overnin% boards of stock e8c an%es must ave ?CJ non-broker members, and t at on committees andlin% matters of discipline, default, etc&, brokers would be in t e minority& 2ll stock e8c an%es were mandated to appoint a non-broker e8ecutive director w o would be accountable to S,1I for implementin% t e policy directions of t e Central Dovernment3 S,1I& In course of time, t e position of t e e8ecutive director in t e mana%ement of stock e8c an%e as been stren%t ened& Indian securities market is %ettin% increasin%ly inte%rated wit t e rest of t e world& +lls ave been permitted to invest in all types of securities, includin% %overnment securities& Indian companies ave been permitted to raise resources from abroad t rou% issue of 2D7s, DD7s, 2merican Depository 7eceipts #2D7s$, Dlobal Depository 7eceipts #DD7s$, +ully Convertible Corporate 1onds #+CC1s$, ,8ternal Commercial 1orrowin%s #,C1s$& 7eserve 1ank of India as recently allowed t e limited two-way fun%ibility for t e subscribers of t ese instruments& Indian stock e8c an%es ave been permitted to set up tradin% terminals abroad& * e tradin% platform of Indian e8c an%es can now be accessed t rou% t e Internet from anyw ere in t e world& In line wit t e %lobal p enomena, Indian capital markets ave also moved to rollin% settlements on a *K< basis w ere trades are settled on t e second day after tradin%& National Sto(k E (,an1e * e National Stock ,8c an%e commenced its operations in ())> as a first step in reformin% t e securities market t rou% improved tec nolo%y and introduction of best practices in mana%ement& It started wit t e concept of an independent %overnin% body wit out any broker representation t us ensurin% t at t e operators/ interests were not allowed to dominate t e %overnance of t e e8c an%e& 1efore t e NS, was set up, tradin% on t e stock e8c an%es in India used to take place t rou% open outcry wit out use of information tec nolo%y for immediate matc in% or recordin% of trades& * is was time consumin% and inefficient& * e practice of p ysical tradin% imposed limits on tradin% volumes as well as, t e speed wit w ic new information was incorporated into prices& *o obviate t is, t e NS, introduced screen-based tradin% system #S1*S$ w ere a member can punc into t e computer t e 'uantities of s ares and t e prices at w ic e wants to transact& * e transaction is e8ecuted as soon as t e 'uote punc ed by a tradin% member finds a matc in% sale or buys 'uote from counterparty& S1*S electronically matc es t e buyer and seller in an order-driven system or finds t e customer t e best price available in a 'uote-driven system, and ence cuts down on time, cost and risk of error as well as on t e c ances of fraud& S1*S enables distant participants to trade wit eac ot er, improvin% t e li'uidity of t e markets& * e i% speed wit w ic trades are e8ecuted and t e lar%e number of participants w o can trade simultaneously allows faster incorporation of price-sensitive information into prevailin% prices& * is increases t e informational efficiency of markets& 6it S1*S, it becomes possible for market participants to see t e full market, w ic elps to make t e market more transparent, leadin% to increased investor confidence& * e NS, started nation-wide S1*S, w ic ave provided a completely transparent tradin% mec anism& 7e%ional e8c an%es lost a lot of business to NS,, forcin% t em to introduce S1*S& *oday, India can boast t at almost (CCJ tradin% takes place t rou% electronic order matc in%& .rior to t e settin% up of NS,, tradin% on stock e8c an%es in India took place wit out t e use of information tec nolo%y for immediate matc in% or recordin% of trades& * e practice of p ysical tradin% imposed limits on tradin% volumes as well as t e speed wit w ic t e new information was incorporated into prices& * e unscrupulous operators used t is information asymmetry to manipulate t e market& * e information asymmetry elped brokers to perpetrate a manipulative practice known as -%ala-& Dala is a practice of e8tractin% i% est price of t e day for -buy- transaction irrespective of t e actual price at w ic t e purc ase was actually done and %ive lowest price of t e day for -sell- transactions irrespective of t e price at w ic sale was made& * e clients did not ave any met od of verifyin% t e actual price& * e electronic and now fully online tradin% introduced by t e NS, as made suc manipulation difficult& It as also improved li'uidity and made t e entire operation more transparent and efficient& * e NS, as set up a clearin% corporation to provide le%al counterparty %uarantee to eac trade t ereby eliminatin% counterparty risk& * e

National Securities Clearin% Corporation Ltd& #NSCCL$ commenced operations in 2pril ())@& Counterparty risk is %uaranteed t rou% fine-tuned risk mana%ement systems and an innovative met od of on-line position monitorin% and automatic disablement& .rinciple of -novation- is implemented by NS, capital market se%ment& Gnder t is principle, NSCCL is t e counterparty for every transaction and, t erefore, default risk is minimi0ed& *o support t e assured settlement, a -settlement %uarantee fund- as been created& 2 lar%e settlement %uarantee fund provides a cus ion for any residual risk& 2s a conse'uence, despite t e fact t at t e daily traded volumes on t e NS, run into t ousands of crores of rupees, credit risk no lon%er poses any problem in t e marketplace& Depository Syste" * e erstw ile settlement system on Indian stock e8c an%es was also inefficient and increased risk, due to t e time t at elapsed before trades were settled& * e transfer was by p ysical movement of papers& * ere ad to be a p ysical delivery of securities -a process frau% t wit delays and resultant risks& * e second aspect of t e settlement relates to transfer of s ares in favour of t e purc aser by t e company& * e system of transfer of owners ip was %rossly inefficient as every transfer involves p ysical movement of paper securities to t e issuer for re%istration, wit t e c an%e of owners ip bein% evidenced by an endorsement on t e security certificate& In many cases t e process of transfer would take muc lon%er t an t e two mont s stipulated in t e Companies 2ct, and a si%nificant proportion of transactions would end up as bad delivery due to faulty compliance of paper work& * eft, for%ery, mutilation of certificates and ot er irre%ularities were rampant& In addition, t e issuer as t e ri% t to refuse t e transfer of a security& 2ll t is added to costs and delays in settlement, restricted li'uidity and made investor %rievance redressal time consumin% and, at times, intractable& *o obviate t ese problems, t e Depositories 2ct, ())@ was passed& It provides for t e establis ment of depositories in securities wit t e obFective of ensurin% free transferability of securities wit speed, accuracy and security& It does so by #a$ makin% securities of public limited companies freely transferable, subFect to certain e8ceptionsI #b$ demateriali0in% t e securities in t e depository modeI and #c$ providin% for maintenance of owners ip records in a book entry form& In order to streamline bot t e sta%es of settlement process, t e 2ct envisa%es transfer owners ip of securities electronically by book entry wit out makin% t e securities move from person to person& * e 2ct as made t e securities of all public limited companies freely transferable, restrictin% t e company/s ri% t to use discretion in effectin% t e transfer of securities, and t e transfer deed and ot er procedural re'uirements under t e Companies 2ct ave been dispensed wit & *wo depositories, vi0&, NSDL and CDSL, ave come up to provide instantaneous electronic transfer of securities& In any stock e8c an%e, trades or transactions ave to be settled by eit er s'uarin% up t e carryin% forward positions or settlin% by payment of net cas or net delivery of securities& * is account settlement period, if it is lon% leads to several price distortions and allows for market manipulation& It increases t e c ances of speculation resultin% in volatility, w ic urts t e small investors& 6it t e application of I* in t e securities market - screen-based tradin% and tradin% t rou% t e Internet - it as been possible to reduce t is settlement period& 'estin1 and Certifi(ation 2 critical element of financial sector reforms is t e development of a pool of uman resources avin% t e skills and e8pertise to provide 'uality intermediation services in eac se%ment of t e industry& In order to dispense 'uality intermediation, personnel workin% in t e industry need to #a$ follow certain code of conduct usually ac ieved t rou% re%ulations and #b$ possess re'uisite skills and knowled%e %enerally ac'uired t rou% a system of testin% and certification& It is necessary t at t ey ave a proper understandin% of t e business and skills to elp it remain competitive& Suc testin% and certification as assumed added si%nificance in India as t ere is no formal education3trainin% on financial markets, especially in t e area of market operations w ic ave under%one a complete transformation in t e recent years& *akin% into account international e8perience and needs of t e financial markets, NS, launc ed NC+M #NS,/s Certification in +inancial Markets$& It tests practical knowled%e and skills t at are re'uired to operate in financial markets, in a very secure and unbiased manner, and certifies personnel wit a view to improve 'uality of intermediation& * is as %ained market acceptability, as t ere is a reali0ation t at t e financial markets are soon %oin% to be t e turf of certified professionals due to re%ulatory compulsions and3or initiatives of t e industry& 1y impartin% compre ensive knowled%e and skill in t e c osen field, NC+M en ances career opportunities for NC+M certified persons and allows market participants and intermediaries to build t eir own staff development strate%ies tailored to t eir specific needs& Capital Market Inter"ediaries * ere are several institutions, w ic facilitate t e smoot functionin% of t e securities market& * ey enable t e issuers of securities to interact wit t e investors in t e primary as well as t e secondary arena& %erc&ant 'an(ers 2mon% t e important financial intermediaries are t e merc ant bankers& * e services of merc ant bankers ave been identified in India wit Fust issue mana%ement& It is 'uite common to come across reference to merc ant bankin% and financial services as t ou% t ey are distinct cate%ories& * e services provided by merc ant banks depend on t eir inclination and resources tec nical and financial& Merc ant bankers #Cate%ory I$ are mandated by S,1I to mana%e public issues #as lead mana%ers$ and open offers in take-overs& * ese two activities ave maFor implications for t e inte%rity of t e market& * ey affect investors/ interest and, t erefore, transparency as to be ensured& * ese are also areas w ere compliance can be monitored and enforced& Merc ant banks are renderin% diverse services and functions& * ese include or%ani0in% and e8tendin% finance for investment in proFects, assistance in financial mana%ement, raisin% ,urodollar loans and issue of forei%n currency bonds& Different merc ant bankers speciali0e in different services& :owever, since t ey are one of t e maFor intermediaries between t e issuers and t e investors, t eir activities are re%ulated by; #($ S,1I #Merc ant 1ankers$ 7e%ulations, ())<& #<$ Duidelines of S,1I and Ministry of +inance& #=$ Companies 2ct, ()?@& #>$ Securities Contracts #7e%ulation$ 2ct, ()?@& Merc ant bankin% activities, especially t ose coverin% issue and underwritin% of s ares and debentures, are re%ulated by t e Merc ant 1ankers 7e%ulations of Securities and ,8c an%e 1oard of India #S,1I$& S,1I as made t e 'uality of manpower as

one of t e criteria for renewal of merc ant bankin% re%istration& * ese skills s ould not be concentrated in issue mana%ement and underwritin% alone& * e criterion for aut orisation takes into account several parameters& * ese include; #a$ .rofessional 'ualification in finance, law or business mana%ement& #b$ Infrastructure like ade'uate office space, e'uipment and manpower& #c$ ,mployment of two persons, w o ave t e e8perience to conduct t e business of merc ant bankers& #d$ Capital ade'uacy& #e$ .ast track record, e8perience, %eneral reputation and fairness in all t eir transactions& S,1I aut ori0es merc ant bankers #Cate%ory I$ for an initial period of t ree years, if t ey ave a minimum net wort of 7s& ? crore& 2n initial aut ori0ation fee, an annual fee and renewal fee is collected by S,1I& 2ccordin% to S,1I, all issues s ould be mana%ed by at least one aut ori0ed merc ant banker functionin% as t e sole mana%er or lead mana%er& * e lead mana%er s ould not a%ree to mana%e any issue unless is responsibilities relatin% to t e issue, mainly disclosures, allotment and refund, are clearly defined& 2 statement specifyin% suc responsibilities as to be furnis ed to S,1I& S,1I prescribes t e process of due dili%ence t at a merc ant banker as to complete before a prospectus is cleared& It also insists on submission of all t e documents disclosin% t e details of account and t e clearances obtained from t e 7OC and ot er %overnment a%encies for tappin% peoples/ savin%s& * e responsibilities of lead mana%er, underwritin% obli%ations, capital ade'uacy, due dili%ence certification, etc&, are laid down in detail by S,1I& * e obFective is to facilitate t e investors to take an informed decision re%ardin% t eir investments and not e8pose t em to unknown risks& Cre!it Rating Agencies * e ())Cs saw t e emer%ence of a number of ratin% a%encies in t e Indian market& * ese a%encies appraise t e performance of issuers of debt instruments like bonds or fi8ed deposits& * e ratin% of an instrument depends on parameters like business risk, market position, operatin% efficiency, ade'uacy of cas flows, financial risk, financial fle8ibility, and mana%ement and industry environment& * e obFective and utility of t is e8ercise is two-fold& +rom t e point of view of t e issuer, by assi%nin% a particular %rade to an instrument, t e ratin% a%encies enable t e issuer to %et t e best price& Since all financial markets are based on t e principle of risk3reward, t e less risky t e profile of t e issuer of a debt security, t e lower t e price at w ic it can be issued& * us, for t e issuer, a favourable ratin% can reduce t e cost of borrowed capital& +rom t e viewpoint of t e investor, t e %rade assi%ned by t e ratin% a%encies depends on t e capacity of t e issuer to service t e debt& It is based on t e past performance as well as an analysis of t e e8pected cas flows of a company, w en viewed on t e industry parameters and performance of t e company& :ence, t e investor can Fud%e for imself w et er e wants to place is savin%s in a -safe- instrument and %et a lower return or e wants to take a risk and %et a i% er return& * e ())Cs saw an increase in activity in t e primary debt market& Gnder t e S,1I %uidelines all issuers of debt ave to %et t e instruments rated& * ey also ave to prominently display t e ratin%s in all t at marketin% literature and advertisements& * e ratin% a%encies ave t us become an important part of t e institutional framework of t e Indian securities market& R)* Agents + Registrars to Issue 79* 2%ents form an important link between t e investors and issuers in t e securities market& 2 company, w ose securities are issued and traded in t e market, is known as t e Issuer& * e 79* 2%ent is appointed by t e Issuer to act on its be alf to service t e investors in respect of all corporate actions like sendin% out notices and ot er communications to t e investors as well as dispatc of dividends and ot er non-cas benefits& 79* 2%ents perform an e'ually important role in t e depository system as well& * ese are described in detail in t e second section of t is 6orkbook& Stoc( 'ro(ers Stockbrokers are t e intermediaries w o are allowed to trade in securities on t e e8c an%e of w ic t ey are members& * ey buy and sell on t eir own be alf as well as on be alf of t eir clients& *raditionally in India, partners ip firms wit unlimited liabilities and individually owned firms provided brokera%e services& * ere were, t erefore, restrictions on t e amount of funds t ey could raise by way of debt& 6it increasin% volumes in tradin% as well as in t e number of small