1

Working of depository system in India with Research and analysis

CHAPTER-1
INTRODUCTION TO DEPOSITORY

INTRODUCTION TO DEPOSITORY

A significant development of the 20th century particularly in its later part is expansion
of financial market world over which mostly was driven by globalization, technology,
innovations and increasing trade volume. India has not been an exception with probably
largest number of listed companies with a very large investor population and ever
increasing volumes of trades.

However, this continuous growth in activities increased problems associated with

stock trading. Most of these problems arose due to the intrinsic nature of paper based
trading and settlement, like theft or loss of share certificates. This system required
handling of huge volumes of paper leading to increased costs and inefficiencies. The
process beginning from buying shares through the stock exchanges till getting the
certificates duly endorsed in the buyer’s name was indeed quite complex and time -
consuming and was riddled with a variety of problems. Growing number of investors
participating in the capital market has increased the possibility of being hit by a bad
delivery, The cost and time spent by the brokers for rectification of these bad deliveries
tends to be higher with the geographical spread of the clients. The increase in trade
volumes lead to exponential rise in the back office operations thus limiting the growth
potential of the broking members. The inconvenience faced by investors (in areas that are
far flung and away from the main metros) in settlement of trade also limits the
opportunity for such investors, especially in participating in auction trading. The physical
form of holding and trading in securities also acted as a bottleneck for broking
community in capital market operations. Risk exposure of the investor also increased due
to this trading in paper. Some of these associated risks were: delay in transfer of shares,
possibility of forgery on various documents leading to bad deliveries, legal disputes etc.,
and possibility of theft of share certificates, prevalence of fake certificates in the market,
mutilation or loss of share certificates in transit. Thus, the system of security transactions
was not as investor-friendly as it ought to be. In this scenario dematerialized trading
under depository system is certainly a welcome move. This popular financial service
emerged in Germany first time.

Meaning of depository

A depository is an organization which holds securities (like shares, debentures, bonds,

government securities, mutual fund units etc.) of investors in electronic form at the
 2

request of the investors through a registered Depository Participant. It also provides

services related to transactions in securities.

Depositories Act, 1996

The Depositories Act, 1996 provides for the establishment of depositories in securities
with the objective of ensuring free transferability of securities with speed, accuracy and
security by (a) making securities freely transferable subject to certain exceptions;
(b)dematerialization of the securities in the depository mode; and (c) providing for
maintenance of ownership records in a book entry form. In order to streamline the
settlement process, the Act envisages transfer of ownership of securities electronically by
book entry. The Act has made the securities of all companies freely transferable in
the depository mode, restricting the Company’s right to use discretion in effecting the
transfer of securities. The other procedural and the transfer deed requirements stated in
the Companies Act have also been dispensed with.

Eligibility Criteria for a Depository – Any of the following may promote

a depository:

1. A public financial Institution as defined in section 4A of the Companies Act, 1956

2. A bank included in the Second Schedule to the Reserve Bank of India Act, 1934;
3. A foreign bank operating in India with the approval of the Reserve Bank of India;
4. A recognized stock exchange;
5. An institution engaged in providing financial services where not less than 75% of the
equity is held jointly or severally by these institutions;
6. A custodian of securities approved by Government of India, and
7. A foreign financial services institution approved by Government of India.

The promoters of a depository are also known as its sponsors. A depository company
must have a minimum net worth of Rs. 100 corer. The sponsor(s) of the depository
have to hold at least 51% of the equity capital of the depository company. Participants
of that depository, if any, can hold the balance of the equity capital. However, no
single participant can hold, at any point of time, more than 5% of the equity capital.
No foreign entity, individually or collectively either as a sponsor or as a DP, or as a
sponsor and DP together, can hold more than 20% of the equity capital of the
depository.

Registration:-
 3

As per the provisions of the SEBI Act, a depository can deal in securities only after
obtaining a certificate of registration from SEBI. The sponsors of the proposed depository
should apply to SEBI for a certificate of registration in the prescribed form. On being
satisfied with the eligibility parameters of a company to act as a depository, SEBI may
grant a certificate of registration subject to certain conditions.

Commencement of Business:-

A depository that has obtained registration as stated above can function only if it obtains
a certificate of commencement of business from SEBI. A depository must apply for and
obtain a certificate of commencement of business from SEBI within one year from the
date of receiving the certificate of registration from SEBI.SEBI grants a certificate of
commencement of business if it is satisfied that the depository has adequate systems and
safeguards to prevent manipulation of records and transactions. SEBI takes into account
all matters relevant to the efficient and orderly functioning of the depository. It
particularly examines whether:

1. The depository has a net worth of not less than Rs. 100 crore;
2. The Bye-Laws of the depository have been approved by SEBI
3. The automatic data processing systems of the depository have been protected
against un authorized access, alteration, destruction, disclosure or dissemination
of records and data;
4. The network, through which continuous electronic means of communication are
established between the depository, participants, issuers and issuers' agents, is
secure against unauthorized entry or access.
5. The depository has established standard transmission and encryption formats for
electronic communication of data between the depository, participants, issuers
and issuers' agents;
6. The physical or electronic access to the premises, facilities, automatic data
processing systems, data storage sites and facilities including back-up sites, and
to the electronic data communication network connecting the DPs, issuers and
issuers' agents is controlled, monitored and recorded;
7. The depository has a detailed operational manual explaining all aspects of its
functioning, including the interface and method of transmission of information
between the depository, issuers, issuers' agents, DPs and beneficial owners;
8. The depository has established adequate procedures and facilities to ensure that its
records are protected against loss or destruction and arrangements have been
made for maintaining back-up facilities at a location different from that of the
depository;
 4

9. The depository has made adequate arrangements including insurance for

indemnifying the beneficial owners for any loss that may be caused to such
beneficial owners by the wrongful act, negligence or default of the depository or
its participants or of any employee of the depository or participant;
10. The granting of certificate of commencement of business is in the interest of
investors in securities market.

Agreement between Depository and Issuers –If either the issuer (a company which has
issued securities) or the investor opts to hold his securities in a demat form; the issuer
enters into an agreement with the depository to enable the investors to dematerialize their
securities.

No such agreement is necessary where:

i. Depository, is the issuer of securities, or;

ii. The State or Central Government is the issuer of government securities.
Where the issuer has appointed a registrar to the issue or share transfer, the depository
enters into a tripartite agreement with the Issuer and Registrar & Transfer (R&T) Agent,
as the case may be, for the securities declared eligible for dematerialization. At present,
NSDL is discharging the responsibility of R&T Agent for the securities issued by State
and Central Governments.

Rights and Obligations of Depositories –Depositories have the rights and obligations
conferred upon them under the Depositories Act, the regulations made under the
Depositories Act, Bye-Laws approved by SEBI, and the agreements made with the
participants, issuers and their R&T agents.

Every depository must have adequate mechanisms for reviewing, monitoring and
evaluating the depository's controls, systems, procedures and safeguards. It should
conduct an annual inspection of these procedures and forward a copy of the inspection
report to SEBI. The depository is also required to ensure that the integrity of the
automatic data processing systems is maintained at all times and take all precautions
necessary to ensure that the records are not lost, destroyed or tampered with. In the event
of loss or destruction, sufficient back up of records should be available at a different
place. Adequate measures should be taken, including insurance, to protect the interests
of the beneficial owners against any risks. Every depository is required to extend all such
co-operation to the beneficial owners, issuers, issuers' agents, custodians of securities,
other depositories and clearing organizations, as is necessary for the effective, prompt
and accurate clearance and settlement of securities transactions and conduct of business.
 5

The depository should indemnify beneficial owners of securities for any loss caused to
them due to the negligence of the DP. However, where the loss is caused due to the
negligence of a DP, the depository shall have the right to recover it from such DPs.

Bye-Laws- A depository is required to make Bye-Laws governing its operations. The

Bye-Laws have to be in conformity with the Depositories Act and the regulations made
there under, and need to be approved by SEBI before becoming effective.

Depository:-

Every depository is required to maintain the following records and documents.

These have to be preserved for a minimum period of five years.

1. Records of securities dematerialized and rematerialized.

2. The names of the transferor, transferee, and the dates of transfer of securities.
3. A register and an index of beneficial owners.
4. Details of the holdings of the securities of beneficial owners as at the end of each day.
5. Records of instructions received from, and sent to, participants, issuers, issuers'
agents and beneficial owners.
6. Records of approval, notice, entry and cancellation of pledge or hypothecation.
7. Details of participants.
8. Details of securities declared to be eligible for dematerialization in the depository.
9. Such other records as may be specified by SEBI for carrying on the activities as a
depository

Comparison between banks and depository-

Similarity:

1. Promoted by reputed persons and institutions: Both bank and depository are
Promoted by persons and institutions of repute and good standing. For e.g.-HDFC
bank waspromoted by housing Development Corporation Ltd. and similarly
NSDL is promotedby Industrial Development Bank of India Limited (IDBI), Unit
Trust of India (UTI)and National Stock Exchange of India Limited (NSE).
2. Renders safe keeping services: Both banks and depository provide safe keeping
services. Banks provides safe custody of cash and locker facility for keeping
valuable articles to its clients. Depositories also provide safe keeping of shares,
debentures, bonds, government securities, mutual fund units to its clients.
3. Central office and branches: Like bank every depository has one central office
which is the main office and other branch offices which are situated in different
cities and follow the guidelines of central office.
4. Charge of fees- banks charge fees for locker facilities to its clients, similarly
depository charges fees for safe keep of share certificates in electronic form.
 6

5. Transfer of funds and securities : Funds/securities are transferred only at the

instruction of the account holder
6. Written confirmation of transfer (of shares and currencies )
7. Account is operated by power of attorney: a person under power of attorney can
operate the account.
8. Customers are entitled to get statement s of accounts
9. Nomination facility: in case of bank accounts customer can nominate any person
to whom account will be transferred in case of death of the person similarly in
case of depository, a customer can nominate a person to whom the shares will
be transferred.
10. Currencies (in case of banks ) and shares (in case of depositories) when held
do not have any distinctive number

Differentiation:

Bank Account Vs. Demat Account

A Bank A Depository (like CDSL)

For opening a bank account, such as a savings A demat account is opened by an investor
bank account, a minimum balance has to be without any securities, i.e. with zero
deposited along with the account balance.

A customer having an account with a An account holder of the depository is

bank is called as an Account Holder. called as Beneficial Owner (of the
securities).

A bank is entitled to use funds lying in the A depository is not entitled to use the
savings or current deposit accounts of the securities lying in the demat accounts of
customers in the normal course of business the customers and hence does not pay any interest
and pays interest to them for the use. to them.
 7

A bank account can be operated upon A demat account can be opened, operated
“jointly”, or, by “either or survivor” of the upon only by ALL the account holders
account holders or by “any one/two/three JOINTLY, at present.
of", the joint account holders.

In the bank account, addition or deletion of In the demat account, addition or deletion
name(s) of one or more of the of name(s) of one or more of the account
accountholders is permitted. holders (beneficial owners) is NOT
permitted.
In the bank account, there is no requirement In demat account, the beneficial owners is
of execution of an agreement between the required to sign a DP-BO agreement before
bank and account holder at the time of opening opening the demat account.
the account

Immobilization and Dematerialization

Conversion of securities from physical (paper) form to electronic form can be achieved
by two methods Immobilization or Dematerialization. Under the immobilization method,
after giving credit of the securities in electronic form, physical certificates are stored or
lodged with an organization, which acts as a custodian – a securities depository.
Subsequent transactions in such immobilized securities take place through book-entries.

