Title of the Project

Demat System in India

Submitted in partial fulfillment of the requirements for

Post Graduate Diploma in Management

SUBMITTED BY

Name: Puja Awasthi

PGDM Roll No. PG-13-91
Batch: 2013- 2015

IES Management College and Research Centre,

Bandra, Mumbai
 ACKNOELEDGEMENT

“It is not possible to prepare a project report without the assistance &encouragement of
other people. This one is certainly no exception.”

On the very outset of this report, I would like to extend my sincere & heartfelt obligation
towards all the personages who have helped me in this endeavor. Without their active
guidance, help, cooperation & encouragement, I would not have made headway in the
project.

I am extremely thankful and pay my gratitude to my faculty CA Pooja Gupta for her
valuable guidance and support on completion of this project in its presently.

I extend my gratitude to the director DR. Dinesh Harsolekar of our college IES MCRC for
giving me this opportunity.

I will also like to thank MD of Mahanagar Cooperative bank Bhosle Sir, Admin Head
Thube Sir and my industry guide Bharti sir for helping me and guiding me.

At last but not least gratitude goes to all of my friends who directly or indirectly helped me
to complete this project report.

Any omission in this brief acknowledgement does not mean lack of gratitude.

Thanking You
Puja Awasthi
 Bandra, Mumbai
MAY – JUNE 2014

Student’s Declaration

I hereby declare that this report, submitted in partial fulfillment of the requirement for
the award for the PGDM, to IES Management College and Research Centre is my
original work and not used anywhere for award of any degree or diploma or fellowship
or for similar titles or prizes.
I further certify that without any objection or condition subject to the permission of the
company where I did my summer project, I grant the rights to IES Management College
and Research Centre to publish any part of the project if they deem fit in
journals/Magazines and newspapers etc without my permission.
Place : Mumbai
Date :

-------------------------------
Signature
Name : PUJA AWASTHI
Class : PGDM
Roll No. : PG-13-91

3
 Certificate from the company

This is to certify that the dissertation submitted in partial fulfillment for the award of
PGDM of IES Management College and Research Centre is a result of the bonafide
research work carried out by Mr. / Ms. PUJA AWASTHI under my supervision and
guidance. No part of this report has been submitted for award of any other degree, diploma,
fellowship or other similar titles or prizes. The work has also not been published in any
journals/Magazines.

Date: Industry guide

Signature of the Industry Guide: ______________
Name of Industry Guide: ____________________
Company : _______________________
Place: Designation : _______________________

4
 Certificate from the Faculty Guide

This is to certify that the dissertation submitted in partial fulfillment for the award of
PGDM of IES Management College and Research Centre is a result of the bonafide
research work carried out by Mr. / Ms. PUJA AWASTHI under my supervision and
guidance. No part of this report has been submitted for award of any other degree, diploma,
fellowship or other similar titles or prizes. The work has also not been published in any
journals/Magazines.

Date: Faculty guide

Signature of the Faculty Guide: ______________

Name of Faculty Guide: ____________________

Place:
IES Management College and Research Centre

5
 TABLE OF CONTENTS

Executive summary..........................................................................................................1

Objective...........................................................................................................................3

Methodology.....................................................................................................................4

Scope..................................................................................................................................4

Limitations........................................................................................................................4

Background.......................................................................................................................6

Introduction to demat system........................................................................................8

Depository.......................................................................................................................10

Depository system..........................................................................................................12

National securities depository ltd. (nsdl)......................................................................18

Central depository services ltd. (cdsl)..........................................................................23

Depository participant...................................................................................................28

Dematerialization...........................................................................................................31

Rematerialisation...........................................................................................................35

Benefits of demat system...............................................................................................37

Problem and scope of demat system.............................................................................39

Analysis of client prespective........................................................................................45

Data analysis...................................................................................................................48

Suggestions......................................................................................................................60

Conclusion.......................................................................................................................61

Annexure -a.....................................................................................................................63

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 Bibliography...................................................................................................................66

EXECUTIVE SUMMARY

The Indian Financial System has undergone a considerable change in the recent past. The
Financial Sector reforms, along with technological advancement have integrated
international markets, which have facilitated the scope for uninterrupted mobility of funds
in various financial markets. It has also led to efficient and low-cost transactions related to
securities. This can be seen in the Indian financial sector reforms also, which started in the
early 1990s.

Dematerialization of financial securities is the first sign of financial reforms in India.

Finance Ministry and SEBI realized the need of more efficient financial system. As a result
of this NSDL and CDSL came into picture. It aims at ensuring the safety and soundness of
Indian marketplaces by developing settlement solutions that increase efficiency, minimize
risk and reduce costs.

Our project on “Demat System in India” gave us a detailed picture of how securities are
transferred electronically in the share market. In this project I have analyze how this
system works and is useful for different kinds of investors and what are the benefits and
flaws of it for both, the companies and the investors.

It becomes increasingly important for students of management to understand the

developments in the financial infrastructure that facilitates the whole financial system. I
was fortunate enough to get an opportunity to work on this project as it gave me a wide
understanding of the entire demat system in our country.

7
 Chapter 2
SCOPE OF THE
PROJECT

2
TITLE

“DEMAT SYSTEM IN INDIA”

AIM
To know the concepts of the Demat System in India and to know how this system works
and is useful for different kinds of investors and what are the benefits and flaws of it for
both, the companies and the investors.

OBJECTIVE

 To know the concepts of the Demat System in the Indian scenario.

 To find out what are the advantages and disadvantages of such a system.
 To find out what are the preferences of an investors while choosing such a system.
 To analyze how decisions are made by the companies and the investors regarding
the demat system of securities and what authorities govern it.

HYPOTHESIS
The Demat System has revolutionized the Indian securities exchange system and it saves a
lot of time and money of the investors and is a lot more convenient method of exchanging
securities and thus, is a boon to the securities market.

QUESTIONS
 What are the concepts of Demat System?
 What are the advantages and disadvantages of such a system?
 Which are the different authorities that govern such a system?
 What are the different preferences of investors and companies while going for
Demat system and what do they exactly look for while making a decision?

3
METHODOLOGY

 Questionnaire method of data collection was used to get the required information
from the clients
 Information was also collected from the library sources, online database, case
studies and with reviews from the faculty members.

SCOPE

I have tried to briefly cover the concept of Demat System in India and have tried to analyze
the advantages and disadvantages of the system which helps the investors and the
companies to make the decision.

LIMITATIONS

Despite of trying my level best, there will still some limitations, which I think
remains there to draw fruitful conclusion. There will some practical problems, which may
come across and could not be properly death with.

1. Due to the paucity of time and limited resources the respondents would not be
contacted in entirely and the study will conducted on a sample basis and choice of
sample will be at random.
2. Chances of biasness may be there because of the use of convenient and judgment
sampling.
3. Area covered under my study is very small and limited.
4. The research is conducted only within the short span.

4
 Chapter 3
D E M AT SYSTEM IN INDIA

5
 BACKGROUND

Indian capital market has seen unprecedented boom in its activity in the last 15 years in
terms of number of stock exchanges, listed companies, trade volumes, market
intermediaries, investor population, etc. However, this surge in activity has brought with it
numerous problems that threaten the very survival of the capital markets in the long run,
most of which are due to the large volume of paper work involved and paper based trading,
clearing and settlement.