investors, lack of ade'uate capitali0ation of t ese firms e8posed investors to t e risks of t ese firms %oin% bust and t e investors would ave no recourse to recoverin% t eir dues& 6it t e le%al c an%es bein% effected in t e members ip rules of stock e8c an%es as well as in t e capital %ains structure for stock-brokin% firms, a number of brokera%e firms ave converted t emselves into corporate entities& In fact, NS, encoura%ed t e settin% up of corporate brokin% members and as today only (CJ of its members w o are not corporate entities& Custo!ians In t e earliest p ase of capital market reforms, to %et over t e problems associated wit paper based securities, lar%e oldin% by institutions and banks were sou% t to be immobili0ed& Immobili0ation of securities is done by storin% or lod%in% t e p ysical security certificates wit an or%ani0ation t at acts as a custodian - a securities depository& 2ll subse'uent transactions in suc immobili0ed securities take place t rou% book entries& * e actual owners ave t e ri% t to wit draw t e p ysical securities from t e custodial a%ent w enever re'uired by t em& In t e case of I.O, a Fumbo certificate is issued in t e name of t e beneficiary owners based on w ic t e depository %ives credit to t e account of beneficiary owners& * e Stock :oldin% Corporation of India Limited was set up to act as a custodian for securities of a lar%e number of banks and institutions w o were mainly in t e public sector& Some of t e banks and financial institutions also started providin% -Custodial- services to smaller investors for a fee& 6it t e introduction of demateriali0ation of securities t ere as been a s ift in t e role and business operations of Custodians& 1ut t ey still remain an important intermediary providin% services to t e investors w o still old securities in p ysical form& %utual ,un!s Mutual funds are financial intermediaries, w ic collect t e savin%s of small investors and invest t em in a diversified portfolio of securities to minimi0e risk and ma8imi0e returns for t eir participants& Mutual funds ave %iven a maFor fillip to t e capital market - bot primary as well as secondary& * e units of mutual funds, in turn, are also tradable securities& * eir price is determined by t eir net asset value #N25$ w ic is declared periodically& * e operations of t e private mutual funds are re%ulated by S,1I wit re%ard to t eir re%istration, operations, administration and issue as well as tradin%&

* ere are various types of mutual funds, dependin% on w et er t ey are open ended or close ended and w at t eir end use of funds is& 2n open-ended fund provides for easy li'uidity and is a perennial fund, as its very name su%%ests& 2 closed-ended fund as a stipulated maturity period, %enerally five years& 2 %rowt fund as a i% er percenta%e of its corpus invested in e'uity t an in fi8ed income securities, ence t e c ances of capital appreciation #%rowt $ are i% er& In %rowt funds, t e dividend accrued, if any, is reinvested in t e fund for t e capital appreciation of investments made by t e investor& 2n Income fund on t e ot er and invests a lar%er portion of its corpus in fi8ed income securities in order to pay out a portion of its earnin%s to t e investor at re%ular intervals& 2 balanced fund invests e'ually in fi8ed income and e'uity in order to earn a minimum return to t e investors& Some mutual funds are limited to a particular industryI ot ers invest e8clusively in certain kinds of s ort-term instruments like money market or %overnment securities& * ese are called money market funds or li'uid funds& *o prevent processes like dividend strippin% or to ensure t at t e funds are available to t e mana%ers for a minimum period so t at t ey can be deployed to at least cover t e administrative costs of t e asset mana%ement company, mutual funds prescribe an entry load or an e8it load for t e investors& If investors want to wit draw t eir investments earlier t an t e stipulated period, an e8it load is c ar%eable& *o prevent profli%acy, S,1I as prescribed t e ma8imum t at can be c ar%ed to t e investors by t e fund mana%ers& Depositories * e depositories are important intermediaries in t e securities market t at is scrip-less or movin% towards suc a state& In India, t e Depositories 2ct defines a depository to mean -a company formed and re%istered under t e Companies 2ct, ()?@ and w ic as been %ranted a certificate of re%istration under sub-section #I2$ of section (< of t e Securities and ,8c an%e 1oard of India 2ct, ())<&- * e principal function of a depository is to demateriali0e securities and enable t eir transactions in bookentry form& Demateriali0ation of securities occurs w en securities issued in p ysical form is destroyed and an e'uivalent number of securities are credited into t e beneficiary owner/s account& In a depository system, t e investors stand to %ain by way of lower costs and lower risks of t eft or for%ery, etc& * ey also benefit in terms of efficiency of t e process& 1ut t e implementation of t e system as to be secure and well %overned& 2ll t e players ave to be conversant wit t e rules and re%ulations as well as wit t e tec nolo%y for processin%& * e intermediaries in t is system ave to play strictly by t e rules& 2 depository establis ed under t e Depositories 2ct can provide any service connected wit recordin% of allotment of securities or transfer of owners ip of securities in t e record of a depository& 2 depository cannot directly open accounts and provide services to clients& 2ny person willin% to avail of t e services of t e depository can do so by enterin% into an a%reement wit t e depository t rou% any of its Depository .articipants& * e services, functions, ri% ts and obli%ations of depositories, wit special reference to NSDL are provided in t e second section of t is 6orkbook& -epositor# .articipants 2 Depository .articipant #D.$ is described as an a%ent of t e depository& * ey are t e intermediaries between t e depository and t e investors& * e relations ip between t e D.s and t e depository is %overned by an a%reement made between t e two under t e Depositories 2ct, ())@& In a strictly le%al sense, a D. is an entity w o is re%istered as suc wit S,1I under t e provisions of t e S,1I 2ct& 2s per t e provisions of t is 2ct, a D. can offer depository related services only after obtainin% a certificate of re%istration from S,1I& S,1I #D9.$ 7e%ulations, ())@ prescribe a minimum net wort of 7s& ?C Lak for t e applicants w o are stockbrokers or non bankin% finance companies #N1+Cs$, for %rantin% a certificate of re%istration to act as a D.& +or 7 9 * 2%ents a minimum net wort of 7s& (C crore is prescribed in addition to a %rant of certificate of re%istration by S,1I& If a stockbroker seeks to act as a D. in more t an one depository, e s ould comply wit t e specified net wort criterion separately for eac suc depository& If an N1+C seeks to act as a D. on be alf of any ot er person, it needs to ave a net wort of 7s& ?C cr& in addition to t e net wort specified by any ot er aut ority& No minimum net wort criterion as been prescribed for ot er cate%ories of D.s& :owever, depositories can fi8 a i% er net wort criterion for t eir D.s& NSDL stipulates a minimum net wort of 7s& (CC Lak to be eli%ible to become a D. as a%ainst 7s& ?C Lak prescribed by S,1I #D9.$ 7e%ulations, e8cept for 7 9 * a%ents and N1+Cs, as mentioned above& * e role, functions, responsibilities and business operations of D.s are described in detail in t e second section of t is book& Instru"ents * e c an%es in t e re%ulatory framework of t e capital market and fiscal policies ave also resulted in newer kinds of financial instruments #securities$ bein% introduced in t e market& 2lso, a lot of financial innovation by companies w o are now permitted to undertake treasury operations, as resulted in newer kinds of instruments - all of w ic can be traded E bein% introduced& * e variations in all t ese instruments depend on t e tenure, t e nature of security, t e interest rate, t e collateral security offered and t e tradin% features, etc& -e"entures * ese are issued by companies and re%ulated under t e S,1I %uidelines of Hune ((, ())<& * ese are issued under a prospectus, w ic as to be approved by S,1I like in t e case of e'uity issues& * e ri% ts of investors as debenture olders are %overned by t e Companies 2ct, w ic pro ibits t e issue of debentures wit votin% ri% ts& * ere are a lar%e variety of debentures t at is available& * is includes; L .articipatin% debentures L Convertible debentures wit options L * ird party convertible debentures L Debt3e'uity swaps L Mero coupon convertible notes L Secured premium notes L Mero interest fully convertible debentures L +ully convertible debentures wit interest L .artly convertible debentures&