Under the dematerialization method, the securities, issued in physical form are destroyed
and exactly equal numbers of securities are created in the depository system, which are
credited

into the account of the investor. Unlike physical securities, the securities converted into
electronic form do not have any distinctive numbers and they are treated as equal and
replaceable in all ways i.e. securities in electronic form are fungible. All subsequent
transactions (transfer of ownership) of such securities take place in book-entry form.

India has adopted dematerialization method whereas immobilization has been adopted by
some of the countries like Hong Kong and USA. Japan has adopted both,
dematerialization as well as immobilization for achieving a paper-less securities market.
Whether a country has adopted immobilization or dematerialization, the investor has a
right to get the securities converted back into physical form through a process called as
dematerialization, in case of need.

Availing of various services offered by a depository

 8

A depository in India cannot open a demat account of an investor and / or provide

services to such a person directly. For opening a demat account or availing the services
offered by the depository, a person is required to approach a Depository Participant (DP)
who is an agent of the depository, complete the account opening formalities as per the
Depositories Act, SEBI regulations, depository byelaws. Thereafter, the investor can
receive securities in the demat account as well as tender the securities held by him / her in
physical form for dematerialization to the DP (as explained in the subsequent part) and
hold the same in book entry form in the account.

When an investor holds securities in physical form, his / her name is recorded as
registered owner in the books of the company. As per the laws currently in force in India,
when the securities are converted in electronic form by way of dematerialization, name of
the depository is registered in the books of the company as registered owner. However,
the investor continues to be the real owner of the securities and is entitled to receive all
the benefits such as dividend, interest, bonus shares etc. in respect of the said security and
as such is called as Beneficial Owner (BO) under the depository system.

Today “demat” has become a common word. The institutional and individual investors
spread all over India are found to be making an extensive use of the depository
participant services for holding their securities in electronic form.

LEGAL FRAMEWORK

Introduction

The depositories in India are regulated under the following legal framework:

 The Depositories Act, 1996

 SEBI (Depositories and Participants) Regulations, 1996
 Companies Act, 1956
 Securities and Exchange Board of India Act, 1992
 Prevention of Money Laundering Act, 2002
Apart from the above-mentioned Acts and Regulations, following govern the business
and operations of a depository.
 Bye Laws of the depository
 Operating Instructions of the depository
 9

Depositories Act
1996

SEBI

SEBI (Depository
SEBI Act, 1992 and Participants)
Regulations, 1996

Depository

Applicability of
Operating
Bye Laws Agreements other Acts/
Instructions
Regulations

The Depositories Act, 1996 gives power to depositories to make bye-laws

But such bye laws should be consistent with the provisions of this Act and the SEBI
Regulations. Such bye-laws shall provide for:

a) The eligibility criteria for admission and removal of securities in the depository;
b) The conditions subject to which the securities shall be dealt with;
c) The eligibility criteria for admission of any person as a participant;
d) The manner and procedure for dematerialization of securities;
e) The procedure for transactions within the depository;
f) The manner in which securities shall be dealt with or withdrawn from a depository;
g) The procedure for ensuring safeguards to protect the interests of participants and
beneficial owners;
h) The conditions of admission into and withdrawal from a participant by beneficial
owner;
 10

i) The procedure for conveying information to the participants and beneficial owners on
dividend declaration, shareholder meetings and other matters of interest to the
beneficial owners;
j) The manner of distribution of dividends, interest and monetary benefits
received from the company among beneficial owners;
k) The manner of creating pledge or hypothecation in respect of securities held with a
depository;
l) Inter se rights and obligations among the depository, issuer, participants, and
beneficial owners;
m) The manner and the periodicity of furnishing information to the Board, issuer and
other persons;
n) The procedure for resolving disputes involving depository, issuer, company or a
beneficial owner;
o) The procedure for proceeding against the participant committing breach of the
regulations and provisions for suspension and expulsion of participants from the
depository and cancellation of agreements entered with the depository;
p) The internal control standards including procedure for auditing, and monitoring.

SEBI (Depositories and Participants) Regulations, 1996

Board (SEBI) grants a certificate of registration to a depository subject to the following

conditions, namely:
a) The depository shall pay the registration fee specified within fifteen days of receipt
of intimation from the Board;
b) The depository shall comply with the provisions of the Act, the Depositories
Ordinance, the bye-laws, agreements and these regulations;
c) The depository shall not carryon any activity other than that of a depository unless the
activity is incidental to the activity of the depository;
d) the sponsor shall, at all times, hold at least fifty one per cent of the equity capital of
the depository and the balance of the equity capital of the depository shall be held by
its participants;
e) No participant shall at any time, hold more than five per cent of the equity capital of
the depository;
f) If any information previously submitted by the depository or the sponsor to the Board
is found to be false or misleading in any material particular, or if there is any change
in such information, the depository shall forthwith inform the Board in writing;
g) The depository shall redress the grievances of the participants and the beneficial
owners within thirty days of the date of receipt of any complaint from a
 11

Participant or a beneficial owner and keep the Board informed about the number and the
nature of redressals:
h) The depository shall make an application for commencement of business under
regulation14 within one year from the date of grant of certificate of registration under
this regulation; and
i) The depository shall amend its bye-laws as directed by SEBI.

Certificate of Commencement of Business

The Board shall take into account for considering grant of certificate of
commencement of business, the following points, namely, whether
a) The depository has a net worth of not less than rupees one hundred crore;
b) The bye-laws of the depository have been approved by the Board;
c) The automatic data processing systems of the depository have been protected
against unauthorized access, alteration, destruction, disclosure or dissemination
of records and data:
d) the network through which continuous electronic means of communications are
established between the depository, participants, issuers and issuer’s agents is
secure against unauthorized entry or access;
e) The depository has established standard transmission and encryption formats
for electronic communications of data between the depository, participants,
issuers and issuers’ agents;
f) the physical or electronic access to the premises, facilities, automatic data
processing systems, data storage sites and facilities including back up sites and
facilities and to the electronic data communication network connecting the
depository, participants, issuers and issuer’s agents is controlled, monitored and
recorded;
g) the depository has a detailed operations manual explaining all aspects of its
functioning including the interface and method of transmission of information
between the depository,-issuers, issuers’ agents, participants and beneficial
owners;
h) the depository has established adequate procedures and facilities to ensure that its
records are protected against loss or destruction and arrangements have been made for
maintaining back up facilities at a location different from that of the depository;
i) the depository has made adequate arrangements including insurance
for indemnifying the beneficial owners for any loss that may be caused to such
beneficial owners by the wrongful act, negligence or default of the depository or
its participants or of any employee of the depository or participant; and
j) The grant of certificate of commencement of business is in the interest of investors in
the securities market.
The Board shall, before granting a certificate of commencement of business makes a
Depository
 12

Physical verification of the infrastructure facilities and systems established by the

Depository.
Record of Services by Depository Participant (DP)
i) Types of records
Every participant shall maintain the following records and documents, namely:
a) Records of all the transactions entered into with a depository and with a
beneficial owner;
b) Details of securities dematerialised, rematerialized on behalf of beneficial
owners with whom it has entered into an agreement;
c) Records of instructions received from beneficial owners and statements of
account provided to beneficial owners; and
d) Records of approval, notice, entry and cancellation of pledge
or hypothecation, as the case may be.
Every participant shall make available for the inspection of the depository in
which it is a participant all records referred above. Every participant shall allow
persons authorized by the depository in which it is a participant to enter its
premises during normal office hours and inspect its records.

Every participant shall intimate the Board the place where the records and documents are
maintained.

The participant shall preserve records and documents for a minimum period of
five years.

ii) Where records are kept electronically by the participant, it shall ensure that the
integrity of the data processing systems is maintained at all times and take all precautions
necessary to ensure that the records are not lost. Destroyed or tampered with and in the
event of loss or destruction, ensure that sufficient back up of records is available at all
times at a different place.

iii) If a participant enters into an agreement with more than one depository, it shall
maintain the specified records separately in respect of each depository

iv) No participant shall assign or delegate its functions as participant to any other person,
without the prior approval of the depository.

Agreement by Issuer

Every issuer whose securities have been declared as eligible to be held in dematerialized
form in a depository shall enter into an agreement with the depository.
 13

Records to be maintained by Depository

Every depository shall maintain the following records and documents, namely:
a) Records of securities dematerialized and rematerialized;
b) The names of the transferor, transferee, and the dates of transfer of securities;
c) A register and an index of beneficial owners;
d) Records of instructions received from and sent to participants, Issuers, issuers‟
agents and beneficial owners;
e) Records of approval, notice, entry and cancellation or pledge or hypothecation, as
the case may be;
f) Details of participants;

Chapter 2 – Review of Literature

REVIEW OF LITERATURE
T. Koshy, 1997, “Depository in the Debt Market: The Unfinished Agenda”

Though the Indian capital market is over 100 years old, it continues mainly as a market
forequity related products. Debt is more or less financed through banks and
financialinstitutions, although in the recent past, financial markets are playing an
increasinglysignificant role. Even the Government securities market essentially consists
of primary issuesand inter-institutional trades.However, due to a variety of institutional
and regulatoryreasons, the Indian debt market has not been able to achieve even a
fraction of its truepotential.Although an exemption in stamp duty may appear to be
against the interests of State Governments – owing to a loss in revenue –the resultant increase
in liquidity will go along way in improving their fund raising efforts as also of their state
financial institutions andmunicipalities for infrastructure projects. The National Securities
Depository Limited(NSDL) has already taken up this matter with the State Governments.
NSDL has requestedfor a revenue- neutral policy change which will imply the levying of
a one-time charge at thetime of issue and eliminating duty at the time of transfer.This
research paper explaindifferent advantages whichdebt market participants will enjoy if
they join the NSDL

LC Gupta, Naveen Jain, 2003, “Indian Securities Depository system, what has Gone
Wrong?”
 14

Unknowingly and unintentionally‟ the share depository system is adversely affecting

million of small investors and hurting the equity market’s growth by causing such
investors to gradually withdraw from the market. This paper attempts to explain how this
has come about and what corrective action is needed

TrinathTadakamalla, 2004, "Dematerialized Securities"

Dematerialized securities are securities that are not on paper and a certificate to that
effect does not exist. They exist in the form of entries in the book of depositories.
Essentially, unlike the traditional method of possessing a share certificate to the effect of
ownership of shares, in the demat system, the shares are held in a dematerialized form.
This system works through a depository who is registered with the Securities and
Exchange Board of India (SEBI) to perform the functions of a depository as regulated by
SEBI. Under Section 68 B of the Companies Act, inserted by the Companies
(Amendment) Act, 2000, it is mandated that every initial public offer made by a listed
company in the excess of Rs 10 Crores has to be issued in dematerialized form by
complying with the requisite provisions of the Depositories Act, 1996. This article
explains Dematerialized securities and Dematerialization process.

Iti Jain & Sudhanshu Roy, 2004, “Dematerialization of Securities”

This paper is mainly a study of the dematerialization‟ process in the Indian capital
market, which was introduced through the aforesaid enactment. The paper is divided into
five parts. First part introduces the depository system in India and also looks at the need
and objectives of the depository system in India. Second part introduces the process of
dematerialization looking at the players involved in dematerialization. Third part further
dissects the demat process and looks at the procedure involved in dematerialization of
securities. Second last part looks at the pros and cons of dematerialization while the last
part finally concludes the paper evaluating the success and failure of the
dematerialization in the Indian capital market.