Until the late eighties, the common man kept away from capital market and thus the
quantum of funds mobilized through the market was meager. A major problem, however,
continued to plague the market. The Indian markets were drowned in shares in the form of
paper and hence it was problematic to handle them. Fake and stolen shares, fake signatures
and signature mismatch, duplication and mutilation of shares, transfer problems, etc. The
investors were scared and were under compensated for the risk borne by them. The century
old system of trading and settlement requires handling of huge volumes of paper work.
This has made the investors, both retail and institutional, wary of entering the capital
market. However, lack of modernization become a hindrance to growth and resulted in
creation of cumbersome procedures and paper work.

However, the real growth and change occurred from mid-eighties in the wake of
liberalization initiatives of the Government. The reforms in the financial sector were
envisaged in the banking sector, capital market, securities market regulation, mutual funds,
foreign investments and Government control. These institutions and stock exchanges
experienced that the certificates are the main cause of investors` disputes and arbitration
cases. Since the paper work was not matching the rapid growth so there was a need for a
better system to ensure removal of these impediments. Government of India decided to set
up a fully automated and high technology based model exchange that could offer screen-
based trading and depositories as the ultimate answer to all such reforms and eliminate
various bottlenecks in the capital market, particularly, the clearing and settlement system in

6
stock exchanges. A depository in very simple terms is a pool of pre-verified shares held in
electronic mode which offers settlement of transactions in an efficient and effective way.

7
 INTRODUCTION TO DEMAT SYSTEM

THE WORLD OF ELECTRONIC TRANSFER OF SECURITIES

In this new era of change and transformation, where time zones have disappeared and
distance does not matter anymore, each and every aspect of our life is being governed by
knowledge-driven technology and communication. Even in a developing country like
India, where nearly 33% of the population still lives below the poverty line, we can
observe the transformation of the country from an agricultural and industrial economy, into
knowledge and information-based economy.

India has had a vibrant capital market that is more than a century old, and the Indian
shareholders are very much involved in it, which has largely contributed to its economic
growth and development. Two of the major share markets in India, BSE and NSE, are
widely reflective of the pattern of growth of the Indian economy. We can see that a large
numbers of players are stepping into the share bazaar with an expectation of reaping huge
benefits – some for long-term investment purposes and others for windfall profits. Most of
these new players are tech-savvy and constantly in shortage of time.

In this new technology-driven era, can the share market be left behind?

Modernization in the trading and settlement system has been witnessed in the capital
market through automated trading mechanism of Demat. The advent of Electronic trading
and settlement has brought in transparency in trading and has eliminated risks associated
with Bad Delivery and handling huge load of paperwork. The country has made a
remarkable growth in the capital market by switching over to electronic trading.
Indian investor community has undergone sea changes in the past few years. India now has
a very large investor population and ever increasing volumes of trades. However, this
continuous growth in activities has also increased problems associated with stock trading.
Most of these problems arise due to the intrinsic nature of paper based trading and
settlement, like theft or loss of share certificates. This system requires handling of huge

8
volumes of paper leading to increased costs and inefficiencies. Risk exposure of the
investor also increases due to this trading in paper.

India adopted the Demat System for electronic storing, wherein shares and securities are
represented and maintained electronically, thus eliminating the troubles associated with
paper shares. After the introduction of the depository system by the Depository Act of
1996, the process for sales, purchases and transfers of shares became significantly easier
and most of the risks associated with paper certificates were mitigated.

In this chapter we intend to discuss in detail the basics of a depository system, the
depository participants (DP) and the dematerialization of shares.

9
 DEPOSITORY

Depository means a company formed and registered under the Companies Act, 1956 and
which has been granted a certificate of registration under sub-section (1A) of section 12 of
the Securities & Exchange Board of India Act, 1992. A Depository is an Organization
which holds Securities in Dematerialized Form i.e. by way of Electronic Records and
which enables Securities Transactions to be processed by Book Entry, at the request of the
shareholder. This eliminates the physical form of holding.

A Depository can be compared to a bank, which holds securities, such as shares,

debentures, bonds, Government Securities, units etc., of investors in an electronic form.
Besides holding securities, it also provides services related to transactions in securities.

A Depository interacts with the investors through its agents called Depository Participants
(DPs). If an investor wants to avail the services offered by the Depository, he/she has to
open an account with a DP. This is similar to opening an account with any
Branch of a bank, in order to utilize the bank's services.

The Depository is obligated to maintain the Client Holdings, enable Demat and Remat of
eligible securities, disbursement of corporate benefits, and effect settlement of securities
traded

10
 BENEFITS OF DEPOSITORY TO THE INVESTORS

Main concerns of the Investors, after receiving deliveries of securities is to get the
securities registered in his / her own name. However, in most of the times, investors are
exposed to Risk related to Capital Market and due to various reasons Investors are not able
to register his / her ownership.

We can broadly classify the Investor's Risks as below:

 Default by Seller of Securities relating to Transfer Deeds.

 Default by Seller of Securities relating to Share Certificates.
 Default by Purchaser of Securities to present the Securities along with duly
completed Transfer Deed within stipulated time period.
 Default by Issuer, Registrar to Register Transfer Request.
 Default by Issuer, Registrar to deliver the duly Transferred Share Certificates
To the Transferee.

The above list shows that except for one reason, buyer of the Securities is always at Risk of
losing the ownership of the share purchased, due to seller's default. To provide much
needed protection / relief to the Buyer Investors, Govt. of India had decided to introduce
the Depository System in India.

11
 DEPOSITORY SYSTEM

Your money may be held in the form of liquid cash at your home or may be deposited in a
bank. The bank holds your funds in the electronic form and subsequently debits or credits
the account, depending on your issuance of cheques or deposit of cheques. The advantages
of safety and convenience of dealing with a bank overweigh the reasons for holding liquid
cash in your home. Your financial assets such as Equity Shares may be compared to the
above example. You may hold physical share certificates in your home and be exposed to
the various risks of lack of safety, mutilation, loss etc. Alternatively, you may deposit your
shares in an organization called a Depository, which holds your shares in the electronic
form.

How does depository system works?

Dematerialized securities (‘Demat’ in short) are securities that are not on paper and a
certificate to that effect do 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 (IPO) 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.

12
 COMPARISON OF DEPOSITORY SYSTEM WITH
PHYSICAL SHARE SYSTEM

 The risk of loss, mutilation is common for physical certificates and completely
removed in electronic shares.

 Handling of a large number of physical certificates is ended in the Depository mode.

 In the electronic segment, there are no bad delivers as in physical segment.

 There is no stamp duty payable in electronic shares compared to the duty of 0.50%
in the physical segment while transferring ownership.

 In loans against shares, banks usually charge a lower interest rate and margin money
than in the physical share certificates.

 Settlements in the Stock Exchanges have commenced in the electronic segment and
have proven to be far more efficient and convenient compared to physical shares.

BENEFITS OF DEPOSITORY SYSTEM

1. Elimination of Bad Deliveries.

In the Depository environment, once holdings of an investor are dematerialized, the

question of bad delivery does not arise. Hence after dematerialization, Depository /
Depository Participants cannot hold the Dematerialized Securities “Under Objection ".

As per claims of NSDL, in the physical environment, about 20% of delivered stock
constitutes bad deliveries. Of these, about 1% is ultimately absorbed by the system as bad
delivery cost.

13
Rectification of objection always involves extensive follow up by the investor. This means
that in the physical environment, every fifth person taking delivery of stock gets securities,
the genuineness to which there is a doubt whereas he parts with genuine funds.

2. Elimination of all Risks of Physical Certificates.

Physical Certificates are usually exposed to security risks due to theft of Stocks. The
buyers of the Securities are also exposed to mutilation and / or loss of certificates during
movements through and from the registrars. This requires the investor to incur additional
burden for obtaining Duplicate Certificates including cost of advertisements, etc. This
problem does not arise in the Depository Environment.