'on!s Indian Development +inancial Institutions #D+Is$ in India, like ID1I, ICICI and I+CI ave been raisin% capital for t eir operations by issuin% bonds& * ese too are available in a lar%e variety& * ese include; L Income bonds L *a8-free bonds L Capital %ains bonds L Deep discount bonds L Infrastructure bonds L 7etirement bonds In addition to t e interest rates and maturity profiles of t ese instruments, t e issuer institutions ave been includin% a put3call option on especially t e very lon%-dated bonds like deep discount bonds& Since t e tenures of some of t ese instruments spanned some <C or <? years durin% w ic t e interest rate re%imes may under%o a complete c an%e, t e issuers ave kept t e fle8ibility to retire t e costly debt& * is t ey do by e8ercisin% t eir option to redeem t e securities at pre-determined periods like at t e end of five or seven years& * is as been witnessed in number of instruments recently muc to t e c a%rin of investors w o were lookin% for secure and assle-free lon%-dated instruments& .re/erence S&ares 2s t e name su%%ests, owners of preference s ares enFoy a preferential treatment wit re%ard to corporate actions like dividend& * ey also ave a i% er ri% t of repayment in case of windin% up of a company& .reference s ares ave different features and are accordin%ly available as; L Cumulative and non-cumulative L .articipatin% L Cumulative 9 7edeemable fully convertible to preference s ares L Cumulative 9 7edeemable fully convertible to e'uity s ares L .reference s ares wit warrants L .reference s ares 01uit# S&ares 2s t e name indicates, t ese represent t e proportionate owners ip of t e company& * is ri% t is e8pressed in t e form of participation in t e profits of t e company& * ere as been some innovation in t e way t ese instruments are issued& Some ybrid securities like e'uity s ares wit detac able warrants are also available& 2o ernment Securities * e Central Dovernment or State Dovernments issue securities periodically for t e purpose of raisin% loans from t e public& * ere are two types of Dovernment Securities - Dated Securities and *reasury 1ills& Dated Securities ave a maturity period of more t an one year& *reasury 1ills ave a maturity period of less t an or up to one year& * e .ublic Debt Office #.DO$ of t e 7eserve 1ank of India performs all functions wit re%ard to t e issue mana%ement, settlement of trade, distribution of interest and redemption& 2lt ou% only corporate and institutional investors subscribe to %overnment securities, individual investors are also permitted to subscribe to t ese securities& 2n investor in %overnment securities as t e option to ave securities issued eit er in p ysical form or in book-entry form #commonly known as Subsidiary Deneral Led%er !SDL" form$& * ere are two types of SDL facilities, vi0&, SDL-( and SDL-<& In t e SDL-( facility, t e account is opened wit t e 71I directly& * ere are several restrictions on openin% SDL-( accounts and only entities, w ic fulfill all t e eli%ibility criteria, are permitted to open SDL-( account& * e 71I as permitted banks, re%istered primary dealers and certain ot er entities like NSCCL, S:CIL and NSDL to provide SDL facilities to subscribers& 2 subscriber to %overnment securities w o opts for SDL securities may open an SDL account wit 71I or any ot er approved entity& Investments made by suc approved entity on its own account are eld in SDL-( account and investments eld on account of ot er clients are eld in SDL-< account& 3ational Sa ing Certi/icates an! 4isan Vi(as .atra Considerin% various benefits of demateriali0ation to investors, Department of .osts #Do.$ in association wit National Securities Depository Limited #NSDL$ as introduced t e facility of oldin% National Savin%s Certificates 5III issue #NSC$ 9 4isan 5ikas .atra #45.$ in demateriali0ed form& NSC and 45. can be eld by individuals& +urt er, Foint olders only upto two are allowed& Investors can old NSC345. in t eir e8istin% demat account, w ic would enable t e investors to consolidate different types of investments in a sin%le demat account and multiple investments in t ese securities will also %et reflected in a sin%le account statement& Investors can deal wit any post office for effectin% c an%e in address, c an%e in bank account number, c an%e in nominee, etc& On redemption, t e investor need not %o to t e post office, is bank account will be credited directly or e will receive a warrant at is residence& 5are+&ouse Receipts NSDL as been approac ed by multi-commodity e8c an%es to provide depository facility for ware ouse receipts& 2s le%al status of ware ouse receipts is different from t at of securities, it is necessary for D.s to enter into a separate a%reement wit persons seekin% to open a demat account for t e purpose of oldin% and dealin% in electronic ware ouse receipts& Capital Market Pro(esses * ere are various processes t at Issuers of securities follow or utilise in order to tap t e savers for raisin% resources& Some of t e commonly used processes and met ods are described below; Initial .u"lic 6//ering (I.6) Companies, new as well as old can offer t eir s ares to t e investors in t e primary market& * is kind of tappin% t e savin%s is called an I.O or Initial .ublic Offerin%& S,1I re%ulates t e way in w ic companies can make t is offerin%& Companies can make an I.O if t ey meet S,1I %uidelines in t is re%ard& * e si0e of t e initial issue, t e e8c an%e on w ic it can be listed, t e merc ant bankers/ responsibilities, t e nature and content of t e disclosures in t e prospectus, procedures for all t ese are laid down by S,1I and ave to be strictly complied wit & ,8emption may be %ranted by S,1I in certain cases for minimum public

offer or minimum subscription in t e case of certain industry sectors like infrastructure or bankin%& Several c an%es ave also been introduced in recent years in t e manner in w ic t e I.Os can be marketed& +or e8ample, t ey can now take t e book buildin% route or t ey can even be marketed t rou% t e secondary market by brokers or D.s& 2ll t ese c an%es ave been made wit t e obFective of makin% t e process more investor friendly by reducin% risk, controllin% cost, %reater transparency in t e pricin% mec anism and protectin% li'uidity in t e ands of t e investor& Some of t e I.Os ave been available for subscription online - w ere t e bids are made in real time and t e information is made available on an instantaneous basis on t e screen& It is possible to subscribe for I.O s ares in demat form t rou% D.s& .ri ate .lacement Many companies c oose to raise capital for t eir operations t rou% various intermediaries by takin% w at in marketin% terms would be known as t e w olesale route& * is is called in financial markets as private placement& * e retail route of approac in% t e public is e8pensive as well as time consumin%& S,1I as prescribed t e eli%ibility criteria for companies and instruments as well as procedures for private placement& :owever, li'uidity for t e initial investors in privately placed securities is ensured as t ey can be traded in t e secondary market& 1ut suc securities ave different rules for listin% as well as for tradin%& .re/erential 6//er7Rig&ts Issue Companies can e8pand t eir capital by offerin% t e new s ares to t eir e8istin% s are olders& Suc offers for sale can be made to t e e8istin% s are olders by %ivin% t em a preferential treatment in allocation or t e offer can be on a ri% ts basis, i&e&, t e e8istin% olders can %et by way of t eir ri% t, allotment of new s ares in certain proportion to t eir earlier