Dr. M. T. Raju, Dr. Prabhakar R. Patil, 2005,“Dematerialisation of Equity Shares

inIndia: Liquidity, Returns and Volatility”

Dematerialization of shares is an important milestone in the annals of Indian Capital

Markets. Understanding and measuring the impact of it on various segments is necessary
since its tired the microstructure of Indian capital markets in general and stock exchanges
inparticular. Demand and Supply forces determine prices of a product. Liquidity plays
animportant role in the interplay of demand and supply forces. The impact of
 15

dematerialization on liquidity in the Indian stock exchanges is quantified and analyzed.

Quality of shareschanged for better owing to dematerialization and thus investors are
expected to earn higherreturns as a natural step, albeit, for some time only. Changes in
quality of shares are expectedto cause changes in demand and supply for shares, which in
turn, influences the levels inshare prices (volatility). All these three issues are studied in
the present paper. Liquidity andreturns improved substantially in the post-demat period
while volatility was very much belowthe daily changes permitted.

Prof. G. Vasudha, 2006, “Dematerialization: An Introduction”

Dematerialization is the process of converting the physical form of shares into electronic
form. Prior to dematerialization the Indian stock markets have faced several problems
like delay in the transfer of certificates, forgery of certificates etc. Dematerialization
helps to overcome these problems as well as reduces the transaction time as compared to
the physical segment. The article discusses the procedures, advantages and problems of
dematerialization. The Indian Stock markets have seen a major change with the
introduction of depository system and scrip less trading mechanism. There were various
problems like inordinate delays in the transfer of share certificates, delay in receipt
of securities and inadequate infrastructure in banking and postal segments to handle a
large volume of application and storage of share certificates .To overcome these
problems physical dealing in securities should be eliminated .The Indian stock market
introduced the system of dematerialization recognizing the need for scrip less trading.

NarendraJadhav, 2007,Development of Securities Market– The Indian Experience”

Well-developed securities markets are the backbone of any financial system. Apart from
providing the medium for channelizing funds for investment purposes, they aid in pricing
of assets and serve as a barometer of the financial health of the economy. The Indian
securities markets have witnessed reforms in the post-liberalization era in terms of market
design, technological developments, settlement practices and introduction of new
instruments. The markets have achieved tremendous stability and as a result, have
attracted huge investments by foreign investors. There still is tremendous scope for
improvement in both the equity market and the government securities market. However,
it is the corporate debt market, which needs to be given particular emphasis given its
importance for providing long-term finance for development.

Nidheesh K B , 2008,“Demat Processing in India”

A new phase in the Indian stock markets began in the 1970s, with the introduction of
Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the
multinational companies, which created a surge in retail investing. The early
 16

1980s witnessed another surge in stock markets when major companies such as Reliance
accessed equity markets for resource mobilization that evinced huge interest from retail
investors. A new set of economic and financial sector reforms that began in the early
1990s gave further impetus ream line the processes and systems including setting up an
efficient market infrastructure to enable Indian finance to grow further and mature. The
importance of an efficient micro market infrastructure came into focus following the
incidence of market abuses in securities and banking markets in 1991 and 2001 that led to
extensive investigations by two respective Joint Parliamentary Committees. The
Securities and Exchange Board of India (SEBI), which was set up in 1988 as an
administrative arrangement, was given statutory powers with the enactment of the SEBI
Act, 1992.

Objectives of the study is To study and analyses the process of Dematerialization and
Investors opinion towards Demat Processing., To know and explain procedure for
opening of Demat account and process of dematerialization of securities to eliminate
the problem related with physical holdings of securities., To explain the advantages of
Dematerialization of securities, convince and make them to dematerialize their
securities., To know the problem faced by the investor and reason for physical holdings
of securities without dematerialization of securities., To give awareness among the
investors about Demat and to make them to open Demat Account.

Dr. KiritSomaiya, 2008, “Story of Demat Scams”

21st Century India is moving in the direction of becoming a Developed

Country. Importance on the growth, Government investment in infrastructure from the
year 2000 has changed the picture of Indian economy. Rs 1,00,000crore Government spending on
the core and infrastructure industries during 2001-03, has created a boom in the Indian
Economy. Indianindustries have gained self-confidence to compete with the world. The
boom in the economyresulted in the boom in finance industry and that of Capital
Market. It is unique in India thateverybull run in the Capital Market has got
supplemented by a scam. Harshad Mehta Scam – 1992, the scam of CRB-NBFC, the
plantation companies and the Ketan Parekh Scam.Itisthe sad part of the Indian Capital
Market that every IPO boom has a scam. It was during1986-88, the primary market
momentum had a mini-scam of mini-steel plants and mini-cement plant public issues.
These companies tapped the market, fooled the Small Investors,collected hundreds of
crores of Rupees, diverted the funds. Small Investor was the loser.Thispaper is mainly a
study of the difrent Demat Scams that take place in India 2006.

NISM ,2010“Workbook for NISM -Series-VI: Depository Operations Certification

Examination”
 17

This workbook has been developed by the certification team of NISM. This workbook
developed by NISM in cooperation with the Examination Committee for Depository
Operations Examination consisting of representatives from National Securities
Depository Limited (NSDL) and Central Depository Services Limited (CDSL). This
workbook has been developed to assist candidates in preparing for the National Institute
of Securities Markets(NISM) Certification Examination for Depository Operations. It
provides basic information about indian capital market, working and functions of
depository.

Central Depository Services (India) Limited, 2010, “Inspection Manual”

CDSL has formulated bye laws, operating instructions and also it comes out
withamendments regularly through communiqués. It is very crucial for depository to
ascertainwhether the RTA so registered carries on the operations in the overall interest of
the capitalmarket and the investors. To achieve this objective, CDSL conducts regular
Inspection of itsDPs and RTAs through their own staff and independent firms
of professionals.The underlying focus of these inspections is to improve the operations of
the RTA, to verifywhether RTA are aware of and adhere to the Act, Rules, Regulations,
various communiquésissued by CDSL and to ensure better and efficient record keeping
by them so that betterservices are provided to the investor.

Prof. Sultan Singh &Sakshi Goyal,2011, “Analysis of Factors Affecting the Decision
Making of the Investors in Depository System”

The present study is an attempt to study the factors affecting the decision making of
theinvestors in depository system. The primary data are collected with the help of pre-
testedstructured questionnaire on five point Likert scale from 294 respondents (investors)
of different age, gender, education, occupation, income from the cities like
Gurgoan,Chandigarh and New Delhi, selected on the basis of convenience sampling. The
datacollected have been analysed with the help of various descriptive statistics like
frequency andpresent and the results are tested by the use of ANOVA technique. Most of
the investors areof the view that shorter settlement period, safety of securities with the
depositories, attitude of the staff available with the DPs, timely services provided by the
DPs to the investors,reduction in transaction cost, repatriation of sales proceeds of
shares/debentures by NRIs aresome of the factors which affects the decision making of
the investors in depository system Opening demat account with DPs is easy but they
charge for providing this service.Converting the securities into electronic from and
selling the securities on behalf of theminors are difficult in the system. But they are of the
view that T+3 and ruling settlement isthe result of the depository system. The education
of the investors plays an important role indecision making where the difference in the
 18

opinions of the investors is found significant inmost of the cases, followed by other
factors such as occupation, age, etc.

NSDL, 2011 “Handbook for NSDL Depository Operations Module” (published by

NSDL),

This handbook has been divided into four volumes for readers' convenience. The
firstvolumegives an overview of the Indian capital market and NSDL depository
system.Thesecond volume deals with admission procedure for different business partners
of NSDL, theirobligations, practices, systems and procedures to be followed by them
and benefits and safetyof depository system. The third volume helps in acquiring a
working level understanding of certain basic services offered by NSDL like account
opening, dematerialisation, and transferof securities and related operations. The last
volume deals with special services offered byNSDL like Pledge, Stock Lending and
Borrowings, Corporate Actions, National SavingsCertificates / KisanVikasPatra
(NSC/KVP) in demat form, Warehouse Receipts, MarketParticipants and Investor
Database (MAPIN) and Tax Information Network (TIN).

The procedures explained in the handbook are based on the Depositories Act, Securities
andExchange Board of India (Depositories & Participants) Regulations and Byelaws
& BusinessRules of NSDL. The book contains illustrations, flow charts and checklists
for betterUnderstanding of various concepts and procedures. A sample test paper is given
at the end of the fourth volume to help the candidates appearing for NCFM test form an
assessment of their preparedness. A thorough understanding of this handbook will form a
good base forqualifying the certification test.Readers may like to visit NSDL website
www.nsdl.co.in for updates and to know the newprocedures introduced or changes
brought about in the existing procedures. A feedback formis given at the end of the fourth
volume. Readers may give their feedback, which will be of great help in enhancing the
value of this Handbook in its subsequent editions.

Atin Kumar Das on April 9, 2011, “Law relating to Depositories with Special
Referenceto India: An Analytical Study”

This article explains different laws that regulate working of depositories in India.
Articleexplains the Depositories Act-1996, SEBI (Depositories and Participants)
Regulations- 1996,Companies Act- 1956, Securities and Exchange Board of India Act-
1992 ,Prevention of Money Laundering Act-2002. Apart from the above-mentioned Acts
and Regulations it alsoexplains Bye Laws of the depository, Operating Instructions of the
depository

Chapter 3
 19

Research Methodology

RESEARCH METHODOLOGY

Research Methodology refers to search of knowledge. One can also define

researchmethodology as a scientific and systematic search for required information on a
specifictopic. In Research Methodology we study the various steps that are generally
adopted by aresearcher in his research problem along with the logic behind them..In a
research various methods are used. The selection of method depends on the nature
of problem selected and kind of data necessary for the solution.

OBJECTIVES OF THE STUDY

 To study the working system of depository in India

 To study the conceptual knowledge system of depository in India
 To provide information about the types of accounts that can be opened
in depository.
 To know about the investors views regarding NSDL‟s services in India

Research Design Used In the Project:-

The research design used in this research is ‘exploratory research’.

Exploratory research: is one type of research design, which has as its primary objective
theprovision of insights into and comprehension of the problem situation confronting
theresearch.Exploratory research was performed to gain detailed knowledge and
understanding of thefunctioning of depository in the country by using both primary
and secondary data.

Source of Data:-

 PRIMARY SOURCE OF DATA:-the primary data is in the form of

uestionnaire which his used to gather investor’s views about depository system’s
services in India. The sampling method used was basically convenience sampling

Sample size:-The study is based on sample size of 60 people who have de-mat account
inNSDL.
 20

 SECONDARY SOURCE OF DATA: For this project secondary data is also

used.Secondary data is the data compiled by someone other than the user. It
includes publisheddata in the form of documents, research papers, web pages and
other organisationalrecords.

It is recommended to use secondary data in order to avoid duplicating of effort, running

upunnecessary costs, and tiring of informants.

Types of secondary data used-

In this project the secondary data used was of the following types
1. Internal secondary data:-the data which is available within the organisation – was
obtained from the website of Ludhiana Stock Exchange ‘www.lse.org’.
2. External secondary data is the data which is obtained from sources external to
theorganisation as commercial publications, government publications,
professionalorganisations, trade associations professional marketing
research agencies etc.
All secondary data used in this project was in the electronic form, and was obtained from
the internet.

Computerised databases used in this project

1. Bibliographical data base is the one which is obtained from journals, government
publications, magazines, newspapers etc. Such online publications were accessed
to obtain definitions of terms used in this article.
2. Full text database was obtained from the websites of NSDL and CDSL to get the
details of working of depository.