3. Special concession from Govt. of India for Stamp Duty.

Section 30 of the Depositories Act, 1996, has made special provision, which exempt the
Transfer of Equity Instruments & Units of Mutual Funds in the Depository from incidence
of Stamp Duty.
In case of Physical mode of Transfer of Equity instruments & Units of Mutual Funds, the
buyers had to shell out for Stamp Duty @ 0.5% of the purchase cost.

4. Immediate Transfer and Registration of Securities.

In the Depository environment, investors (Clients) become Legal Owner of the Securities
once the Securities are credited to the investors account with the Depository Participants
on pay out, here in after the investors becomes the Beneficial Owner of the Depository.

The Depository System has relived the Buyer of the Securities from the exercise of sending
the Securities to the Issuer for getting the securities transferred to his own name as

14
Depository itself is the registered owner of Dematerialized Stocks is empowered to effect
transfer of Ownership.

In the Physical mode of Transfers usually takes around three to four months and is rarely
completed within the statutory framework of two months. The delay in the process might
expose the investor to opportunity cost due to delay in transfer. The Transferee is further
exposed to risk of loss of Securities in transit.

5. Shorter settlement Cycle.

The Depository affects transfers through Book Entry, and usually follows rolling
settlement cycle of T+3. In the T+3 settlements, all trades are settled on the 3rd working
day from the trade day. This enables faster turnover of stock and prompt liquidity to the
investor.

6. Pay-in and Pay-out of Securities / Funds on the same day for Demat trades.

As mentioned above, in the Demat Segments the settlement of trades (both securities and
funds) is on the 3rd working day from the trade day. This enables the Client / Buyer who
makes the payments on the 3rd working day, to receive the securities in his Accounts with
his/her D.P. on the same day in the evening and a Seller / Client who delivers the securities
on the 3rd working day to receive the funds on the same evening.

7. Faster Disbursement of Non Cash Corporate Benefits like Rights, Bonus, etc.

The Beneficial Owner who opts for Demat Credit of Securities for Bonus / Rights, these
non-cash corporate entitlements are credited to Client's A/c with D.P. electronically. This
ensures faster disbursement of entitlements and reduces the risk of loss of certificates in
transit.

15
8. Reduction in Rate of interest on Loans Granted.

Some market friendly Banks / Financial institutions provide loans at confessional rates
against pledge of dematerialized securities. The pledge of dematerialized stock provides
the institution with greater control and opportunity for recovery in case of default by the
loanee. The Dematerialized Stocks further enable the institution hassle free transaction,
while getting securities registered in their (Bank / Institutions) name at the time of book
closure.

9. Reduction in Brokerage by many brokers for Trading in Dematerialize Securities

Some brokers provide concession in Brokerage for Dematerialized Stocks, as dealing in

dematerialized securities reduces Brokers back office work of handling paper and other
incidental risk.

10. Reduction in handling of huge volumes of paper.

This is due to the electronic form of the securities. The dematerialization of securities
would drastically bring a reduction in the paperwork.

11. Elimination of problems related to change of address of investor,

transmission, etc.

In case of change of address or transmission of demat shares, investors are saved from
undergoing the entire change procedure with each company or registrar. Investors have to
only inform their DP with all relevant documents and the required changes are effected in
the database of all the companies, where the investor is a registered holder of securities.

16
12. Periodic status reports.

The investors receive the Statement of Holding and Transaction Statement regularly. This
enables them to have a better control over their operations.

17
 NATIONAL SECURITIES DEPOSITORY LTD. (NSDL)

National Securities Depositories Ltd. (NSDL) was set up as the first depository in
the country having various depository participants registered with it. NSDL was
inaugurated on 8th November 1996. It was set up with an initial capital of Rs.124 crore,
promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI),
National Stock Exchange of India Ltd. (NSEIL) and the State Bank of India (SBI). The
actual trading in dematerialized securities started at National Stock Exchange on 26th
December 1996.

Although India had a vibrant capital market, which is more than a century old, the
paper-based settlement of trades caused substantial problems like bad delivery and delayed
transfer of title till recently. The enactment of Depositories Act in August 1996 paved the
way for establishment of NSDL, the first depository in India. This depository promoted by
institutions of national stature responsible for economic development of the country has
since established a national infrastructure of international standard that handles most of the
trading and settlement in dematerialized form in Indian capital market.

Using innovative and flexible technology systems, NSDL works to support the
investors and brokers in the capital market of the country. NSDL aims at ensuring the
safety and soundness of Indian marketplaces by developing settlement solutions that
increase efficiency, minimize risk and reduce costs. NSDL plays a quiet but central role in
developing products and services that will continue to nurture the growing needs of the
financial services industry.

In the depository system, securities are held in depository accounts, which is more
or less similar to holding funds in bank accounts. Transfer of ownership of securities is
done through simple account transfers. This method does away with all the risks and
hassles normally associated with paperwork. Consequently, the cost of transacting in a
depository environment is considerably lower as compared to transacting in certificates.

18
BASIC SERVICES
Under the provisions of the Depositories Act, NSDL provides various services to investors
and other participants in the capital market like, clearing members, stock exchanges, banks
and issuers of securities. These include basic facilities like account maintenance,
dematerialization, rematerialisation, settlement of trades through market transfers, off
market transfers & inter-depository transfers, distribution of non-cash corporate actions
and nomination/transmission. The Depository System, which links the issuers, depository
participants (DPs), NSDL and Clearing Corporation/ clearing house of stock exchanges,
facilitates holding of securities in dematerialized form and effects transfers by means of
account transfers. This system, which facilitates scrip less trading, offers various direct and
indirect benefits to the market participants.

SPECIAL SERVICES
Depository is a facility for holding securities, which enables securities transactions to be
processed by book entry. In addition to the core services of electronic custody and trade
settlement services, NSDL provides special services like pledge, hypothecation of
securities, automatic delivery of securities to clearing corporations, distribution of cash and
non-cash corporate benefits, stock lending, distribution of securities to allottees in case of
public issues, Internet-based services for clearing members 'SPEED' & Internet based
services for account holders 'SPEED-e'.

NSDL has taken the initiative for providing the facility of enabling brokers to deliver
contract notes to custodian / fund managers electronically through its STEADY facility.
STEADY (Securities Trading - information Easy Access and DeliverY) was launched by
NSDL on November 30, 2002. STEADY is a means of transmitting digitally signed trade
information with encryption across market participants electronically and efficiently,
through Internet.

SECURITY

19
NSDL claims to have undertaken sufficient security measures. These measures are:

 A DP can be operational only after registration by Sebi, which is based on the

recommendation from NSDL and Sebi’s own independent evaluation. Sebi has
prescribed criteria for becoming a DP in the regulations.

 DPs are allowed to affect any debit and credit to an account only on the basis of
valid instruction from the client.

 Every day, there is a system driven mandatory reconciliation between the DP and
NSDL.

 There are periodic inspections into the activities of both DP and R&T agent by
NSDL. This also includes records based on which the debit/ credit are affected.

 The data interchange between NSDL and its business partners is protected by
standard protection measures such as encryption. This is a SEBI requirement.

 There are no direct communication links between two business partners and all
communications between two business partners are routed through NSDL

 All investors have a right to receive their statement of accounts periodically from
the DP.

 Every month NSDL forwards statement of accounts to a random sample of

investors as a counter check.