oldin%& 2ll suc offers ave also to be approved by S,1I w ic as laid out certain criteria for t ese routes of tappin% t e public& * ese ave to be complied wit & Internet 'ro(ing 6it t e Internet becomin% ubi'uitous, many institutions ave set up securities tradin% a%encies t at provide online tradin% facilities to t eir clients from t eir omes& * is as been possible since all t e players in t e securities market, vi0&, stockbrokers, stock e8c an%es, clearin% corporations, depositories, D.s, clearin% banks, etc&, are linked electronically& * us, information flows amon%st t em on a real time basis& * e tradin% platform, w ic was converted from t e tradin% all to t e computer terminals at t e brokers/ premises, as now s ifted to t e omes of investors& * is as introduced a i% er de%ree of transparency in transactions& * e investor knows e8actly w en and at w at rate is order was processed& It also creates an end-to-end audit trail t at makes market manipulation difficult& * e availability of securities in demat form as %iven a furt er fillip to t is process& :owever, t e emer%ence of w at is known as -day-traders- as resulted in t e business environment of brokers w ic as c an%ed& Investors, w o can now trade directly, no lon%er re'uire t eir intermediation& Service c ar%es ave t erefore been declinin% - all of w ic as been in favour of investors& Internet Initiati*es at NSDL Securities .osition 0as# 0lectronic -issemination+e (S.00-+e) In order to e8tend t e benefits of tec nolo%ical pro%ress to investors, NSDL as launc ed S.,,D-e services& S.,,D-e is a internet based facility for clients of Depository .articipants #D.s$ t at enables t e account olders to submit instructions to t eir D.s t rou% S.,,D-e website on internet& * e clients can submit instructions at a time convenient to t em from a place convenient to t em usin% S.,,D-e website of NSDL& * e account olders can also view t e status of t eir instructions submitted t rou% S.,,D-e on t e website itself& S.,,D-e is e8pected to %reatly reduce t e time and efforts re'uired in processin% t e instructions& Internet+"ase! -emat Account Statement (I-eAS) NSDL launc ed its first Internet-based initiative, SPEED #Securities .osition ,asy ,lectronic Dissemination$, in +ebruary <CCC now called I-eAS #Internet-based Demat 2ccount Statement$& * is facility is available on S.,,D-e website for viewin% balances and transactions in demat accounts& It is available to t e users of S.,,D-e, Clearin% Members w o ave subscribed to IDe2S and to t ose clients w ose .articipants are re%istered for IDe2S& * e information #balances and transactions$ is updated on an online basis wit a delay of ma8imum =C minutes& Securities *ra!ing In/ormation 0as# Access an! -eli er# (S*0A-8) Gsin% t e infrastructure of S.00-+e, NSDL as developed its t ird Internet-based application, S*0A-8 #Securities *radin% Information ,asy 2ccess and Delivery$, w ic is a means of transmission of trade information electronically across market participants& S*0A-8 will enable electronic communication between brokers, custodians and fund mana%ers in respect of Custodian trades& In order to use t e S*0A-8 facility, brokers, custodians and fund mana%ers will ave to access S*0A-8 website on Internet wit smart card, bearin% di%ital si%nature certificate issued by licensed Certifyin% 2ut ority #C2$, approved by NSDL& +urt er all batc es and uploads from brokers 3 custodians 3 fund mana%ers will be di%itally si%ned by t e respective users and will be accepted by S*0A-8 only after successful verification of di%ital si%nature& 2lso all downloads obtained by brokers 3 custodians 3 fund mana%ers will bear t e di%ital si%nature of S*0A-8 site&

CHAP'ER $ O*er*ie+ of NSDL 6ey features of t,e depository syste" in India%ulti+-epositor# S#stem$ * e depository model adopted in India provides for a competitive multi depository system& * ere can be various entities providin% depository services&

-emateriali9ation as against immo"ili9ation$ * e model adopted in India provides only for demateriali0ation of securities& * is is a si%nificant step in t e direction of ac ievin% a completely paper-free securities market& Many of t e developed countries ave opted eit er for immobili0ation #e&%& :on% 4on%$ or bot immobili0ation and demateriali0ation #e&%& Hapan$ of securities& Immo"ili9ation of securities is done by storing or lodging the physical security certificates with an organization that acts as a custodian - a securities depository. All subsequent transactions in such immobilized securities take place through book entries. The actual owners have the right to withdraw the physical securities from the custodial agent whenever required by them. In the case of IP ! a "umbo certificate is issued in the name of the beneficiary owners based on which the depository gives credit to the account of beneficiary owners. -emateriali9ation of securities occurs when securities issued in physical form is destroyed and an equivalent number of securities are credited into the beneficiary owner#s account. India has adopted dematerialization route to depository. In a depository system! the investors stand to gain by way of efficient settlements! lower costs and lower risks of theft or forgery! etc. $ut the implementation of the system has to be secure and well governed. All the players have to be conversant with the rules and regulations as well as with the technology for processing. The intermediaries in this system have to play strictly by the rules. -epositor# ser ices t&roug& !epositor# participants$ * e depositories can provide t eir services to investors t rou% t eir a%ents called depository participants& * ese a%ents are appointed subFect to t e conditions prescribed under Securities and ,8c an%e 1oard of India #Depositories and .articipants$ 7e%ulations, ())@ and ot er applicable conditions& ,ungi"ilit# + In t e depository system, t e securities demateriali0ed are not identified by distinctive numbers or certificate numbers as in t e p ysical environment& * us all securities in t e same class are identical and interc an%eable& +or e8ample, all e'uity s ares in t e class of fully paid up s ares are interc an%eable& Registere! 6:ner7 'ene/icial 6:ner + In t e depository system, t e owners ip of securities demateriali0ed is bifurcated between 7e%istered Owner and 1eneficial Owner& +or t e securities demateriali0ed, NSDL is t e 7e%istered Owner in t e books of t e issuerI but owners ip ri% ts and liabilities rest wit 1eneficial Owner& 2ll t e ri% ts, duties and liabilities underlyin% t e security are on t e beneficial owner of t e security& ,ree *rans/era"ilit# o/ s&ares$ *ransfer of s ares eld in demateriali0ed form takes place freely t rou% electronic book-entry system& ',e Depository Syste" * e Depositories 2ct, ())@, defines a depository to mean -a company formed and re%istered under t e Companies 2ct, ()?@ and w ic as been %ranted a certificate of re%istration under sub-section #I2$ of section (< of t e Securities and ,8c an%e 1oard of India 2ct, ())<& * e principal function of a depository is to demateriali0e securities and enable t eir transactions in book-entry form& * e securities are transferred by debitin% t e transferor/s depository account and creditin% t e transferee/s depository account& 2 depository is very muc like a bank in many of its operations& 6e can draw an analo%y between t e two in order to %et a better understandin% of t e depository system& #See +i%&(, <$