Chapter 4

Working of Depository System

DEPOSITORY SYSTEM

Depository system essentially aims at eliminating the voluminous and cumbersome paper
work involved in the scrip- based system and offers scope for „paperless‟ trading through
 21

state-of-the-art technology. It is an institution which maintains an electronic record

of ownership or securities. The storage and handling of certificates is hence immediately
eliminated which generates a reduction in costs like back office cost for handling,
transporting and storing certificates. Depositary participant is an institution akin to bank
for securities. When an investor hands over securities to a depository participant,
investor‟s account is credited. The investor‟s depository system account will show their
holdings. His account is updated for histransactions of sale and purchase but without
physical movement of scripts or transfer deeds.In depository system, share certificates
belonging to the investors are dematerialised (demats). Dematerialisation or “Demat” is a
process whereby investors‟ securities like shares, debentures etc., are converted into
electronic data and stored in computers by a Depository. Securities registered in
investor‟s name are surrendered to depository participant (DP) andthese are sent to the
respective companies who will cancel them after “Dematerialization”and credit
investor‟s depository account with the DP. The securities on Dematerializationappear as
balances in one‟s depository account. These balances are transferable like physical
shares. If at a later date, investors wish to have these “demat” securities converted back
into paper certificates, the Depository does this and their names are entered in the records
of depository as beneficial owners. The beneficial ownership will be with investor but legal
ownership will be with the depository. Consequently, benefits like interest, dividend,
andrights: bonus and voting rights will be with investors. Since depository is to get
securitiestransferred in its name, the depository name will be registered in the ownership
registermaintained by the company. Thus, instead of name of several owners, the name of
depositoryfigures in the register of company.Since transfer will be affected only in
depository, register of company need not be updated on every transactions of sale or
purchase of company’s share. It alleviates the hardships currently faced by the investors
and it also offers option for converting the shares from electronic to physical or paper
form through a process of rematerialisation (remat). Depository system is, indeed, time tested
and long prevalent in many advance countries andhas been playing a significant role in
stock markets around the world.

Constituents of Depository System:-

The depository system comprises of:-

i) Depository
ii) Depository Participants (DPs)
iii) Companies/issuer
iv) Investors

i. Depository: Depository functions like a securities bank, where the dematerialized

physical securities aretraded and held in custody. This facilitates faster risk free and
 22

low cost settlement. Depositoryis much like a bank and performs many activities that
are similar to a bank depository:

a) Enables surrender and withdrawal of securities to and from the depository through
the process of „demat‟ and „remat‟,
b) maintains investors‟ holdings in electronic form,
c) Effects settlement of securities traded in depository mode on the stock exchanges,
d) carries out settlement of trades not done on the stock exchanges (off market
trades).

In India a depository has to be promoted as a corporate body under Companies Act, 1956.
Itis also to be registered as a depository with SEBI. It starts operations after obtaining
acertificate of commencement of business from SEBI. It has to develop automatic
data processing systems to protect against unauthorised access. A network to link up with
depository participants, issuers and issuer‟s agent has to be Created.

Depository, operating in India, shall have a net worth of rupees one hundred crore
andinstruments for which depository mode is open need not be a security as defined
intheSecurities Contract (Regulations) Act 1956. The depository, holding securities,
shallmaintainownership records in the name of each participant. Despite the fact
that legal ownership iswith depository, it does not have any voting right against the
securities held by it. Rights areintact with investors.

There are two depositories in India at present i.e.

1. NSDL: National Securities Depository limited
2. CDSL:Central Depository Services (India) Limited

ii. Depository Participants (DP): A DP is investors‟ representative in the depository

system and as per the SEBI guidelines,financial institutions/banks/custodians/stock
brokers etc. can become DPs provided they meetthe necessary requirements
prescribed by SEBI. DP is also an agent of depository whichfunctions as a link
between the depository and the beneficial owner of the securities. DP hasto get itself
registered as such under the SEBI Act. The relationship between the depositoryand
the DP will be of a principal and agent and their relation will be governed by the bye-
laws of the depository and the agreement between them. Application for registration
as DP istobe submitted to a depository with which it wants to be associated. The
registration grantedis valid for five years and can be renewed. As depository holding
the securities shall maintainownership records in the name of each DP, DP in return
as an agent of depository,Shall maintain ownership records of every beneficial
owner (investor) in book entry form.A DP is the first point of contact with the
 23

investor and serves as a link between the investorand the company through depository
in dematerialisation of shares and other electronictransactions. A company is not
allowed to entertain a demat request from investors directlyand investors have to
necessarily initiate the process through a DP.

Eligibility criteria for depository participants:

The following entities are eligible for becoming depository participant in accordance
withRegulation 19 of the SEBI (Depositories and Participants) Regulations, 1996.
 A public financial institution as defined in Section 4A of the Companies Act,
1056.
 A bank included in the second schedule of the Reserve Bank of India Act, 1934.
 A foreign bank, operating in India with the approval of Reserve Bank of India.
 A state financial corporation established under the provisions of section 3 of the
State Financial Corporations Act, 1951.
 An institution engaged in providing
 financial services, promoted by any of the four institutions mentioned above.
 A custodian of securities, who has been granted a certificate of registration by
SEBI under Section 12(1A) of the SEBI Act, 1992.
 A clearing corporation or a clearing house of a stock exchange.
 A stockbroker having a minimum net worth of rupees TWO CRORES. The
aggregate value of the portfolio of securities, of the BOs, held in dematerialized
form in a depository throughhim, shall not exceed 100 times of the net worth of
the stockbroker. (Not applicable for DPs who‟s net worth is Rs. ten crores). In
case the stockbroker seeks to act as a participant in more than one depository, he
shall comply with the net worth criteria separately with eachsuch depository.
 A non-banking finance company, having a net worth of not less than rupees fifty
lakhsprovided that such company shall act as a participant only on behalf of itself
and not onbehalf of any other person. Provided further that a non-banking finance
company may act as aparticipant on behalf of any other entity, if it has a net worth
of Rs. fifty crores in addition tothe net worth specified by any other authority.
 A registrar to an issue or share transfer agent who has a minimum net worth
of Rupees ten crores and who has been granted a certificate of registration by
SEBI
Characteristics of depository participant:

1. Acts as an Agent of Depository

2. Directly deal with customer
3. Functions like Securities Bank
4. Account opening
5. Facilitates dematerialization
6. Instant transfer on pay – out
 24

7. Credits to investor in IPO, rights, bonus

8. Settles trades in electronic segment

iii. ISSUER / Companies:-

The issuer is the co. which issues the securities. It maintains a register for recording the
names of the registered owners of securities and the depositories. The issuer sends a list
of shareholders who opt for the depository system. And only those co.’s can issue the
securities which are registered under stock exchanges

iv. BENEFICIAL OWNER/ INVESTOR:

Beneficial owner is a person whose name is recorded as such with a depository. It means
aperson who is engaged in buying and selling of securities issued by the companies and
isregistered his/ her securities with the depository in the form of book entry. And he/ she
has allthe rights and liabilities associated with the securities

Facilities offered by depository system:

1. Dematerialization:-It is a process of conversion of physical share – certificate into

electronic – form. So, when a shareholder uses the dematerialization facility,
company take back the shares, through depository – system and equal numbers of
shares are credited in his account in e-form.
1. Rematerialization:-
Rematerialization is the exact reverse of Dematerialization. Itrefers to the process of
issuing physical securities in place of the securities held electronically in book-entry
form with a depository.

Other Services

a) Pledging Dematerialized Shares: Dematerialized shares could be pledged; in fact, this

is more advantageous as compared to pledging share certificates. After loan is repaid
one can request for a closure of pledge by instructing one‟s DP through a standard
format. The pledgee on receiving the repayment as well as the request for closure of
pledge willinstructhis DP accordingly. Even the locked-in securities can be pledged.
The pledger continues toremain the beneficiary holder of those securities even after
the securities are pledged.
b) Initial Public Offerings: Credits for public offers can be directly received into demata
ccount. In the public issue application form of depository eligible companies, there
will be aprovision to indicate the manner in which securities should be allotted to the
applicant. One is to mention one‟s client account number and the name and
 25

identification number of DP. Allallotment due to investor will be credited into

required account.
c) Receipt of Cash/non cash Benefits: When any corporate event such as rights or bonus
or dividend is announced for a particular security, depository will give the details of
all the clients having electronic holdings in that security as of the record date to the
registrar. The registrar will then calculate the corporate benefits due to all the
shareholders. Thedisbursement of cash benefits such as dividend/ interest will be
done directly by the registrar.In case of non-cash benefits, depository will directly
credit the securities entitlements in thedepository accounts of all those clients who
have opted for electronic allotment based on theinformation provided by the registrar.
d) Stock Lending and Borrowing: Through the depository account securities in thedemat
form can be easily lent/ borrowed. Securities can be lent or borrowed in electronic
form through an approved intermediary, who has opened a special „intermediary‟
account with a DP. Instructions are to be given to DP through a standard format
(which is availablewith DP) to deposit securities with the intermediary. Similarly to
borrow securities from theintermediary, one has to instruct DP through a standard
format (which is available with yourDP).
e) Transmission of Securities: Transmission of securities due to death, lunacy,bankruptc
y, insolvency or by any other lawful means other than transfer is also possible inthe
depository system. In the case of transmission, the claimant will have to fill in
atransmission request form, (which is available with the DP) supported by
valid documents.
f) Freezing Account with DP: If at any time as a security measure one wishes that notra
nsaction should be effected in one’s account, one may advise one‟s DP accordingly.
DP will ensure that account of such investor is totally frozen until further instructions
from him.

Benefits of Depository System:

1. This system will eliminate paper work as the book entry system does not need
physical movement of certificates for transfer process.
2. The risk of bad deliveries, fraud and misplaced, mutilated and lost share certificates
willnot exist.
3. The electronic media will shorten settlement time and hence the investor can save
time andincrease the velocity of security movement.
4. Investors will be able to change portfolio more frequently.
5. The capital market will be more transparent as the trading, clearing and
settlementmechanism have to be highly automated and interlinked with the depository
among them.
 26

6. The market will be highly automated and efficient due to the usage of computing
andtelecommunication technology for the back office activities for all the capital
market players.

i) Appointing DP

Any investor who intends to transact through depository system has to engage
onedepository participant (DP). He can approach a DP of his choice and open an
accountwith him just like one opens an account with a bank. Investor gets an
identificationnumber called Client ID (just as one gets ones bank account number) which
serves as areference point for all his transactions with D.P.Every investor before getting
his holding dematerialised has to enter into an agreementwith the depository through a
participant. This step is necessary whether investor alreadyhas securities or securities are
yet to be issued in a fresh issue. The investor contracts only with that depository which
accepts his security in „depository mode‟ since it is not necessary that all eligible
securities must be in depository mode and with all thedepositories. The decision on
whether or not to hold securities within the depository mode and if in depository mode,
with which depository or participants, would be entirely withthe investor.

ii) Request for ‘Demat’

After any agreement is entered for getting securities dematerialized and his account
isopened, the investor makes an application to depository participants in form called
‘Dematerialization Request Form’ (DRF) to be provided by the DP and hands over his
Share certificates duly cancelled by writing’ surrendered for dematerialization ‘ to them
for demat. The DP will accept certificates registered only in investor’s name.The request
for dematerialization with the depository participants is sent to the depositorythrough
depository network with which DP is connected.Simultaneously DP submits the
securities certificates to the issuer company or it’sRegistrar of transfer.

iii) Approach the Company or Registrar of Transfer

The depository will electronically intimate the issuer or its „Registrar and transfer
agent‟of the dematerialisation request. The issuer or the „Registrar and transfer
 27

Agent‟ has to verify the validity of the security certificates as well as the fact that the
DRF has been made by the person recorded as a member in its Register of Members.
If the issuer or its Registrar is satisfied, it dematerialises the scrip and updates its record.

iv) Confirmation of Demat:-

The Registrar to transfer or the concerned company when satisfied with the case
of demathas to inform the depository of the completion
of dematerialisationauthorisinganelectronic credit for that security in favour of the
investor.

v) Crediting the Client’s Account

DP credits investor‟s account with the number of shares so dematerialised and

thereafterinvestor hold the securities in electronic form. If there is rejection of demat
request thensuch credit is not given. After crediting the account, the client is sending the
necessaryinformation in form of a statement like we get bank statement after bank
transactions.