 In the depository, the depository holds the investor holdings on trust. Therefore, if
the DP goes bankrupt the creditors of the DP will have no access to the holdings in
the name of the clients of the DP. These investors can then either dematerialize
their holdings or transfer them to a different account held with another DP.

 Investor grievance: All grievances of the investors are to be resolved by the

concerned DP. If they fail to do so the investor has the right to approach NSDL.
20
  Insurance Cover: NSDL has taken a comprehensive insurance policy to protect the
interest of the investors in cases of failure of the DP to resolve a genuine loss. The
details of the policy is as under:

 Upper limit per claim: Rs200mn

 Number of claims allowed: unlimited

 Minimum value of the claim: Rs150, 000

 To cover claims valued less than Rs150, 000 NSDL has an investor protection fund
in place.

Besides all these safety measures efforts have been done to make this electronic system
foolproof.

COMPUTER AND COMMUNICATION INFRASTRUCTURE OF NSDL

The systems are accepted by NSDL only after a rigorous testing procedure.

Machine level back up: The IBM mainframe situated at "Trade World" (NSDL office in
Mumbai) in which the data is processed has adequate redundancy built into its
configuration. There is a standby central processing unit (CPU) to which processing can be
switched over to in case of main system CPU failure. The disk has RAID implementation,
which ensures that a single point failure will not lead to loss in data.

System has spare disk configuration where data is automatically copied from the main disk
upon encountering the first failure (due to RAID implementation - first failure does not
result in loss of data).

All network components like router, communication controllers etc, have on-line
redundancy and thus a failure does not result in loss of transaction.

21
Disaster back up site: In addition, a disaster back up site equipped with a computer
identical to the mainframe computer & computing resources has been set up at a remote
location about 175 km away from Mumbai. This site has been tested for operations from
the site.

Back-up in case of power failure: Continuity in power supply to the main systems is
assured by providing for; dual uninterrupted power supply (UPS) for IBM-Mainframe and
related components wherein the two UPSs are connected in tandem. In case of failure of
primary UPS, the secondary UPS takes over instantaneously and thus, there is no
interruption in operation, and back-up diesel generator set.

If an investor loses his statement of holdings, he may inform his DP and obtain a duplicate
statement of holdings. The loss of statement of holding will not affect his actual holdings.

If a DP goes bankrupt, there is no need for an investor to be unduly concerned as enough

provisions are there for the investor to transfer his account from the defunct DP to another
DP or get the securities rematerialized. There cannot be any lien on the account holders’
assets by creditors belonging to the DP or NSDL and therefore the account holders’ assets
are absolutely safe. There is no credit risk in case of a defunct NSDL or its DPs.

Depository account details are confidential. There are strict systems and procedures
established to protect the confidentiality of investor information at the depository to ensure
that these are available to only authorized persons. Even a DP other than your own, cannot
have access to your account.

22
 CENTRAL DEPOSITORY SERVICES LTD. (CDSL)

The second depository, Central Depository Services (India), was promoted by the
Stock Exchange, Mumbai (BSE) jointly with leading banks such as State Bank of India,
Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of
India and Centurion Bank. CDSL got the certificate of commencement on 8th February
1999 and commenced limited operations at Bombay Stock Exchange, of opening accounts
and processing Demat request from 22nd March 1999. The initial capital of the company is
Rs.104.50 crores.

All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange,
Delhi Stock Exchange, the Stock Exchange of Ahmedabad, etc have established
connectivity with CDSL.

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

 CDSL received the certificate of commencement of business from SEBI in

February 1999.
 Honorable Union Finance Minister, Shri Yashwant Sinha flagged off the operations
of CDSL on July 15, 1999.
 Settlement of trades in the Demat mode through BOI Shareholding Limited, the
clearinghouse of BSE, started in July 1999.
 As at the end of July 2003, over 4600 issuers have admitted their securities
(equities, bonds, debentures, and commercial papers), units of mutual funds,
certificate of deposits etc. into the CDSL system.

23
The following are the major benefits of having an account with CDSL.

CONVENIENCE:

Wide DP Network: CDSL has over 200 DPs spread around 114 cities/towns across the
country, offering convenience for an investor to select a DP based on his location.

On-line DP Services: The branches of a DP can also be directly connected to CDSL

thereby providing on-line and efficient depository service to investors

Wide Spectrum of Securities Available for Demat: More than 4600 companies have
admitted their equity into CDSL. Further, CDSL has also admitted an entire gamut of debt
instruments viz. bonds, debentures, commercial paper, government securities, certificate of
deposits, etc. Thus an investor can hold almost all his securities in one account with CDSL.

Competitive Fees Structure: CDSL has kept its tariffs very competitive to provide
affordable depository services to investors. CDSL also does not collect any custody fees or
ISIN fees from its DPs.

Internet Access: A DP, which registers itself with CDSL for Internet access, can in turn
provide demat account holders with access to their account on the Internet.

DEPENDABILITY:

On-line Information to Users: CDSL's system is based on centralized database

architecture; DPs can thus provide on-line depository services with to-the-minute status of
the investor's account.

24
Convenient to DPs: The entire database of investors is stored centrally at CDSL. If there
are any system-related issues at DPs end, the investor is not affected, as the entire data is
available at CDSL.

Contingency Arrangements: CDSL has made provisions for contingency terminals,

which enables a DP to update transactions, in case of any system related problems at the
DP's office.

Meeting User's Requirements: Continuous updating of procedures and processes in tune

with evolving market practices is another hallmark of CDSL's services.

Audit and Inspection: CDSL conducts regular audit of its DPs to ensure compliance of
stringent operational and regulatory requirements.

Dormant Account Monitoring: CDSL has in place a mechanism for monitoring dormant
accounts.

Helpdesk: DPs and investors obtain clarifications and guidance from CDSL's prompt and
courteous help line facility.

SECURITY:

Computer Systems: CDSL has installed state-of-the-art computer system and data storage
devices. All data is stored at CDSL and is auto mirrored separately and also transmitted to
a Disaster Recovery site. Data is also backed up on digital linear tapes, which are stored in
fireproof cabinets at the main and disaster recovery sites.

Unique BO Account Number: Each BO in CDSL is allocated a unique account number,

which ensures that at the time of transfer of securities if the transferor's account number is
wrongly entered, the transaction will not go through the CDSL system, unless corrected.

25
Data Security: CDSL ensures the security and integrity of all data by encrypting all
communications between CDSL and its users.

Claims on DP: If any DP of CDSL goes into liquidation, the creditors of the DP will have
no access to the holdings of the BO.

Insurance Cover: CDSL has obtained adequate insurance cover in the unlikely event of
any loss to a BO due to the negligence of CDSL or its DP.

TECHNOLOGY USED

Software:

The software is developed and supported by CMC Ltd., who has also developed the BOLT
system for BSE. The software is a modified version of the banking software-TC4
developed by a subsidiary of CMC Ltd. (in USA), which is currently being used by several
banks worldwide. The software has been customized to suit the requirement of CDSL.

Hardware:

Hewlett Packard provides the hardware. HP 9000 (64 Bit) Enterprise server system (super
computer technology with a robustness of enterprise class), is the highest performing
RISC/UNIX server system available in the marketplace.

This system is connected to a near fault tolerant storage system from EMC2 Corporation
featuring multiple RAID levels and intelligent diagnostics (automatic disk fault finding
system). This is the world's best storage system and the first of its kind to be installed in
India; imported from United States of America after due certification by the relevant US
Agency and installation at our site was also subject to inspection by the US Consulate. The
load handling capacity of UNIX systems used is virtually limitless.
Database Architecture:

26
A Depository facilitates holding of securities in the electronic form and enables securities
transactions to be processed by book entry by a Depository Participant (DP), who as an
agent of the depository, offers depository services to investors. According to SEBI
guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as
DPs. The investor who is known as beneficial owner (BO) has to open a Demat account
through any DP for dematerialization of his holdings and transferring securities.