Le1al Fra"e+ork * e operations of t e depositories are primarily %overned by t e Depositories 2ct, ())@, Securities and ,8c an%e 1oard of India #Depositories 9 .articipants$ 7e%ulations, ())@, 1ye- Laws approved by S,1I, and 1usiness 7ules framed in accordance wit t e 7e%ulations and 1ye-Laws& * e Depositories 2ct passed by .arliament received t e .resident/s assent on 2u%ust (C, ())@& It was notified in a Da0ette on 2u%ust (< of t e same year& * e 2ct enables t e settin% up of multiple depositories in t e country& * is was to see t at t ere is competition in t e service and t ere is more t an one depository in operation& 2t present, two depositories are re%istered wit S,1I - * e National Securities Depository Limited #NSDL$ and Central Depository Services #India$ Limited #CDSL$& Only a company re%istered under t e Companies 2ct, ()?@ and sponsored by t e specified cate%ory of institutions can set up a depository in India& 1efore commencin% operations, depositories s ould obtain a certificate of re%istration and a certificate of commencement of business from S,1I& * e ri% ts and obli%ations of depositories, depository participants, issuers and beneficial owners are spelt out clearly in t e Depositories 2ct ())@& 2s per t e 2ct; L Section >; D. is an a%ent of t e Depository; 2 D. is an a%ent of t e depository, w o provides various services of t e depository to investors& * e D. as to enter into an a%reement wit t e depository to t is effect& 2ny investor w o would like to avail t e services of a depository as to enter into an a%reement wit any D. of is c oice& * e D. will t en make t e depository services available to t e investor& L Section A; +ree *ransferability; * e securities eld by an investor in t e depository are freely transferable from one beneficial owner to anot er& L Section B; Option to old securities in demat form; In t e depository system, every investor subscribin% to securities offered by an issuer as an option to receive t e same in p ysical form or demateriali0ed form& If an investor opts for receivin% t e securities in demateriali0ed form, t e issuer intimates t e depository t e details of allotment of security& On receipt of t is information, t e depository enters t e name of t e allottee as t e beneficial owner of t at security in its record& L Section ); Securities eld in a depository are fun%ible; 2ll securities eld by t e depository are in demateriali0ed and fun%ible form& L Section (C; 7e%istered Owner and 1eneficial Owner; * e depository is deemed to be t e re%istered owner for t e purpose of effectin% transfer of owners ip of security on be alf of a beneficial owner& 1ut as a re%istered owner, it does not ave any votin% ri% ts or any ot er ri% ts in respect of t ose securities& * e beneficial owner is entitled to all ri% ts and benefits as well as subFect to all liabilities in respect of is securities eld in t e depository& L Section (>; Option to opt out of depository; 2 beneficial owner may opt out of a depository in respect of any security by re'uisite intimation to t e depository& L Section (@; Depository to indemnify losses; 2 depository s all indemnify a beneficial owner, any loss caused due to ne%li%ence of t e depository or its participant&

0ligi"ilit# Criteria /or a -epositor# ; 2ny of t e followin% may promote a depository; (& 2 public financial Institution as defined in section >2 of t e Companies 2ct, ()?@I <& 2 bank included in t e Second Sc edule to t e 7eserve 1ank of India 2ct, ()=>I =& 2 forei%n bank operatin% in India wit t e approval of t e 7eserve 1ank of IndiaI >& 2 reco%ni0ed stock e8c an%eI ?& 2n institution en%a%ed in providin% financial services w ere not less t an A?J of t e e'uity is eld Fointly or severally by t ese institutionsI @& 2 custodian of securities approved by Dovernment of India, and A& 2 forei%n financial services institution approved by Dovernment of India& * e promoters of a depository are also known as its sponsors& 2 depository company must ave a minimum net wort of 7s& (CC crore& * e sponsor#s$ of t e depository ave to old at least ?(J of t e e'uity capital of t e depository company& .articipants of t at depository, if any, can old t e balance of t e e'uity capital& :owever, no sin%le participant can old, at any point of time, more t an ?J of t e e'uity capital& No forei%n entity, individually or collectively eit er as a sponsor or as a D., or as a sponsor and D. to%et er, can old more t an <CJ of t e e'uity capital of t e depository& Registration 4 2s per t e provisions of t e S,1I 2ct, a depository can deal in securities only after obtainin% a certificate of re%istration from S,1I& * e sponsors of t e proposed depository s ould apply to S,1I for a certificate of re%istration in t e prescribed form& On bein% satisfied wit t e eli%ibility parameters of a company to act as a depository, S,1I may %rant a certificate of re%istration subFect to certain conditions& Commencement o/ 'usiness ; 2 depository t at as obtained re%istration as stated above can function only if it obtains a certificate of commencement of business from S,1I& 2 depository must apply for and obtain a certificate of commencement of business from S,1I wit in one year from t e date of receivin% t e certificate of re%istration from S,1I& S,1I %rants a certificate of commencement of business if it is satisfied t at t e depository as ade'uate systems and safe%uards to prevent manipulation of records and transactions& S,1I takes into account all matters relevant to t e efficient and orderly functionin% of t e depository& It particularly e8amines w et er; (& * e depository as a net wort of not less t an 7s& (CC croreI <& * e 1ye-Laws of t e depository ave been approved by S,1II =& * e automatic data processin% systems of t e depository ave been protected a%ainst unaut ori0ed access, alteration, destruction, disclosure or dissemination of records and dataI >& * e network, t rou% w ic continuous electronic means of communication are establis ed between t e depository, participants, issuers and issuers/ a%ents, is secure a%ainst unaut ori0ed entry or accessI ?& * e depository as establis ed standard transmission and encryption formats for electronic communication of data between t e depository, participants, issuers and issuers/ a%entsI @& * e p ysical or electronic access to t e premises, facilities, automatic data processin% systems, data stora%e sites and facilities includin% back-up sites, and to t e electronic data communication network connectin% t e D.s, issuers and issuers/ a%ents is controlled, monitored and recordedI A& * e depository as a detailed operational manual e8plainin% all aspects of its functionin%, includin% t e interface and met od of transmission of information between t e depository, issuers, issuers/ a%ents, D.s and beneficial ownersI B& * e depository as establis ed ade'uate procedures and facilities to ensure t at its records are protected a%ainst loss or destruction and arran%ements ave been made for maintainin% back-up facilities at a location different from t at of t e depositoryI )& * e depository as made ade'uate arran%ements includin% insurance for indemnifyin% t e beneficial owners for any loss t at may be caused to suc beneficial owners by t e wron%ful act, ne%li%ence or default of t e depository or its participants or of any employee of t e depository or participantI and (C& * e %rantin% of certificate of commencement of business is in t e interest of investors in securities market& Agreement "et:een -epositor# an! Issuers ; If eit er t e issuer #a company w ic as issued securities$ or t e investor opts to old is securities in a demat form, t e issuer enters into an a%reement wit t e depository to enable t e investors to demateriali0e t eir securities& No suc a%reement is necessary w ere; i& Depository, is t e issuer of securities, orI ii& * e State or Central Dovernment is t e issuer of %overnment securities& 6 ere t e issuer as appointed a re%istrar to t e issue or s are transfer, t e depository enters into a tripartite a%reement wit t e Issuer and 7e%istrar 9 *ransfer #79*$ 2%ent, as t e case may be, for t e securities declared eli%ible for demateriali0ation& 2t present, NSDL is disc ar%in% t e responsibility of 79* 2%ent for t e securities issued by State and Central Dovernments& Rig&ts an! 6"ligations o/ -epositories 4 Depositories ave t e ri% ts and obli%ations conferred upon t em under t e Depositories 2ct, t e re%ulations made under t e Depositories 2ct, 1ye-Laws approved by S,1I, and t e a%reements made wit t e participants, issuers and t eir 79* a%ents& ,very depository must ave ade'uate mec anisms for reviewin%, monitorin% and evaluatin% t e depository/s controls, systems, procedures and safe%uards& It s ould conduct an annual inspection of t ese procedures and forward a copy of t e inspection report to S,1I& * e depository is also re'uired to ensure t at t e inte%rity of t e automatic data processin% systems is maintained at all times and take all precautions necessary to ensure t at t e records are not lost, destroyed or tampered wit & In t e event of loss or destruction, sufficient back up of records s ould be available at a different place& 2de'uate measures s ould be taken, includin% insurance, to protect t e interests of t e beneficial owners a%ainst any risks& ,very depository is re'uired to e8tend all suc co-operation to t e beneficial owners, issuers, issuers/ a%ents, custodians of securities, ot er depositories and clearin% or%ani0ations, as is necessary for t e effective, prompt and accurate clearance and settlement of securities transactions and conduct of business&