Demat Account:-

Definition:

Demat account is a safe and convenient means of holding securities just like a
bank account is for funds. Today, practically 99.9% settlement (of shares) takes place on
dematmode only. Thus, it is advisable to have a Beneficiary Owner (BO) account to trade
at theexchanges.

Benefits Of Demat Account

1. A safe and convenient way of holding securities (equity and debt instruments both).
2. Transactions involving physical securities are costlier than those
involvingdematerialised securities (just like the transactions through a bank teller are
costlierthan ATM transactions). Therefore, charges applicable to an investor are
lesser foreach transaction.
3. Securities can be transferred at an instruction immediately.
4. Increased liquidity, as securities can be sold at any time during the trading
hours(between 9:55 AM to 3:30 PM on all working days), and payment can be
received ina very short period of time.
 28

5. No stamp duty charges.

6. Risks like forgery, thefts, bad delivery, delays in transfer etc., associated withphysical
certificates, are eliminated.
7. Pledging of securities in a short period of time.
8. Reduced paper work and transaction cost.
9. Odd-lot shares can also be traded (can be even 1 share).
10. Nomination facility available.
11. Any change in address or bank account details can be electronically intimated to
allcompanies in which investor holds any securities, without having to inform each
of them separately.
12. Securities are transferred by the DP itself, so no need to correspond with thecompanies.
13. Shares arising out of bonus, split, consolidation, merger etc. are automaticallycredited
into the demat account of the investor.
14. Shares allotted in public issues are directly credited into demat account of the
applicants in quick time.

Opening a Demat Account

to start dealing in securities in electronic form, one needs to open a demat account with a
DPof his choice. An investor already having shares in physical form should ensure that
he getsthe account opened in the same set of names as appearing on the share certificate;
otherwise anew account can be opened in any desired pattern by the investor.

Opening a Demat Account Documents to be attached

Getting started
1. Choose a DP
2. Fill up an account opening
formprovided by DP, and sign
anagreement with DP in a
standardformat prescribed by the
depository.
3. DP provides the investor with a
copyof the agreement and schedule
of charges for his future reference.
4. DP opens the account and provides
theinvestor with a unique
accountnumber, also known as
BeneficiaryOwner Identification
Number (BOID).
1. Passport size photograph
2. Proof of residence (POR) - Any one
of Photo Ration Card with DOB /
PhotoDriving License with DOB
/ Passportcopy / Electricity bill /
Telephone bill
3. Proof of identity (POI) - Any one
of Passport copy / Photo Driving
Licensewith DOB / Voters ID Card
/ PAN Card / Photo Ration Card
with DOB
4. PAN card
 29

Note:

1. The agreement required to be signed by the investor details the rights and duties of
theinvestor and DP.
2. DP may revise the charges by giving a 30 days prior notice. SEBI has rationalized
thecost structure for isation by removing account opening charges, transaction
chargesfor credit of securities and custody charges, effective from January 28, 2005.

Re materialisation process

Rematerialisation is a process of converting electronic holdings of investor back

intoshare certificates in paper form. The process of rematerialisation is also carried
outthrough DP and the process has to be completed within a period of 30 days. Thus,once
security is dematerialised it is not necessary that investor is to continue indepository
mode for all times to come. He can switch over to remat whereby he getsback physical
possession of security scripts. The client of DP has to submit a requestforremat. This
request is forwarded for necessary action to depository. Thedepository confirms the
rematerialisation request to the Registrar and TransferAgents. The Registrar updates the
accounts and prints the desired certificate. Thedepository is informed by Registrar and
certificate is sent to the investor. The depository updates its records and communicates to
DP to incorporate necessary changes in the account of the client.

CHAPTER-5

CONCEPTUAL KNOWLEDGE OF DEPOSITORIES‟ IN INDIA

CONCEPTUAL KNOWLEDGE OF DEPOSITORIES‟ IN INDIA

 30

There are two depositories in India at present i.e.

1. NSDL: National Securities Depository limited.
2. CDSL: Central Depository Services (India) Limited.

National Securities Depository Limited

In a span of about nine years, investors have switched over to electronic [demat]
settlementand National Securities Depository Limited (NSDL) stands at the centre of this
change. Inorder to provide quality service to the users of depository, NSDL launched a
certificationprogramme in depository operations in May 1999. This certification is
conducted usingNCFM infrastructure created by NSE and is called "NSDL - Depository
Operations Module".Theprogramme is aimed at certifying whether an individual has
adequate knowledge of depository operations, to be able to service investors. Depository
Participants are required toappoint at least one person who has qualified in the
certification programme at each of theirservicecentres. This handbook is meant to help
the candidates in their preparation for thecertificationprogramme.National Securities
Depository Limited is the first depository to be set-up in India. Itwas incorporated on
December 12, 1995. The Industrial Development Bank of India (IDBI) -the largest
development bank in India, Unit Trust of India (UTI) - the largest Indian mutualfund and
the National Stock Exchange (NSE) - the largest stock exchange in India, sponsoredthe
setting up of NSDL and subscribed to the initial capital. NSDL commenced operations
onNovember 8, 1996.OwnershipNSDL is a public limited company incorporated under the
Companies Act, 1956.NSDL had a paidup equity capital of Rs. 105 crore. The paid up
capital has been reduced toRs. 80 crore since NSDL has bought back its shares of the
face value of Rs. 25 crore in theyear 2000. However, its net worth is above the Rs. 100
crore, as required by SEBIregulations.

The following organisations are shareholders of NSDL as on March 31, 2005.

1. Industrial Development Bank of India
2. Administrator of the Specified Undertaking of the Unit Trust of India – DRF
3. National Stock Exchange
4. State Bank of India
5. Oriental Bank of Commerce
6. Citibank N.A.
7. Standard Chartered Bank
8. HDFC Bank Limited
9. The Hongkong and Shanghai Banking Corporation Limited
10. Deutsche Bank A.G.
11. Dena Bank
 31

12. Canara Bank

Management of NSDL

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

day-today operations are conducted by the Chairman & Managing Director (CMD). To
assist theCMD in his functions, the Board appoints an Executive Committee (EC) of not
more than 15members. The eligibility criteria and period of nomination, etc. are governed
by the Bye-Laws of NSDL in
this regard.

Bye-Laws of NSDL

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

powersconferred under section 26 of the Depositories Act, 1996 and approved by
Securities andExchange Board of India. The Bye-Laws contain fourteen chapters and
pertain to the areaslistedbelow :

1. Short title and commencement

2. Definitions
3. Board of Directors
4. Executive Committee
5. Business Rules
6. Participants
7. Safeguards to protect interest of clients and participants.
8. Securities
9. Accounts/transactions by book entry
10. Reconciliation, accounts and audit
11. Disciplinary action
12. Appeals
13. Conciliation
14. ArbitrationAmendments to NSDL Bye-Laws require the approval of the Board of
Directors of NSDLandSEBI.

Business Rules of NSDL

Amendments to NSDL Business Rules require the approval of NSDL Executive

Committeeandfiling of the same with SEBI at least a day before the effective date for the
amendments.Functions.

NSDL performs the following functions through depository participants:

 32

_ Enables the surrender and withdrawal of securities to and from the

depository(dematerialisation and rematerialisation).
_ Maintains investor holdings in the electronic form.
_ Effects settlement of securities traded on the exchanges.
_ Carries out settlement of trades not done on the stock exchange (off-market trades).
_ Transfer of securities.
_ Pledging/hypothecation of dematerialised securities.
_ Electronic credit in public offerings of companies or corporate actions.
_ Receipt of non-cash corporate benefits like bonus rights, etc. in electronic form.
_ Stock Lending and Borrowing.Services Offered by NSDLNSDL offers a host of
services to the investors through its network of DPs:
_ Maintenance of beneficiary holdings through DPs
_ Dematerialisation_ Off-market Trades
_ Settlement in dematerialised securities
_ Receipt of allotment in the dematerialised form
_ Distribution of corporate benefits
_ Rematerialisation
_ Pledging and hypothecation facilities
_ Freezing/locking of investor's account
_ Stock lending and borrowing facilities

Fee Structure of NSDL

NSDL charges the DPs and not the investors directly. These charges are fixed. TheDPs in
turn, are free to charge their clients, i.e., the investors for their services. Thus, there
isatwotier fee structure.
Inspection, Accounting and Internal Audit
NSDL obtains audited financial reports from all its DPs once every year. NSDL also
carriesout periodic visits to the offices of its constituents - R&T agents, DPs and
clearingcorporations –to review the operating procedures, systems maintenance and
compliance withthe Bye-Laws, Business Rules and SEBI Regulations.Additionally, DPs
are required to submit to NSDL, internal audit reports every quarter.Internal audit has to
be conducted by a chartered accountant or a company secretary inpractice.The Board of
Directors appoints a Disciplinary Action Committee (DAC) to deal with anymatter
relating to DPs clients, Issuers and R&T agents. The DAC is empowered to suspend
orexpel a DP, declare a security as ineligible on the NSDL system, freeze a DP account
andconduct inspection or call for records and issue notices.If a DP is aggrieved by the
action of the DAC, it has the right to appeal to the EC against theaction of the DAC. This
has to be done within 30 days of the action by DAC. The EC has tohear the appeal within
two months from the date of filing the appeal. The EC has the powerto stay the operation
 33

of the orders passed by the DAC. The information on all such actionshas to be furnished
to SEBI.

Settlement of Disputes

All disputes, differences and claims arising out of any dealings on the NSDL, irrespective
of whether NSDL is a party to it or not, have to be settled under the Arbitration and
ConciliationAct 1996.

Technology and Connectivity in NSDL

System View of NSDL Depository System

Account holders (investors) open account with the DPs. The account details, entered in
acomputer system maintained by Depository Participants called DPM, are
electronicallyconveyed to the central system of NSDL called DM. Companies who have
agreed to offerdemat facility to their shareholders use a computer system called DPM
(SHR) to connect tothe NSDL central system. DPM (SHR) may be installed by the
company itself or through itsR&T Agent. This system is used to electronically receive
demat requests, confirm suchrequests or to receive beneficial owner data (Benpos) from
the depository. Stock exchangesreceive pay-in (receiving securities against sales made by
brokers) or to payout (giving securities to brokers against their purchases) using a
computer system connected to NSDLcalled DPM (CC).
 34

All the computer systems installed by DPs (DPM-DP), companies (DPM-SHRs), and
stock exchanges (DPM-CC) are connected to NSDL central system (DM) through V-
SAT (verysmall aperture terminal) or leased lines. These are collectively called Business
PartnerSystems. Any transaction conducted by any computer system in the NSDL
depository systemwhich is targetted to reach any other computer system first gets
recorded in DM and then willreach the target. No two business partners' systems can
communicate to each other withoutpassing through the DM.

Maintenance of Accounts at the Central System

The NSDL central system known as DM maintains accounts of all account holders in
thedepository system. All the transactions entered at any point in the computer system
connectedto it are first effected in the central system and subsequently at these
computers. Thus, thecentral system of NSDL has the records of all details of every
transaction conducted in thedepository system.