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

By looking at the spread of their operations, one would find out that the NSDL is way
ahead of CDSL. This is because of various reasons- the major reason being that NSDL
started much earlier in 1996, as compared to CDSL, which started operating from 1999.
Many believe that the over-all set-up of the infrastructure developed by NSDL for DPs is
much superior to that of CDSL. For example, it is a known fact that NSDL has a much
better back-up system than CDSL.

27
 DEPOSITORY PARTICIPANT

Depository Participant is the agent of the Depository and is the interface between the
depository and the investor. According to SEBI guidelines, financial institutions, banks,
custodians, stockbrokers etc can become Depository Participants.

Stock Holding Corporation of India Ltd. (SCHIL) is the first participant registered
with NSDL. In order to avail the services of a depository, an investor has to open an
account with a depository through a DP just like a person opening an account with the
branch of a bank. A DP is responsible for maintaining the securities accounts of the
investors and handling it in accordance with the investor’s instructions.

Depository Participant is the key player in the system, which acts as an agent of the
Depository and is in fact the customer interface of depository. It opens the accounts of the
investors, facilitates dematerialization, settle trades and effects corporate actions.

The segments in DP business include five main businesses:

 Account Opening:

Opening of an account in the name of the client, whose holdings are held in the same
way as in a bank?
 Dematerialization:

The process of conversion of holdings from physical form to electronic form.

 Rematerialization:

The process of conversion of holdings from electronic form to book entry form.
 Trading and Settlement:

Trading and Settlement of market and off-market trades.

28
  Pledge and Hypothecation:

Facilitating pledge of securities and to provide electronic credit of new share

allotments such as bonus, public issues, rights etc

ELIGIBILITY FOR BEING A DEPOSITORY PARTICIPANT:

As per SEBI (Depositories and Participants) Regulations, 1996, the following

categories are eligible to become DPs.

 Public Financial Institution as defined in section 4A of the companies Act, 1956.

 Bank included in the Second Schedule of the RBI Act, 1934.

 RBI approved foreign banks operating in India.

 State Financial Corporation established under section 3 of SFC Act, 1951.

 Institution engaged in providing financial services, promoted by any of the

institutions mentioned above, either jointly or separately.

 Custodian of Securities who has been granted certificate of registration under

section 12 (1A) of SEBI Act.

 Clearing Corporation or Clearing house of Stock Exchange.

 The Stockbroker, who has been granted certificate of registration under section 12
(1) of SEBI Act, provided that:

29
 (a) They have a minimum net worth of Rs.50lakh.

(b) Aggregate value of the Portfolio of securities held in dematerialized form in a

depository through each stockbroker should not be more than 25 times his net
worth.

 Non-banking Finance company provided that:

(a) They have a minimum net worth of Rs.5lakh, if they wish to act as a DP only on
behalf of themselves and not on behalf of any other person.

(b) They have a minimum net worth of Rs.50crore in addition to the net worth
specified by any other authority, if they wish to act as DP on behalf of any other
person.

The Regulations empower CDSL to set its own selection criteria in the Byelaws.
Thus the applicants must also comply with the following admission criteria stated in the
Byelaws:

 The applicant should have a minimum net worth of Rs.1.5crore.

 The applicant should not have been convicted in any of the five years immediately
preceding the filing of the application in any manner involving misappropriation of
funds and securities, theft, embezzlement of funds, fraudulent conversion or
forgery.
 The applicant should not have been expelled, barred or suspended by SEBI, self-
regulatory organization or any stock exchange.

30
 DEMATERIALIZATION

Demat is a commonly used abbreviation of Dematerialization, which is a process

whereby securities like shares, debentures are converted from the "material" (paper
documents) into electronic data and stored in the computers of an electronic Depository.

Securities registered in your name are surrendered to depository participant (DP) and these
are sent to the respective companies who will cancel them after "Dematerialization" and
credit your depository account with the DP. The securities on Dematerialization appear as
balances in your depository account. These balances are transferable like physical shares.
If at a later date, you wish to have these "Demat" securities converted back into paper
certificates, the Depository helps you to do this by a process called Rematerialization.

By dematerialization of shares the cumbersome process of paper work is eliminated. It

offers scope for paperless trading through state-of-the-art technology, whereby share
transactions and transfers are processed electronically without involving any share
certificate or transfer deed after the share certificates have been converted from physical
form to electronic form.

Dematerialization of shares is optional and an investor can still hold shares in physical
form. However, he/she has to Demat the shares if he/she wishes to sell the same through
the Stock Exchanges. Similarly, if an investor purchases shares, he/she will get delivery of
the shares in Demat form.

31
PROCESS OF DEMATERIALIZATION

(a) Investor surrenders certificates for dematerialization to depositary participant.

(b) Depositary participant intimates NSDL of the request through the system.

(c) Depositary participant’s submits the certificate to the registers.

(d) Registrar confirms the dematerialization request from NSDL

(e) NSDL updates its account of informs the depositary participant.

(f) Depositary participant up dates its accounts and inform the investor.

The entire process of dematerialization may take about 15 to 30 days.

An Investor makes a dematerialization request, along with the investor physical

Certificates of securities, to the issuer or its registrar through a depositary participant. After

32
Prescribed verification and confirmation, their registrar substitutes in its records NSDL as
Registered owner in respect of the securities and inform NSDL accordingly. NSDL then
Enters the name of the investor as the beneficial owner of the securities, credits the
investor’s account, and informs the investor’s depositary participant accordingly

Mandatory Requirements

Firstly the client has to open an account with a Depository Participant and get a unique
Client ID number. Thereafter, he has to fill the Dematerialization Request Form (DRF)
provided by the DP and surrender the shares in physical form to the DP. The Depository
participant on receipt of the above documents will send an electronic request to the
companies through the Depository for confirmation of demat. Each request will bear a
unique transaction number. The DP will surrender the DRF and the above-mentioned
documents with a covering letter requesting the company to confirm Demat. The company
will confirm Demat to the Depository after necessary verification. This depository will
confirm the Dematerialization to DP, which is holding the account. Then DP will credit the
account with the shares so dematerialized. The DP will hold the shares in the
dematerialized form thereafter on behalf of the client. The client will be beneficial owner
of these dematerialized shares.

Precautions:

 Holdings in those securities that have not yet been admitted for demateralisation
by NSDL cannot be dematerialized. List of securities admitted for
demateralisation should be verified before defacing the securities.
 Holdings in street name cannot be dematerialized. A new procedure is in place for
transfer & demat to be done together.
 The combination and sequence of names of holders as printed on the physical
certificate should be identical with the names initiating the dematerialisation
request.

33
 Separate dematerialisation request will have to be filled for locked-in and free
holdings.
 Separate dematerialisation requests will have to be filled for fully paid up and
partly paid up holdings.

34
 REMATERIALISATION

The conversion of Dematerialized securities back into physical certificates is called

Rematerialisation. Rematerialisation is optional on the part of Investor and can be done on
the request of investor, any time after the same have dematerialized.

Prerequisite to a Rematerialisation Request:

 The beneficial owners of the securities should make the request.

 There should be sufficient free balance of securities available in the beneficiary
account to honor the re-materialization request.