* e depository s ould indemnify beneficial owners of securities for any loss caused to t em due to t e ne%li%ence of t e D.& :owever, w ere t e loss is caused due to t e ne%li%ence of a D., t e depository s all ave t e ri% t to recover it from suc D.s& '#e+<a:s 4 2 depository is re'uired to make 1ye-Laws %overnin% its operations& * e 1ye- Laws ave to be in conformity wit t e Depositories 2ct and t e re%ulations made t ere under, and need to be approved by S,1I before becomin% effective& Recor!s to "e maintaine! "# -epositor# 4 ,very depository is re'uired to maintain t e followin% records and documents& * ese ave to be preserved for a minimum period of five years& (& 7ecords of securities demateriali0ed and remateriali0ed& <& * e names of t e transferor, transferee, and t e dates of transfer of securities& =& 2 re%ister and an inde8 of beneficial owners& >& Details of t e oldin%s of t e securities of beneficial owners as at t e end of eac day& ?& 7ecords of instructions received from, and sent to, participants, issuers, issuers/ a%ents and beneficial owners& @& 7ecords of approval, notice, entry and cancellation of pled%e or ypot ecation& A& Details of participants& B& Details of securities declared to be eli%ible for demateriali0ation in t e depository& )& Suc ot er records as may be specified by S,1I for carryin% on t e activities as a depository& Ser*i(es of Depository 4 2 depository establis ed under t e Depositories 2ct can provide any service connected wit recordin% of allotment of securities or transfer of owners ip of securities in t e record of a depository& 2ny person willin% to avail t e services of t e depository can do so by enterin% into an a%reement wit t e depository t rou% any of its participants& 2 depository can provide depository services only t rou% a D.& 2 depository cannot directly open accounts and provide services to clients& ,very depository in its 1ye-Laws must state w ic securities are eli%ible for demat oldin%& Denerally, t e followin% securities are eli%ible for demateriali0ation; #a$ S ares, scripNs, stocks, bonds, debentures, debenture stock or ot er marketable securities of a like nature in or of any incorporated company or ot er body corporate& #b$ Gnits of mutual funds, ri% ts under collective investment sc emes and venture capital funds, commercial paper, certificates of deposit, securiti0ed debt, money market instruments, %overnment securities, national savin% certificates, 4isan 5ikas .atra and unlisted securities& #c$ Securities admitted to NSDL depository are notified to all D.s t rou% circulars sent by email& Investors are informed about t ese securities t rou% NSDL/s 6ebsite - www&nsdl&co&in and N,S* Gpdate - a mont ly newsletter of NSDL& Fun(tions of Depository -emateriali9ation$ One of t e primary functions of depository is to eliminate or minimi0e t e movement of p ysical securities in t e market& * is is ac ieved t rou% demateriali0ation of securities& Demateriali0ation is t e process of convertin% securities eld in p ysical form into oldin%s in book entry form& Account *rans/er$ * e depository %ives effects to all transfers resultin% from t e settlement of trades and ot er transactions between various beneficial owners by recordin% entries in t e accounts of suc beneficial owners& *rans/er an! Registration$ 2 transfer is t e le%al c an%e of owners ip of a security in t e records of t e issuer& +or effectin% a transfer, certain le%al steps ave to be taken like endorsement, e8ecution of a transfer instrument and payment of stamp duty& * e depository accelerates t e transfer process by re%isterin% t e owners ip of s ares in t e name of t e depository& Gnder a depository system, transfer of security occurs merely by passin% book entries in t e records of t e depositories, on t e instructions of t e beneficial owners& Corporate Actions$ 2 depository may andle corporate actions in two ways& In t e first case, it merely provides information to t e issuer about t e persons entitled to receive corporate benefits& In t e ot er case, depository itself takes t e responsibility of distribution of corporate benefits& .le!ge an! =#pot&ecation$ * e securities eld wit NSDL may be used as collateral to secure loans and ot er credits by t e clients& In a manual environment, borrowers are re'uired to deliver pled%ed securities in p ysical form to t e lender or its custodian& * ese securities are verified for aut enticity and often need to be transferred in t e name of lender& * is as a time and money cost by way of transfer fees or stamp duty& If t e borrower wants to substitute t e pled%ed securities, t ese steps ave to be repeated& Gse of depository services for pled%in%3 ypot ecatin% t e securities makes t e process very simple and cost effective& * e securities pled%ed3 ypot ecated are transferred to a se%re%ated or collateral account t rou% book entries in t e records of t e depository& <in(ages :it& Clearing S#stem$ 6 et er it is a separate clearin% corporation attac ed to a stock e8c an%e or a clearin% ouse #department$ of a stock e8c an%e, t e clearin% system performs t e functions of ascertainin% t e pay-in #sell$ or pay-out #buy$ of brokers w o ave traded on t e stock e8c an%e& 2ctual delivery of securities to t e clearin% system from t e sellin% brokers and delivery of securities from t e clearin% system to t e buyin% broker is done by t e depository& *o ac ieve t is, depositories and t e clearin% system s ould be electronically linked& :avin% understood t e depository system, let us now look at t e or%ani0ation and functions of National Securities Depository Limited #NSDL$& National Se(urities Depository Li"ited National Securities Depository Limited is t e first depository to be set-up in India& It was incorporated on December (<, ())?& * e Industrial Development 1ank of India #ID1I$ - t e lar%est development bank in India, Gnit *rust of India #G*I$ - t e lar%est Indian mutual fund and t e National Stock ,8c an%e #NS,$ - t e lar%est stock e8c an%e in India, sponsored t e settin% up of NSDL and subscribed to t e initial capital& NSDL commenced operations on November B, ())@&

6:ners&ip NSDL is a public limited company incorporated under t e Companies 2ct, ()?@& NSDL ad a paid-up e'uity capital of 7s& (C? crore& * e paid up capital as been reduced to 7s& BC crore since NSDL as bou% t back its s ares of t e face value of 7s& <? crore in t e year <CCC& :owever, its net wort is above t e 7s& (CC crore, as re'uired by S,1I re%ulations& ',e follo+in1 or1ani2ations are s,are,olders of NSDL as on Mar(, %#7 $889 (& Industrial Development 1ank of India <& 2dministrator of t e Specified Gndertakin% of t e Gnit *rust of India - D7+ =& National Stock ,8c an%e >& State 1ank of India ?& Oriental 1ank of Commerce @& Citibank N&2& A& Standard C artered 1ank B& :D+C 1ank Limited )& * e :on% 4on% and S an% ai 1ankin% Corporation Limited (C& Deutsc e 1ank 2&D& ((& Dena 1ank (<& Canara 1ank %anagement o/ 3S-< NSDL is a public limited company mana%ed by a professional 1oard of Directors& * e day-today operations are conducted by t e C airman 9 Mana%in% Director #CMD$& *o assist t e CMD in is functions, t e 1oard appoints an ,8ecutive Committee #,C$ of not more t an (? members& * e eli%ibility criteria and period of nomination, etc& are %overned by t e 1ye-Laws of NSDL in t is re%ard& '#e+<a:s o/ 3S-< > 1ye-Laws of National Securities Depository Limited ave been framed under powers conferred under section <@ of t e Depositories 2ct, ())@ and approved by Securities and ,8c an%e 1oard of India& * e 1ye-Laws contain fourteen c apters and pertain to t e areas listed below; (& S ort title and commencement <& Definitions =& 1oard of Directors >& ,8ecutive Committee ?