Distributed Database
Each of the computer systems connected to NSDL system has its own database relating to
itsclients. This helps in giving prompt and accurate service to the clients. However each
of thedatabases is reconciled with the data at the central system everyday in order to
ensure that thedata in the distributed database tallies with the central database.

Common Software
NSDL develops software required by depository participants, companies, R&T Agents
andclearing corporations for conducting depository operations. Thus, the computer
systems usedby all the entities will have common software given by NSDL. However,
depending on thebusiness potential, branch networks and any other specific features, DPs
may developsoftware of their own for co-ordination, communication and control and
provide service totheir clients. Such exclusive software is called "back office software".
DPM system given byNSDL gives "export and import" facility to take out the transaction
details to be used by back office software and to feed in transaction details generated
from the back office software.

Connectivity
The computer system used by DPs, companies, R&T Agents and stock exchanges may beconnected
to NSDL central system through V-SAT network or leased line network. NSDLuses
NSE's V-SAT network for the connectivity purposes. Thus, V-SATs used by NSEbrokers
can connect to NSDL if the software supplied by NSDL is used. V-SAT usessatellites for
communication purposes. Some business partners may connect using leasedlines
provided by MTNL/ BSNL. V-SAT or leased line connections are called
primaryconnectivity. If primary connectivity fails for any reason, BPs must have the
ability toconnect through other means. Such other means are PSTN lines, ISDN lines,
 35

POPlines(normal telephone lines) through which they can dial in to the NSDL system
and conducttheir transactions.

NSDL Facts & Figures

As on May 31, 2011

Number of certificates eliminated (Approx.) 962.49 crore

Number of companies in which more than 3090
75% shares aredematted
Average number of accounts opened per 3679
day since November1996
Presence of demat account holders in the 82% of all pincodes in thecountry
country

Central Depositary Securities Limited

A Depository facilitates holding of securities in the electronic form and enables

securitiestransactions to be processed by book entry by a Depository Participant
(DP), who as an agentof the depository, offers depository services to investors.
According to SEBI guidelines,financial institutions, banks, custodians, stockbrokers, etc.
are eligible to act as DPs. Theinvestor who is known as beneficial owner (BO) has to
open a demat account through any DPfor dematerialisation of his holdings and
transferring securities. A Depository facilitates holding of securities in the electronic
form and enables securitiestransactions to be processed by book entry by a Depository
Participant (DP), who as an agentof the depository, offers depository services to
investors. According to SEBI guidelines,financial institutions, banks, custodians,
stockbrokers, etc. are eligible to act as DPs. Theinvestor who is known as beneficial
owner (BO) has to open a demat account through any DPfor dematerialisation of
his holdings and transferring securities.

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

CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading
bankssuch as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard
CharteredBank, Union Bank of India and Centurion Bank.
 36

CDSL was set up with the objective of providing convenient, dependable and
securedepository services at affordable cost to all market participants. Some of the
importantmilestones of CDSL system are:

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

1999

1) Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the
operations of CDSL on july 15,1999.
2) Settlement of trades in the demat mode through BOI Shareholding Limited, the
clearinghouse of BSE, started in july 1999.
3) All leading stock exchanges like the National Stock Exchange, Calcutta Stock
Exchange,Delhi stock Exchange, The Stock Exchange, Ahmedabad, etc have
established connectivitywith CDSL.
4) As at the end of Dec 2007, over 5000 issuers have admitted their securities
(equities,bonds, debentures, commercial papers), units of mutual funds, certificate
of deposits etc. intothe CDSL system.

Shareholders of CDSL

CDSL was promoted by Bombay Stock Exchange Limited (BSE) in association with
Bank of India, Bank of Baroda, State Bank of India and HDFC Bank. BSE has been
involved withthis venture right from the inception and has contributed overwhelmingly to
the fruition of the project. The initial capital of the company is Rs.104.50 crores. The list
of shareholderswith effect from 11th December, 2008 is as under.

A professional Board of Directors with vast and varied experience in capital marketsand
banking is at the helm of affairs at CDSL.

Board of Directors

Mr. S S Thakur Chairman

Mr. V V Raut Managing Director and Chief Executive
Officer
Mr. P S Reddy Executive Director
Mr. M. R. Mayya Independent Director
Mr. Madhu Kannan Sponsor Director – Bombay Stock
Exchange Limited

Mr. L. P. Aggarwal Sponsor Director – Bombay Stock

 37

Exchange Limited

Mr. Prakash R. Kacholia Sponsor Director – Bombay Stock

Exchange Limited

Mr. Anjan Barua Sponsor Director - State Bank of India

Mr. A. D. M. Chavali Sponsor Director - Bank of Baroda
Mr. A. R. Kuppuswamy Sponsor Director - Bank of India

Management Team

Mr. V V Raut Managing Director and Chief Executive

Officer
Mr. P S Reddy Executive Director
Mr. Pramod Deshpande Chief Technology Officer
Mr. Cyrus Khambata Sr.Vice President.Business
Development(Currently on deputation to
CDSL VenturesLtd. as CEO with effect
from 7-12-2006)
Mr. Jitendra Chad Vice President.Information Technology
Ms. Nayana Ovalekar Vice President.Audit, Inspection &
Compliance
Mr. Bharat Sheth Vice President.Accounts & Administration
Mr. Sunil Alvares Vice President.Business Development
Mr. Ramkumar K. Vice President.Operations
Mr. Jignesh Gandhi Vice President.New Projects
Mr. Satish Budhakar Vice President.Legal & Company
Secretary

FEE STRUCTURE OF CDSL

CDSL fees structure to its depository participants is as follows:

SR.NO. Details of Charges CDSL

1 Account Opening Charges NIL
2 Account Maintenance NIL for individualsRs.500/-
Charges p.a. to Corporates
 38

3 Transaction
ChargesMarket & Off-
Market
4 Transaction Charges
ClearingMember
Accounts
5 Custody Charges
Rs.6/-**
Flat charge of Rs.500/- per
month on CM accounts for
pay-in and pay-outs
received from CH
NIL

6 Demat Charges NIL

7 Remat Charges Rs.10/- per 100 securities or

part quantity orRs. 10/- per
cert. whichever is higher.
8 Pledge/Hypothecation Pledge acceptance - Rs.12/-
Charges per request.Unpledge
acceptance - Rs.12/- per
request.Pledge Invocation
Acceptance -Nil
9 Internet Facility Rs.20,000/- one time for
'easi' registration
10 Internet Facility Rs.30,000/- one time for
'easiest' registration Rs.1,150/-
p.a.for renewal of digital
signature

Monthly charges for DPs or its branches w.e.f. 1st May, 2006

For Main DPs: Rs.3,000/- per month or the amount of the actual bill for a given
monthwhichever is higher.

For DP-Branches: Rs.2,000/- per month or the amount of the actual bill for a given
monthwhichever is higher.

Fees for Clearing Members

CDSL collects only Rs. 500/ - per month from its DPs for a CM except for CM
InvestorsSecurities Account.
The following tariff structure will be effective from Wednesday, April 01, 2009.
 39

Monthly Transaction bill amount(@Rs.6/-

per transaction)(in Rs.) Rate perDebit Transaction(in Rs.)
4.75
More than Rs.15 lakhs
More than Rs.4 lakhs and upto Rs.15 lakhs 5.00
More than Rs.1 lakh and upto Rs.4 lakhs 5.50
Upto Rs.1 lakh 6.00

Chapter 6
DEPOSITORY ACCOUNT AND ITSTYPES
 40

TYPES OF ACCOUNTS

Type of depository account depends on the operations to be performed. There are three
typesOf demat accounts which can be opened with a depository participant viz.
 41

(a) Beneficiary Account

(b) Clearing Member Account
(c) Intermediary Account.

I. Beneficiary Account:

This is an account opened by investors to hold their securities in dematerialised form with
adepository and to carry out the transactions of sale and purchase of such securities in
book entry form through the depository system. A beneficiary account holder is legally
entitled forall rights and liabilities attached to the securities (i.e. equity shares,
debentures, governmentsecurities, etc.) held in that account. Therefore, the account is
called beneficial owneraccount".

A beneficiary account can be in the name of an individual, corporate, Hindu

UndividedFamily (HUF), minor, bank, financial institution, trust, etc. or the broker
himself for thepurpose of his personal investments in demat form. The account is opened
with a DP.A new sub-type viz. "Margin Ac count" has been added to the Client type‟s
 42

viz.; 'Resident' and 'Body Corporate' under Client Maintenance Module in DPM
Application Software(DPMAS). The new sub-type "Margin Account" is added to enable
Clearing Members (CMs)to open beneficiary accounts to hold securities for client margin
purposes.New sub-types are also added to enable promoters to separately hold securities
issued as"Promoter" of the company.

House account vs. non-house account –

An account opened by a DP for the custody of and transactions in its own investments
isreferred to as a house account, and all other beneficiary accounts are referred to as
non-house account. DPs are required to open house accounts for their own investments
to preventco-mingling of their assets with that of their clients.

Neither the Depositories Act nor the regulations made under the Act lay down
anyspecifications about who can open a beneficiary account. Since all beneficial owners
aredeemed to be members of a company (under section 41(3) of the Companies Act),
only thosewho are eligible to become members of a company under the Companies Act,
can open abeneficiary account with a depository. Thus, all legal entities with the
exception of partnership firms can open an account in the depository system.

Documents for Verification

I. Non-body Corporate Investors: For the purpose of verification, all non-body

corporateinvestors have to submit the following documents, as prescribed by SEBI,
along with thestipulated account opening form.

A beneficiary account must be opened only after obtaining a proof of identity and
address of the applicant. An authorised official of the Participant should verify the
photocopies of any of following documents submitted with their corresponding
originals and put his/her signatureon them with remarks "verified with original"
before proceeding to open the account.

a) Proof of Identity (POI)-

I. Passport
II. Voter ID card
III. Driving license
IV. PAN card with photograph
V. MAPIN card (SEBI vide its Circular No. MRD/DoP/Cir-08/2007 dated June
25, 2007 hascommunicated its decision to discontinue with the requirement
 43

of UniqueIdentification Number (UIN) under the SEBI (Central Database of

Market Participants)Regulations 2005 (MAPIN regulations)/circulars.
VI. Identity card/document with applicant's Photo, issued by
a. Central/State Government and its Departments,
b. Statutory/Regulatory Authorities,
c. Public Sector Undertakings,
d. Scheduled Commercial Banks,
e. Public Financial Institutions,
f. Colleges affiliated to Universities (this can be treated as valid only till the time
the applicant is a student),
g. Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to
theirMembers; and
h. Credit cards/Debit cards issued by Banks.

b) Proof of address (POA)-

I. Ration card
II. Passport
III. Voter ID card
IV. Driving license
V. Bank passbook

Bank passbook is one of the Proof of Address (POA) being submitted by applicant(s)To
the DP at the time of opening depository account. In this regard, procedure is as Follows,

(i) Computer generated original bank statement:

DPs may accept the computer generated original bank statement as POA if Neither
obtainingthe copy of bank passbook nor attestation (stamp and signature) Of the
authorised official of the bank on the original bank statement is feasible. Provided such
original bank statement isprinted on the stationery of the bank Carries logo & name of
the bank, displays the name,address and bank Transactions/holdings of the Client for
the latest quarter ending.