Process of Rematerialisation of Stock:

1. Investor requests the DP for rematerialisation.

2. The depository participant informs it to the NSDL
3. NSDL Intimates the Registrar
4. The Registrar of the company prints certificate with new numbers and informs
NSDL
5. NSDL adjusts its account and passes on the details to the DP
6. The certificates are dispatched to the investor. The rematerialisation process is
completed within 30 days.
The entire process takes a maximum of 30days. No trading is possible on the securities
sent for remat.

5
DEPOSITORY DEPOSITORY
(NSDL) PARTICIPANT
2

4 3 1

INVESTOR 35
REGISTRAR
6
 Chapter 4
Benefi ts, Problem
and Scope of
Demat System.

36
 BENEFITS OF DEMAT SYSTEM

The Depository system has the following benefits to different groups:

Benefit to the Country

 The depository system helps the capital market to be more liquid, attracting more
foreign investors and is in compliance with international standards, as it creates
efficient and risk-free trading environment.
 It minimizes the settlement risks and frauds in carrying out transactions in capital
markets and thus can restore faith of investors in capital markets.
 It helps to reduce delay in trading practices creating investor friendly atmosphere in
the capital markets.

Benefit to the Company

 The depository system helps in reducing the cost of new issues due to less printing
and distribution cost.
 It increases the efficiency of the registrars and transfer agents and the Secretarial
Department of the company.
 It provides better facilities for communication and timely services with
shareholders, investor etc.

Benefit to the Investor

 The depository system reduces risks involved in holding physical certificated, e.g.,
loss, theft, mutilation, forgery, etc.
 It ensures transfer settlements and reduces delay in registration of shares.
 It ensures faster communication to investors.
 It helps avoid bad delivery problem due to signature differences, etc.
 It ensures faster payment on sale of shares.
 No stamp duty is paid on transfer of shares.
 Provides more acceptability and liquidity of securities.

37
Benefit to Brokers

The depository system reduces risk of delayed settlement.

 It ensures greater profit due to increase in volume of trading.
 It eliminates chances of forgery – bad delivery.
 It increases overall of trading and profitability.
 It increases confidence in investors.

38
 PROBLEM AND SCOPE OF DEMAT SYSTEM

Like they say, ‘Every coin has two sides’. Despite all the efficiencies brought-in by the
demat system, there are certain drawbacks to which your attention needs to be drawn.

The Indian systemic inefficiency has actually turned the virtual queue into a reality. The
dematerialization process for paperless trading of shares has created a virtual queue, which
will take months, if not years, to process. It highlights several inefficiencies in the new
system and has thrown up an important new tax issue.

Demat ought to take care of many inefficiencies. The tedious process of physically
transferring ownership of shares is shortened. Instead of several months, ownership is
supposed to change hands instantly. The chance of a bad transfer because a signature
doesn't match is reduced to zero. So are the opportunities of thievery in the mail or forged
share certificates. The twin problems of odd lots and jumbo lots both disappear since it is
possible to trade either a single demat share or lakhs at a shot.

So demat solves various familiar problems that plague every stock market that operates
with physical paper. No wonder when SEBI initiated the process of demat it was welcomed
wholeheartedly by most investors.

Some insecure company managements dislike rapid, unsupervised transfer of ownership.

The odd unscrupulous investor who deliberately messed up his signature and gave bad
delivery in order to obtain interest-free cash also dislikes demat. But the vast majority
welcomed it. One instantly beneficial effect was the easing of brokerage rates. Another was
a vast increase in institutional volumes. When you buy physical shares from the stock
market, you could never be certain of the validity of the title of shares. There were many
reasons- the sellers' signature did not match, or the certificates were fake, forged or stolen,
and so on.

Demat shares are supposed to obviate these problems. Buying shares in the demat form
always guarantees you a good title as soon as the settlement is over. The biggest attraction

39
of trading in demat shares is that the shares you buy come with a clean title and
immediately after the settlement on the relevant stock exchange.

But then problems started surfacing. First of all, the demand for demat services was
severely under-estimated. According to estimates, there are now 9 million pending
individual applications for demat accounts. The system has been overloaded and reached a
breaking point. As a result, somebody opening a demat account can expect to spend several
months waiting for the paperwork to be completed.

Meanwhile, a physical trading route does exist for the individual investor who needs to
raise cash in a hurry. But while a physical sale is possible, all transfers (in the shares of
designated companies) now involve a compulsory demat. Since the buyer of physical
securities must factor in a long waiting period, there is a wide differential between paper
trade quotes and demat quotes. The discount on physical paper is now around 15 percent,
or more.

The amount of paperwork involved in the demat process is also seriously painful. Some of
it is absurd. For example, if Mr. and Mrs. Haridoss Paul hold some shares in the name of
Mr. & Mrs. Haridoss Paul and a second batch in the name of Mrs. & Mr. Haridoss Paul,
they will need to open two demat joint accounts with their names reversed! There are other
niggling little details.

Brokers and banks are therefore quite reluctant to initiate the process for their clients.
Some refuse outright. Others disregard the SEBI directives and insist that demat clients
open low-interest or zero-interest accounts as a sort of extra fee. At a minimum deposit of
Rs 1,000 per demat account and 9 million individual accounts, the amount already blocked
in these low-interest or zero-interest accounts adds up to around Rs.900 crore. Assuming
this trend continues, and given that there are more than 23 million individual investors, the
eventual cost of demat would include sub-optimal returns on about Rs 2,300 crore. That is
a large and unforeseen opportunity cost for any new system.

40
There are further problems. The simple fraud of stealing a share certificate out of the mail
and selling it in the kerb is no longer possible with a demat account. But the only proof of
ownership for demat shares is a receipt. Trades and transfers are carried out on the basis of
that piece of paper. Anybody who has the account number and knows the details can order
a transfer of shares from one account to the other very easily.

Forgery is actually easier. The receipt itself isn't too difficult to duplicate either. Frauds of
this nature haven't started happening yet at least on a large enough scale to draw attention.
But it is something that gives the investor pause for serious thought. It's bound to occur
sooner or later. And given the lack of a paper trail, it will be difficult to establish the fraud,
let alone prosecute and offer relief to victims.

Another problem lies in the tax treatment of demat shares. With dated physical transfer
certificates, it is fairly easy to calculate Capital Gains Tax (CGT) liability. Demat shares
are fungible and don’t have distinctive numbers. It is not easy to track the sale or trade of
shares after they are dematerialized.

Suppose the investor has two lots of shares of the same company. One lot was bought
several years ago and is hence, liable only to long-term capital gains tax, in case of a sale.
This is levied at 10 per cent flat or an inflation-indexed at 22 per cent whichever is lower.
The second lot was, however, bought within the last fiscal. This is liable to 33 per cent
short-term CGT in the event of a sale.

All this has of course changed, with the Budget 2004-2005 announced on 8th of July by the
Finance Minister, Shri P. Chidambaram. There will be no more long-term capital gains tax,
and a flat rate of 10% short-term capital gains tax.

If you sold a physical lot, presumably you would deliver the older set to minimize the
payout. But in case of a demat, there is an extremely grey area about which CGT rate
should be levied. The Central Board of Direct Taxes hasn't worked out a clear procedure
for distinguishing the earlier lot from the later lot. You could find yourself locked in a

41
dispute and facing a demand for short-term capital gains tax. This is obviously of major
significance.

There are several more niggling problems. In theory, the demat is supposed to be within 24
hours. However, PSU bank timings don't conveniently overlap trading times. Banking
hours close at 2 pm while trading continues till 4.30 pm. On average, a transfer will take 48
hours or more. On occasion, the demat account may be temporarily credited with shares
pending confirmation of a transfer. An unwary investor who sells without ensuring that he
has actually received a confirmed transfer is open to everything starting from severe
embarrassment and ending with charges of fraud.