& 1usiness 7ules @& .articipants A& Safe%uards to protect interest of clients and participants B& Securities )& 2ccounts3transactions by book entry (C& 7econciliation accounts and audit ((& Disciplinary action (<& 2ppeals (=& Conciliation (>& 2rbitration 2mendments to NSDL 1ye-Laws re'uire t e approval of t e 1oard of Directors of NSDL and S,1I& See :::?ns!l?co?in /or latest in/ormation? *&e complete te@t o/ t&e "#e+la:s is a aila"le on t&e 3S-< 5e"site + :::?ns!l?co?in? 'usiness Rules o/ 3S-< 2mendments to NSDL 1usiness 7ules re'uire t e approval of NSDL ,8ecutive Committee and filin% of t e same wit S,1I at least a day before t e effective date for t e amendments& ,unctions NSDL performs t e followin% functions t rou% depository participants; O ,nables t e surrender and wit drawal of securities to and from t e depository #demateriali0ation and remateriali0ation$& O Maintains investor oldin%s in t e electronic form& O ,ffects settlement of securities traded on t e e8c an%es& O Carries out settlement of trades not done on t e stock e8c an%e #off-market trades$& O *ransfer of securities& O .led%in%3 ypot ecation of demateriali0ed securities& O ,lectronic credit in public offerin%s of companies or corporate actions& O 7eceipt of non-cas corporate benefits like bonus ri% ts, etc& in electronic form& O Stock Lendin% and 1orrowin%& Ser ices 6//ere! "# 3S-< NSDL offers a ost of services to t e investors t rou% its network of D.s; O Maintenance of beneficiary oldin%s t rou% D.s O Demateriali0ation O Off-market *rades O Settlement in demateriali0ed securities O 7eceipt of allotment in t e demateriali0ed form O Distribution of corporate benefits

O 7emateriali0ation O .led%in% and ypot ecation facilities O +ree0in%3lockin% of investor/s account O Stock lendin% and borrowin% facilities ,ee Structure o/ 3S-< NSDL c ar%es t e D.s and not t e investors directly& * ese c ar%es are fi8ed& * e D.s in turn, are free to c ar%e t eir clients, i&e&, t e investors for t eir services& * us, t ere is a two-tier fee structure& Inspection, Accounting an! Internal Au!it NSDL obtains audited financial reports from all its D.s once every year& NSDL also carries out periodic visits to t e offices of its constituents - 79* a%ents, D.s and clearin% corporations E to review t e operatin% procedures, systems maintenance and compliance wit t e 1ye-Laws, 1usiness 7ules and S,1I 7e%ulations& 2dditionally, D.s are re'uired to submit to NSDL, internal audit reports every 'uarter& Internal audit as to be conducted by a c artered accountant or a company secretary in practice& * e 1oard of Directors appoints a Disciplinary 2ction Committee #D2C$ to deal wit any matter relatin% to D.s clients, Issuers and 79* a%ents& * e D2C is empowered to suspend or e8pel a D., declare a security as ineli%ible on t e NSDL system, free0e a D. account and conduct inspection or call for records and issue notices& If a D. is a%%rieved by t e action of t e D2C, it as t e ri% t to appeal to t e ,C a%ainst t e action of t e D2C& * is as to be done wit in =C days of t e action by D2C& * e ,C as to ear t e appeal wit in two mont s from t e date of filin% t e appeal& * e ,C as t e power to stay t e operation of t e orders passed by t e D2C& * e information on all suc actions as to be furnis ed to S,1I& Settlement o/ -isputes 2ll disputes, differences and claims arisin% out of any dealin%s on t e NSDL, irrespective of w et er NSDL is a party to it or not, ave to be settled under t e 2rbitration and Conciliation 2ct ())@& %ystem &iew of '%() (epository %ystem. Fi1ure & depicts a system view of t e NSDL depository system&

2ccount olders #investors$ open account wit t e D.s& * e account details, entered in a computer system maintained by Depository .articipants called D.M, are electronically conveyed to t e central system of NSDL called DM& Companies w o ave a%reed to offer demat facility to t eir s are olders use a computer system called D.M #S:7$ to connect to t e NSDL central system& D.M #S:7$ may be installed by t e company itself or t rou% its 79* 2%ent& * is system is used to electronically receive demat re'uests, confirm suc re'uests or to receive beneficial owner data #1enpos$ from t e depository& Stock e8c an%es receive pay-in #receivin% securities a%ainst sales made by brokers$ or to payout #%ivin% securities to brokers a%ainst t eir purc ases$ usin% a computer system connected to NSDL called D.M #CC$& 2ll t e computer systems installed by D.s #D.M-D.$, companies #D.M-S:7s$, and stock e8c an%es #D.M-CC$ are connected to NSDL central system #DM$ t rou% 5-S2* #very small aperture terminal$ or leased lines& * ese are collectively called 1usiness .artner Systems& 2ny transaction conducted by any computer system in t e NSDL depository system w ic is tar%eted to reac any ot er computer system first %ets recorded in DM and t en will reac t e tar%et& No two business partners/ systems can communicate to eac ot er wit out passin% t rou% t e DM& %aintenance o/ Accounts at t&e Central S#stem * e NSDL central system known as DM maintains accounts of all account olders in t e depository system& 2ll t e transactions entered at any point in t e computer system connected to it are first effected in t e central system and subse'uently at t ese computers& * us, t e central system of NSDL as t e records of all details of every transaction conducted in t e depository system& -istri"ute! -ata"ase ,ac of t e computer systems connected to NSDL system as its own database relatin% to its clients& * is elps in %ivin% prompt and accurate service to t e clients& :owever eac of t e databases is reconciled wit t e data at t e central system everyday in order to ensure t at t e data in t e distributed database tallies wit t e central database& Common So/t:are NSDL develops software re'uired by depository participants, companies, 79* 2%ents and clearin% corporations for conductin% depository operations& * us, t e computer systems used by all t e entities will ave common software %iven by NSDL& :owever, dependin% on t e business potential, branc networks and any ot er specific features, D.s may develop software of t eir own for co-ordination, communication and control and provide service to t eir clients& Suc e8clusive software is called -back office software-& D.M system %iven by NSDL %ivesP e8port and import- facility to take out t e transaction details to be used by back office software and to feed in transaction details %enerated from t e back office software& Connecti it# * e computer system used by D.s, companies, 79* 2%ents and stock e8c an%es may be connected to NSDL central system t rou% 5-S2* network or leased line network& NSDL uses NS,/s 5-S2* network for t e connectivity purposes& * us, 5-S2*s used by NS, brokers can connect to NSDL if t e software supplied by NSDL is used& 5-S2* uses satellites for communication purposes& Some business partners may connect usin% leased lines provided by M*NL3 1SNL& 5-S2* or leased line connections are called primary connectivity& If primary connectivity fails for any reason, 1.s must ave t e ability to connect t rou% ot er means& Suc ot er means are .S*N lines, ISDN lines, .O. lines #normal telep one lines$ t rou% w ic t ey can dial in to t e NSDL system and conduct t eir transactions&


Salient points of t,e NSDL)Depository Operations Module (& * e test is of A? minutes duration& <& * e total marks for t e e8amination are (CC& =& ,ac participant s ould secure a minimum of @CJ of t e marks to be eli%ible to receive t e certificate in NSDL - Depository Operations Module& >& * us a participant s ould secure a minimum of @C marks out of total (CC to pass t e test& ?& 2 participant s ould secure a minimum of BCJ of t e marks to be a certified trainer& @& * us a participant s ould secure a minimum of BC marks out of total (CC to be certified as a trainer& LIS' OF 'ES' CEN'RES 'O APPEAR FOR NCFM E:AMINA'ION