(ii) Computer generated bank statement on plain paper:

DPs may accept the computer generated bank statement which is printed on a Plain paper
asPOA provided it clearly mentions the name, address and bank Transactions/holdings of
theClient for the latest quarter ending. Provided such A bank statement is duly attested
(signedand stamped) by the authorised official Of the bank mentioning the name and
designation of such authorised official. In both the aforesaid circumstances, DPs are
advised as follows:
 44

a) Obtain a cancelled cheque in original and signature of the applicant(s) (allThe holders
in case of joint holdings) on the bank statement.

b) The bank statement should be of the latest quarter ending e.g. depositoryAccounts
opened in the month of April, May and June should be supportedBy the bank statement
of the quarter ending March 31.

Capturing of landmark details

Clients prefer to write landmark details viz., name of the

building/mall/junction/ School/garden/hotel/bank/railway station/company name/bus
depot etc. with the Precedingwords such as 'nearby', 'adjacent to', 'behind', 'next to',
'opposite to' “Off' etc. in the accountopening form as it facilitates for easy location of
their Addresses and prompt delivery of various communications to be received by The
Clients. In this context, procedure is asfollows,

A. At the time of opening demat accounts:

DPs should ensure compliance with the various guidelines/circulars issued By NSDL
onaccount opening and after satisfying itself, may capture the Address including
landmark details in the DPM System as provided by the Clients in the account opening
forms.

B. Change in landmark details:

In case of change (addition/deletion/modification) in the landmark details Already
capturedin the DPM system at the time of opening demat accounts, DPs may limit the
changes to thelandmark details after obtaining a request From the Clients on a plain
paper, which is signedby all the holder(s) (in Case of joint holdings). DPs are advised to
note that the primaryaddress Captured in the DPM system as mentioned in the proof of
address, at the Time of opening demat accounts should remain intact, limiting
the changes To the landmark details.
VI. Verified copies of

a) Electricity bills (not more than two months old),

b) Telephone bills (not more than two months old) pertaining to only Landline
telephones(other than Fixed Wireless Phone) irrespective of the service provider
can be accepted byDPs as POA. (DP may ascertain the fact that such telephone
number exists in the name of theentity, by making a call or by any other means)
and
c) Leave and License Agreement / Agreement for sale.
VII. Self-declaration by High Court & Supreme Court judges,giving the new address
In respect of their own accounts.
 45

VII. Identity card/document with address, issued by

a) Central/State Government and its Departments,

b) Statutory/Regulatory Authorities,
c) Public Sector Undertakings,
d) Scheduled Commercial Banks,
e) Public Financial Institutions,
f) Colleges affiliated to Universities (this can be treated as valid only till the time
Theapplicant is a student) and
g) Professional Bodies such as ICAI, ICWAI, Bar Council etc., to their Members. In
case of joint holdings, POI and POA documents must be collected in respect of all
Account holders. The aforesaid documents are the minimum requirement for opening
a BO Account. Participants are advised to exercise due diligence while establishing
the identity of the person to ensure the safety and integrity of the depository system.
Participants can apply stricter criteria and accordingly, decide to accept, select
documents out of the list of documents prescribed by SEBI, as proof
of identity/address.

II. For Corporate Investors:For the purpose of verification, all corporate investors have
tosubmit the following documents as prescribed by SEBI along with the stipulated
accountopening form.

(1) Memorandum & Articles of Association (MOA & AOA), Board resolution for
openingdemat account and the list of authorised signatories along with their
specimen signatures andphotographs, etc.
(2) Introduction by an existing account holder or by the applicant's bank.
(3) Proof of address of the corporate, evidenced by the document registered with
Registrar of Companies or acknowledged copy of Income Tax Return or Bank Statement or
Leave andLicense Agreement/Agreement for sale.

An authorised official of the Participant shall verify the proof of address with the
originaldocuments and affix his/her signature on the documents submitted by the Client,
whileexercising such due diligence.

Common Information

The process of opening an account with a depository, nature of such an account, and
variousfactors to be considered for opening a depository account is explained below.
Some detailsare common to all types of accounts. These are:

1. Name of the holder

 46

2. Date of birth (for individual accounts)

3. Occupation
4. Address & phone/fax number
5. Bank details like name of bank, type of account (current/savings), account
number, branchaddress, MICR, etc.
6. PAN number
7. Details of nomination (for individual accounts only)
8. Specimen signatures
9. MAPIN UIN (s)
10. E-mail address
11. Mobile number
12. Address for communication

2. Clearing Member Account:

The entities that are authorised to pay in and receive the pay out from a Clearing
Corporation(CC)/ Clearing House against trades done by them or their clients are known
as clearingmembers (CM). CMs are identified in the system through their CM-BP-ID. All
pay-in andpay-out transactions are carried out through their accounts.

There are two types of clearing members:

1. All members of a stock exchange popularly known as brokers are clearing

members;
2. Custodians who are permitted by the stock exchange to act as a clearing member.

Procedure to Open a Clearing Member Account

The steps undertaken to open the account are same as those of individuals, difference lies
inthe type of form and details to be filled in and documents to be submitted. The only
majordifference is that the clearing member has to first register it with the clearing
corporation andobtain a CCCM- ID. The clearing account is identified by the
combination of CC-CM-IDgiven by the clearing corporation, CM-BP-ID given by the
depository and the Client-IDgiven by the DP.

Before opening a clearing account, the DP should send to the depository the
clearingmember's account opening form. The Depository then allots the CM-BP-ID.
Based on theCM-BP-ID so allotted, the account gets activated. The DP then generates
Client-ID andcommunicates the date of opening the account in DPM system to the
depository.
 47

Details to be filled in the form are:

1. Name of the Clearing Member

2. Company's short name, if any
3. Address of the registered office, telephone number, fax number, e-mail, if any
4. Name and address of the authorised signatories, their designations and telephone
numbers,status code, sub-status code
5. Bank account particulars, bank name and its branch, current account number,
RBIreference number, RBI approval date, PAN/ GIR number
6. Signatures of Authorised signatory (ies)

Details of Introducer - If an existing client has introduced a new client to the DP his
signatureis required on the form. In other cases, the DP may ask for details that it
considersappropriate. A separate enclosure has to be attached to the account opening
form specifyingthe following details:

1. Name and address of the clearing member

2. Name and address of the clearing corporation
3. Clearing Corporation Id (CC-ID)
4. Clearing Member Id (CM-ID)
5. Stock Exchange clearing code
6. SEBI Registration number
7. Trade name
8. Copy of Board Resolution for authorised signatories should also be submitted.

Generally, there will be only one CM account per broker for a stock exchange.

Checklist for a Clearing Member Account

 Ensure that all compulsory fields in the account opening form have been entered.
 Ensure that a copy of the board resolution for authorised signatories has been
enclosed in case of corporates.
 Ensure that required letter from Stock Exchange giving CC-ID is enclosed.
 Ensure CM is informed of standing instruction facility for receipt.
 Ensure CM is informed that in case of delivery to CC instruction, either of the
joint -holderscan sign the instruction.
 48

 If the forms are received at the branch of a DP, ensure that the account opening
form alongwith required references is dispatched to head office in a proper and
timely manner. If required, retain a copy.
 Ensure follow up with head office in case defined deadline in respect of account
opening isnot met.

The clearing account should only be used for clearing and settlement purposes and not for
any other purpose, e.g., holding of securities. All the securities received in a settlement
account should be transferred to respective beneficial accounts as soon as possible, but in
no case later than the time prescribed by the depository/ stock exchange/SEBI in
this regard. The opening of clearing member account constitutes a "standing instruction"
to receive credits from the clearing corporation when there is a pay-out.
Intermediary Account: An intermediary account can be opened by a SEBI
registeredintermediary for the purpose of stock lending and borrowing. The clearing
member accountand the intermediary account are transitory accounts. The securities
in these accounts are heldfor a commercial purpose only.

Client types
There are several client types in the depository system and different codes are allotted
tothem.
These are listed below:
1. Resident
 _ Ordinary
 _ Hindu Undivided Family (HUF)
2. Financial Institutions (FI)
 _ Government-sponsored FI
 _ State Financial Corporation
 _ Others
3. Foreign Institutional Investors (FIIs)
 _ Mauritius-based
 _ Others
4. Non-resident Indian (NRI)
 _ Repatriable
 _ Non-Repatriable
5. Body Corporate
 _ Domestic Company
 _ Overseas Corporate Body (OCB)
 _ Government Company
 _ Central Government
 _ State Government
 49

 _ Co-operative Body
 _ Non-Banking Finance Companies (NBFC)
 _ Non-NBFC
 _ Broker
 _ Foreign Bodies
 _ Group Companies
 _ OCB-NonRepatriable
 _ Foreign Venture Capital
 _ Limited Liability Partnership
 _ Others
6. Clearing Member (CM)
7. Foreign National
8. Mutual Fund
9. Trust
10. Bank

CHAPTER-7
ANALYSIS & INTERPRETATION
 50

ANALYSIS

I used a structured questionnaire for eliciting the required responses relating to

DepositoryServices. Respondents chosen for this research are only those who have a
DEMAT accountwith any depositary participant. 60 respondents were approached for
this purpose, out of which 38 were male and 22 were female respondents. All the
respondents co-operated withthe researcher in filling the questionnaire.

The various responses were classified, and tabulated. A simple statistical analysis was
madeby the researcher. An attempt is made to present the analysis which covers various
aspects of Depository Services that affect a customer‟s opinion related to depository
system‟s services.

Statement No. 1 - Duration of holding and trading in securities (in years)?

The purpose of this question is to determine how long the investor has been investing
insecurities.

Table-1
(Shows the frequency and the percentage of respondents holding and trading
in securities).

Male investors Female investors

Time (In years) Frequency Percentage Frequency Percentage
Below 5 years 17 45 19 86
 51

5-10 years 15 39 3 14
10-15 years 5 13 0 0
Above 15 years 1 3 0 0
Total 38 100 22 100

Graph-1

(Shows the percentage of respondents holding and trading in securities)

90

80

70

60

50 Male Investors

40 Female Investors

30

20

10

0
Below 5 years 5- 10 Years 10- 15 years Above 15 years

Analysis and Interpretation:

from above table and graph it is clear that 45% of males and86% of females are trading in
security market for a period of less than 5 years and no femaleis trading for a period more
than 10 years.

This shows that females have recently developed knowledge, skills and confidence
requiredfor starting trading in stock market as compared to males who were trading in
stock marketfor more than decade.

Statement No.2 - Usual modes of trading used by investor.

The purpose of this statement is to know about the respondent‟s preference regarding
different methods of trading.
 52

Table-2
(Some the frequency and percentage of usual modes of trading used by different
respondent)

Male Female
Modes of Frequency Percentage Frequency Percentage
Tradings
Online Trading 13 34 5 23
Trading 12 32 8 36
through broker
Both 13 34 9 41
Total 38 100 22 100

Graph 2
(Showing percentage of usual modes of trading used by different respondents)

45

40

35

30

25
Male Investors

20 Female Investor

15

10

0
Modes of Tradings Online Trading Trading through
broker
 53

Analysis and Interpretation: from the above table and graph it is clear that the number
of males using online trading mode, trading through brokers and both, is 34%, 32% &
34%respectively. While in case of females, there is no significant difference in the
investors usingonline trading mode, trading through brokers, and both, which is 23%,
36% 41%respectively.

This shows that each mode of trading has its relative advantages and disadvantages.
Nomethod of trading is absolutely perfect. Choice of the method depends on the personal
choiceand convenience of investor.

Statement No.3- Different areas of investment in securities market.

The purpose of this statement is to know about respondent‟s preference regarding

different securities in which he/she wants to invest.