None of these problems are insurmountable. But it will require a coordinated effort from
various agencies to sort them out. SEBI and RBI have to come up with a way of
streamlining the demat process and regularizing the status of deposits accepted, if any. The
NSDL and CSDL will have to speed up their registration procedures and devise a more
foolproof system of receipt and transfer. Banks and stock exchanges will have to
coordinate working hours and the use of temporary entries. The CBDT will have to come
up with clear tax guidelines.

None of these are processes, which needed to be ratified or mandated by Parliament. So the
excuse of political instability cannot be trotted out for delays. Demat has already been in
progress for a year.

Rule 100 of market regulator SEBI determines whether the shares delivered in a
settlement, are good or not. Under rule 100, the shares that have been transferred any
number of times can still be withdrawn by the company, if a transfer is found to be invalid
for any reason.

Suppose A sells physical shares to B and B gets them dematerialized. Later B sells the
shares in the stock exchange and C buys them. Meanwhile A discovers that his share
certificates were stolen and fraudulently sold by someone else. He gets a court order
restraining the company from further transferring the shares and attaching them (currently

42
in possession of C). This is known as 'stop transfer'. So C who has bought dematerialized
shares is now struck with the shares. He cannot sell these shares since they would be
frozen in his account

In demat shares, pre-demat problems about the validity of a share do not affect the interest
of the buyers after dematerialization. Shares go through a verification process at the
registrars' before they are dematerialized.

Therefore the responsibility lies with the registrar. The registrar must find a remedy if the
original transfer of shares, before their dematerialization comers under doubt. But there is a
catch. The company and its registrars are not responsible if the reasons for original transfer
being invalid were not available at the time of dematerialization. Matters have to be dealt
with on a case to case basis. Which means that even demat buyer may find that his shares
have been frozen in his demat account. This kind of case has to be contested in court by the
parties involved.

This issue is not directly addressed in The Depositories Act, 1996. SEBI’s regulations on
depositories and depository participants also do not mention the issue. Matters get more
complex if an investor has traded further in shares of the same company in his demat
account.

Investors do not like receiving physical share certificate because the process of getting the
shares converted into dematerialised form takes anywhere between four to six weeks.
Many investors look to sell immediately on listing especially a stock that is up 60 per cent
on listing. Of course, if 25 per cent of all investors are barred from trading because they
hold physical shares it automatically reduces the floating stock and potentially creates a
perfect situation for stock prices to remain artificially high.

43
 Chapter 5
Finding and Analysis

44
 ANALYSIS OF CLIENT PRESPECTIVE

We have included in our survey different aspects like location/ proximity, charges,
customer service, security level, reliability, goodwill etc. in our survey we got that
customer service is the most important aspect for clients. 25 out of 40 clients have rated it
very high while choosing the DP.

(1) LOCATION

When clients decide about the DP, there are many issues on their mind. They also consider
many implicit costs. For example many clients would prefer a DP which is nearer to their
home/office because it would give them convenience. We found out in our study that many
individual clients consider this issue important while choosing a DP. It doesn’t make much
difference to big brokers and sub-brokers as they have far greater volumes and so they give
more importance to the charges, relationships and so on.

(2) CHARGES

All the clients, whether an individual, a sub-broker or a main broker, would consider
charges closely while choosing a DP. This is the most important factor which influences
the clients’ choice of DP. There are two types of charges in demat, namely, fixed and
variable. The major fixed charge is annual maintenance charge and the major variable
charge is the transaction (buy/sell) charge. Active clients would look at variable charges
closely while selecting a DP. On the other hand, those clients who are not so active would
look at annual maintenance charge closely.

(3) CUSTOMER SERVICE

Customer service is one of the most important issues for clients. It includes a variety of
things, starting from the sending of the statement of holding and the transaction statement
on time, to providing the latest internet-based SPEED-e and IDeAS facilities. The clients

45
look for that DP which matches their need of services. Certain clients require the
Statements more frequently than other clients and may find it cumbersome to visit the DP
everyday for the same. Now-a-days, the number of internet-friendly clients is increasing
due to the Information revolution. At present there may not be many clients willing to use
the Internet, but this number is only set to rise in future, and this could provide a wide
scope of improvement.

(4) RELIABILITY

It is very important for DPs to provide satisfactory level of services with consistency. This
means that the quality of service should not keep changing from time to time. The client
should be able to estimate the timings and functioning of the services with a fair level of
accuracy. By providing services with consistency creates reliability. One important aspect
here is that the client should be assured that their transactions are all valid and safe as far as
the services of the DP are concerned.

(5) GOODWILL

Many clients also consider goodwill of the DPs, because ultimately they are putting their
securities with the DPs and therefore taking risk. So the clients would prefer well-
established DPs. It takes time, money and loads of efforts in building a good reputation for
a company. The clients should be convinced of the credibility and the reliability of the
organization.

(6) FAMILIARITY WITH THE ORGANIZATION

Familiarity with the organization gives certain level of comfort to the clients. We can say
that a good relationship will lead to good business. In any organization, maintaining
relationships is of utmost importance.

46
 (7) TIMINGS FOR INSTRUCTION SLIP SUBMISSION

Timings for submission of instruction slip are not the critical issue, still for many clients it
is not a non-issue either. Generally clients would prefer some flexibility on the part of DPs
to accept the instruction slips. Most DPs are quite flexible in this regard and have no
problems in adjusting to the requirements of the clients.

47
DATA ANALYSIS

Family Annual Income (in Rs.):

FAMILY ANNUAL INCOME: Respondents(40)

Below 60000 6
60000 to 120000 21
120001 to 180000 9
Above 180000 5

12% 15%

22%
Below 60000 60000 to 120000 120001 to 180000 Above 180000

51%

Interpretation:

The above graph shows that 51% of investors have the annual family income
between Rs.60000 to Rs.120000, 22% of investors have the annual family income between
Rs.120001 to Rs.180000, 12% of investors have the annual family income above
Rs.180000 and only 15% of investors have the annual family income below Rs.60000.

48
1) How would you rate your level of knowledge in the area of Investment?

LEVEL OF KNOWLEDGE: Respondents(40)

Poor 2
Limited 9
Moderate 22
Expert 5

13% 5%

24%

Poor Limited Moderate Expert

58%

Interpretation:

This graph shows that 52% of the investors have moderate knowledge about the
conditions of the market, 30% of the investors have limited knowledge about the
conditions of the market, 8% of the investors have poor knowledge about the conditions of
the market so we can say that most of the investors depend upon the brokers and only 8%
of the investors have expert knowledge about the conditions of the market so they take
independent decisions about investment.

49
2) With which DP you have your Demat account?

Bank 7
Broker 15
Financial institute 8

Bank

27% 23%

Broker

50%
Financial institute

Interpretation:
As we can see in the graph most of the investor have demat account with the brokers
Some have account with bank and financial institute as well.

50
3) From which source did you come to know about that DP?

SOURCE OF INFORMATION: Respondents(40)

NEWSPAPER 5
MAGAZINE 1
ADVERTISEMENT ON T.V 12
FRIENDS 15
ANY OTHER 7

From which source did you come to know about that DP

NEWSPAPER
18% 13% MAGAZINE
3%
ADVERTISEMENT ON
T.V
FRIENDS
30%
ANY OTHER
38%

Interpretation:

This graph shows that most of Investors comes to know about the DPs i.e. 38% &
30% of the information about Depository Participants are collected from the Friends &
Advertisement on TVs respectively, and remaining comes from the sources like
newspapers, Magazine, SMS, and Internet.