Table-3
(Shows the frequency and percentage of respondet’s prefferd area of investment)

Male Female
Area of Frequency Percentage Frequency Percentage
Investment
Mutual Funds 13 34 6 27
Government 0 0 0 0
Bonds
Equity Shares 25 66 16 73
Total 38 100 22 100
 54

80

70

60

50
Male Investors
40
Female Investors

30

20

10

0
Mutual Funds Government Bonds Equity Shares

Analysis and Interpretation: from above table and graph it is clear that majority of
malesand females investors invest in equity shares (66% in case of males and 73% in
case of females). Hence it is clear that equity shares are most preferred source of
investment ascompared to mutual funds and government bonds.

Statement No.4 - Factors important for a trading company to enhance the loyalty of
itscustomers.

The purpose of this statement is to know about factors, which according to the
respondents,must be present in a depositary participant to enhance their loyalty.

Table-4

(Shows the frequency and percentage of respondent‟s opinion in respect of the most
important factor required by a trading company to enhance the loyalty of the customers)

Male Female
Factors Frequency Percentage Frequency Percentage
 55

Provides 20 53 7 32
maximum
profits
Provides tips 3 8 6 27
from time to
time
No hidden 12 32 3 14
charges
Promptness of 3 8 6 27
service
Total 38 100 22 100

Graph-4

(Shows the percentage of respondents, in whose opinion, out of the given factors, which
isthe most important factor required by a trading company to enhance the loyalty of
itscustomers)

60

50

40

30 Male
Female
20

10

0
Provides Provides tips No Hidden Promptness of
Maximum Profits from time to Charges services
time

Analysis and interpretation: from above table and graph it is clear that 53% of
maleinvestors and 32% of female investors prefer a depositary participant which provides
themaximum profit. This shows that most of the investors consider providing maximum
profitsas the major criteria while selecting a depository participant.
 56

Statement No.5- Time duration in which depository participant contacts its

customers
The purpose of this statement is to know that how frequently a depository participant
contacts its customers.

Table-5
(Shows the frequency and percentage of respondents with respective time durations
in whichdepository participant contacts them)

Male Female
Duration Frequency Percentage Frequency Percentage
Daily 9 24 3 14
Weekly 13 34 13 59
Monthly 13 34 6 27
Yearly 0 0 0 0
Never 3 8 0 0
Total 38 100 22 100

Graph 5
(Shows the percentage of respondents with respective time durations in which depository
participant contacts them)
 57

60

50

40

Male
30
Female

20

10

0
Daily Weekly Monthly Yearly Never

Analysis and interpretation: from above table and graph it is clear that most of
thedepositary participants contact their customers weekly. This shows that depository
system isvery efficient and depository participants contact their customers regularly.

Statement No.6 - Reasonability of service charges of DEMAT a/c

The purpose of this statement is to find out the fraction of the customers that regard
theservice charges of a DEMAT a/c as reasonable.

Table-6
Do you find the DEMAT Frequency Percentage
sevice charges reasonable
Yes 58 96.7
No 2 3.3
Total 60 100

Graph 6
Do respondents find the DEMAT service charges reasonable ?
 58

Sales

YES
NO

Analysis and interpretation: Almost all the respondents (96.7%) find service charges
leviedby the depository participant as reasonable. This shows that service charges levied
are fairand reasonable.

Statement No.7 - Awareness level regarding different functions and services

providedby depository system?

Formulation of problem - objective of asking this group of questions from respondents is

todetermine the different functions and services that an investor should be aware of
whiletrading through the DEMAT account.

The problem may be solved with help of factor analysis.

Factor analysis is a general name denoting a class of procedures primarily used for
datareduction and summarization.

Using factor analysis, I will endeavor to summarize the different variables which are
relatedto the given problem, and to represent them in terms of a few underlying factors.
A sample of 60 respondents was used. The sampling method used was basically
conveniencesampling. The respondents were asked to express their degree of awareness
 59

regarding thefollowing statements, on a 5-point scale. (1=extremely aware, 5= not

aware).

V1. Procedure of Account Opening.

V2. International Security Identification Number (ISDN).
V3. Transaction Statement of DEMAT Account.
V4. Nomination Facility
V5. Rematerialization of DEMAT Securities.
V6. Lending and Borrowing of DEMAT Securities.
V7. Freezing of DEMAT Account.
V8. Knowledge about NSDL or CDSL.
V9. Knowledge about Depositaries Act 1996.

Table-7.1 KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .686
Bartlett's Test of Sphericity Approx. Chi-Square 105.944
df 36
Sig. .000

Test of significant-

a. The value of KMO statistic is =0.686 which is greater than 0.5

b. Chi-square statists is = 105.944 with 36 degree of freedom, hence the null

hypothesisthat the population correlation matrix is an identity matrix, is rejected
and alternate hypothesis (that there is correlation between the variables) is
accepted by Bartlets‟s test of sphericity.

Conclusion: factor analysis can be considered for analyzing the correlation matrix
 60

Correlation Matrix a for v1to v6 variables Table-7.2

VAR0 VAR0 VAR0 VAR0 VAR0 VAR0 VAR0 VAR0 VAR0
0001 0002 0003 0004 0005 0006 0007 0008 0009
VA 1.000 .077 .160 .503 .319 .196 .364 .267 .161
R00
001
VA .077 1.000 .304 .173 .097 .211 .316 .382
R00
002 .134
VA .160 .304 1.000 .159 -.029 .274 -.046 .326 .155
R00
003
C
VA .503 .173 .159 1.000 .333 .512 v .339 .378 .125
o
R00
R
004
R
VA .319 .097 - .333 1.000 .300 .214 .151 .384
E
R00 .029
L
005
A
VA .196 .211 .274 .512 .300 1.000 .169 .222 .231
T
R00
I
006
o
VA .364 .134 -.046 .339 .214 .169 1.000 .173 .088
R00
007
VA .267 .316 .326 .378 .151 .222 .173 1.000 .290
R00
008
VA .161 .382 .155 .125 .384 .231 .088 .290 1.000
R00
009
s VA .279 .111 .000 .006 .067 .002 .020 .109
i R00
g. 001
(i- VA .279 .009 .094 .231 .052 .154 .007 .001
t R00
a 002
 61

i VA .111 .009 .112 .414 .017 .364 .005 .118

l R00
e 003
d) VA .000 .094 .112 .005 .000 .004 .001 .170
(I-
R00
004
VA .006 .231 .414 .005 .010 .050 .126 .001
R00
005
VA .067 .052 .017 .000 .010 .099 .044 .038
R00
006
VA .002 .154 .364 .004 .050 .099 .094 .253
R00
007
VA .020 .007 .005 .001 .126 .044 .094 .012
R00
008
VA .109 .001 .118 .170 .001 .038 .253 .012
R00
009

Inverse of Correlation Matrix for v1to v6 variables Table-7.3

VAR0 VAR0 VAR0 VAR0 VAR0 VAR0 VAR0 VAR0 VAR0

0001 0002 0003 0004 0005 0006 0007 0008 0009
VAR0 1.542 .142 -.239 -.649 -.248 .233 -.339 -.061 -.096
0001
VAR0 .142 1.337 -.278 -.084 .089 -0.50 -.155 -.188 -.435
0002
VAR0 -.239 -.278 1.317 .109 .209 -.340 .214 -.311 -.004
0003
VAR0 -.649 -.084 .109 1.982 -.209 -.772 -.193 -.428 .271
0004
VAR0 -.248 .089 .209 -.209 1.413 -.227 -.069 .042 -.497
0005
VAR0 .233 -.050 -.340 -.772 -.227 1.544 -.048 .104 -.164
0006
VAR0 -.339 -.155 .214 -.193 -.069 -.048 1.249 -.067 .053
0007
 62

VAR0 -.061 -.188 -.311 -.428 .042 .104 -.067 1.395 -.255
0008
VAR0 -.096 -.435 -.004 .271 -.497 -.164 .053 -.255 1.446
0009

Communalities Table-7.4

Initial Extraction
VAR00001 1.000 .579

VAR00002 1.000 .567

VAR00003 1.000 .694

VAR00004 1.000 .720

VAR00005 1.000 .699

VAR00006 1.000 .412

VAR00007 1.000 .446

VAR00008 1.000 .499

VAR00009 1.000 .788

Table-7.5 Total Variance Explained

Component Initial Eigenvalues Extraction Sums of Squared Loadings
Total % of Variance Cumulative Total % of Variance Cumulative
% %
1 2.929 32.541 32.541 2.929 32.541 32.541
2 1.395 15.503 48.044 1.395 15.503 48.044
3 1.080 11.999 60.043 1.080 11.999 60.043
4 .902 10.021 70.064
5 .753 8.367 78.431
 63

6 .636 7.062 85.493

7 .527 5.857 91.350
8 .464 5.155 96.505
9 .315 3.495 100.000

Graph-7.1

Screen plot graph

Determination of number of factors: on the bases of eigenvalue table and screen plot
graphit is clear there are 3 factors whose eigenvalue (variance) are greater than 1.0; hence
3 factorsare selected to find correlation between 9 variables.

Graph-7.2
Component plot graph
 64

Component plot for the 9 variables is shown in the above graph. It gives a rough idea
thathow 9 the variables will be divided among the 3 factors.

Table-7.6 Rotated Component Matrix

Analysis and interpretation:

Naming of the factors:on the basis of my findings, the three factors are named as

Factor - 1.- Basic functions and services.

 65

Factor - 2.- Transactions and knowledge related functions.

Factor - 3. -Other services.

The variables are divided into 3 factors as follows:

Table-7.7 Factors influencing different functions and services that an investor

should be aware of while trading through the DEMAT account

Statement No.8.-Personal details: (Table-8)

 66

Analysis and Interpretation:

from demographic profile it is clear that 63% of there spondents are male and 20%
respondents are female. Most of the respondents are postgraduate (66.7%) and most of
them are between age group of 18-30, that is 78.3%. Hence it shows that most of the
respondents are educated and are young.

CHAPTER-8
 67

FINDINGS AND SUGGESTIONS

Findings:
On the basis of data analysis following are the findings of the research-
1. Most of the respondents (60%) are trading for less than five less than five years.
2. Most of the DEMAT a/c holders use both the modes of trading (i.e.- online
trading and trading through broker).
3. Most of the investors (68%) invest in equity shares.
4. 45% of respondents affirm that they will choose a depositary participant which
provides them maximum profits.
5. Most of the depository participants contact their customers weekly.
6. Almost all the respondents (96%) are satisfied with the service charges.
7. Most of the respondents are aware of the basic functions of DEMAT A/c (like
procedure of account opening, transaction statement of DEMAT Account,
nomination facility, Re-materialization of DEMAT Securities etc.) but most of
them do not have any knowledge about NSDL, CDSL and Depositaries Act 1996.
8. There are more number of male respondents (63.3%) as compare to female
respondents (36.6%)
9. The educational statuses of most of the respondents who hold a DEMAT a/c are
postgraduate (63%).
10. Most of respondents are between age group of 18-30, that is 78.3%.

Suggestion:
1.Since dematerialization has a great bearing on the creation and protection of wealth and
investment earnings of an investor, DPs must increase their efforts in promoting
enhanced services in general, and in those involving security and safety in particular.

2.To encourage the existing and prospective shareholders, all efforts should be made to
ensure good returns, in addition to providing greater security and safety.
 68

3.Since the investors expect better service form depository participants, it should provide
them value-added services.

4. The processing of the DEMAT account opening should be made fast and non-tedious.

5. The DEMAT a/c holder should be given basic information about NSDL, CDSL and
Depositaries Act 1996.

CONCLUSION

On the whole, my project on a study of working of depository system in India was

worthwhile and enlightening, as I got the opportunity to learn a lot about the capital
market. I got to know about the process of dematerialization, account opening and how
the customer perceive regarding services of depository system etc