51
4) What factors did you consider MOST while opening the Demat account?

Serial Factor Very High Medium Low Very

No. High Low
1 Location/Proximity 14 6 6 4 -

2 Timings for Instruction Slip 18 15 7 - -

Submission
3 Charges 30 5 3 2 -

4 Customer Service 35 4 1 - -

5 Security System 24 9 7 - -

6 Reliability 28 10 12 - -

7 Goodwill 25 14 1 - -

8 Others’ Reference 6 5 20 7 2

9 Familiarity with 26 10 4 - -
The Organization

Interpretation:
This table shows that the most of the investors consider the customer
services a main factor which influences them; they are also influence by service
charges, providing the periodically transaction statements and reliability etc.

5) How much amount did you pay for opening of Demat account (in Rs.)?

ACCOUNT OPENING CHARGES: Respondents(40)

BELOW 500 12

52
 500 to 700 21
ABOVE 700 7

18%
30%

BELOW 500 500 to 700 ABOVE 700

53%

Interpretation:

This graph shows that there are 52% i.e. most of the investors had paid the amount
between Rs.500 to Rs.700, 30% investors had paid below Rs.500 and remaining 18% had
paid above Rs.700 as a charge of opening the demat account with their respective DPs.

6) How many days it took to open Demat account?

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 DAYS TO OPEN: Respondents(40)
Below 7 4
7 to 10 12
11 to 15 18
Above 15 6

15% 10%

Below 7 7 to 10 11 to30%
15 Above 15

45%

Interpretation:

This graph shows that the most i.e. 45% of investors had to wait for days between
11 to 15 to open the demat account, 30% of the investors had to wait for days between 7 to
10 for open the Demat accounts, 15% of the investors had to wait for days above 15 for
open the Demat accounts and 10% of the investors had to wait for days below 7 for open
the Demat accounts.

7) Do you have your trading account with same DP?

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 TRADING A/C IN OTHER COMPANIES: Respondents(40)

Yes 41

No 9

18%

Yes No

82%

Interpretation:

This graph shows that the most of investors have their trading accounts with the
same DPs in which they have their respective Demat accounts and there are only 6%
investors who have their trading accounts in other DPs because some of their DPs do not
provide the trading account facilities and some of DPs have not good trading platforms.

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8) Are you satisfied with the brokerage charged by your broker?

SATISFACTION ABOUT BROKERAGE? Respondent (40)

Yes 31
No 9

23%

Yes No

78%

Interpretation:

This chart shows that investors of most of the DP’s are satisfy with the charges
Charged by the brokers.

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 9) Are you facing any problems with your broker while trading?

yes 8
no 32

20%

yes no

80%

Interpretation:

The chart shows that 80% of the investors are satisfied with the behavior of their
brokers.

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 10) Do you wish to open the Demat account with other DP?

WISH TO OPEN DEMAT A/C WITH ANOTHER DP? Respondents(40)

Yes 12

No 28

Interpretation:

This graph shows that there are only 15% investors wish to open Demat account
with other DPs due to high brokerage, not providing the timely necessary information and
bad & uncooperative behavior of broker.

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 Chapter 6
SUGGESTIONS &
R E C O M M E N D AT I O N

59
 SUGGESTIONS

1. DPs should reduce its Demat account opening charges.

2. DPs should establish an investor grievance committee for handling investor
complaints.
3. They should aware the investors about the share market and basic concepts.
4. They should improve their infrastructure so that investors feel convenience for
trading in shares.
5. More awareness should be made about Phone, Internet and Mobile so that the entire
investors can do most of the transaction through them only.
6. The processing time of opening the Demat Account should be taken into
consideration.
7. There must be periodical investors meet so that the latest information can be
provided to the investors.
8. There must be proper and effective Investor care cell to handle the queries of the
Investors.
9. Highly professional staff should be recruited for trading purposes.

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 CONCLUSION

Over the last decade, the Indian capital market has been growing by leaps and bounds.
India has the largest number of listed companies in the world today. It also boasts of a large
number of shareholders, about 32 million. Paradoxically, the problems associated with
transactions, clearing and settlement were also on the rise. Simultaneously, they expose the
investors to greater risks.

Indian market thus required a new system that would eliminate all problems of investors
and would give them healthy environment, and would strengthen their faith in the capital
market, which was very low due to scams. Inordinate delay in investigation of these scams
and escape of wrongdoers from law created doubts in the minds of investors. The position
has substantially improved after the introduction of the depository system.

The present study was undertaken with objectives to study the investment criteria of
different personnel and awareness among customers about Demat, benefits of the Demat
account, and awareness of the Demat a/c.

Demat is gaining ground in India. More and more banks / Financial institution are
encouraging the people to go for opening a Demat Account besides the varies freebies and
rewards rolled out, customer feel convenient to in share market through Demat Account
just because of Dematerialization of shares and securities from physical form to electronic
form in order to avoid manipulation.

Demat system has not yet reached the rural India. It is gaining ground in urban India. But
rural area is still untouched.

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ANNEXURE

62
 ANNEXURE -A

Dear Sir/Madam,
I am a Student of an MBA and as a part of my subject; I have undertaken a research project
on “Demat System in India”.
I would appreciate if you will give precious opinion on different questions.

Name: ________________________________ Age: ________

Occupation: ____________________________ Contact No: ______________

Family Annual Income (in Rs.):

BELOW 60000 60000 to 120000
120001 to 180000 ABOVE 180000

1. How would you rate your level of knowledge in the area of Investment?
POOR LIMITED
MODERATE EXPERT
2. With which DP you have your Demat account?

Bank
Broker
Financial Institutions

3. From which source did you come to know about that DP?
NEWSPAPER MAGAZINE
ADVERTISEMENT ON T.V FRIENDS
ANY OTHER________________________

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4. What factors did you consider MOST while opening the Demat account?
SERIAL VERY HIG VERY
FACTOR MEDIUM LOW
NO. HIGH H LOW
1 Location/Proximity

Timings for Instruction Slip

2
Submission
3 Charges
4 Customer Service
5 Security System
6 Reliability
7 Goodwill
8 Others’ Reference
9 Familiarity with Organization

5. How much amount did you pay for opening of Demat account (in Rs.)?
BELOW 500 500 to 700
ABOVE 700

6. How many days it took to open Demat account?

BELOW 7 7 to 10
11 to 15 ABOVE 15

7. Do you have your trading account with same DP?

YES
NO
If NO, Give Reasons:________________________________________________

8. What is the amount of brokerage charged by DP?

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 IN INTRADAY TRADING

IN DELIEVERY TRADING

9. Are you satisfied with the brokerage charged by your broker?

YES
NO

If NO, Give Reasons: ________________________________________________

10. Are you facing any problems with your broker while trading?
YES
NO

If YES, Give Details: ________________________________________________

__________________________________________________________________
11. Do you wish to open the Demat account with other DP?
YES
NO
If YES, Give Reasons: _______________________________________________

12. What do you suggest to DPs to improve the quality of services?

______________________________________________________________________
______________________________________________________________

Thanks for your cooperation.

BIBLIOGRAPHY

65
Books Referred:
 Security Analysis And Portfolio Management.
By Punithavathy Pandian
 Management of financial services.
By M.Y Khan

Internet Documents

 www.bseindia.com
 www.cdslindia.com
 www.legalserviceindia.com/article/l119-Concept-of-Demat-Shares.html
 www.nsdl.co.in

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