Topic The Depository System The National Securities Depository Limited The Central Depository Services Limited

Comparison of Charges at NSDL & CDSL

Growth of DEMAT Accounts Custodians Stock Holding Corporation of India Ltd

What is Depository?

Need for setting up a Depository in India

An organization which holds securities of an investor in an electronic form through a registered depository participant. Limitation of earlier settlement system High Processing Time. Increased volume of transaction. Foreign Investment restriction due to non availability of depositories. Various problems while dealing in physical shares.
Theft & fake/forged transactions. Share transfer delays. Paper work involved.

DEMAT Share Held by depository system on behalf of investor

Holding and handling is done electronically Doesnt have a folio number

Physical share Held by investor himself

Handling is done in the form of paper Does have certificate no.

No difference as far as beneficial interest of ownership of securities are concerned. Owner is entitled to all the benefits as he would have with a physical share.

Immediate allotment, transfer and registration of securities. No stamp duty on transfer of securities. Elimination of risk associated with physical form of shares. Reduction in paper work & transaction cost. Decrease in settlement risk & frauds. Loan against the pledged DEMAT shares at no cost.

Initiated by SHCIL in July, 1992 with a concept paper on National Clearance & Depository system Subsequently, SEBI constituted a 7 member squad to discuss structural and operational parameters. Finally, Govt. of India promulgated the Depository Ordinance in Sept. 1995. Depositories Act was passed in August, 1996. Depositories are required to be a company under the Companies Act, 1956.

Parties included in a DEMAT transaction:

The Customer DP Depository Share Registrar & transfer agent (R&T)

Eligibility to join as a DP:

Public Financial Institution Bank included in 2nd schedule of the RBI Act, 1934. Foreign Bank operating in India. State Financial Corporation Custodians of Securities Clearing House Stock Broker NBFC Registrar to an issue/share transfer agent

Opening an account Dematerialization Rematerialization

Through PAN card and client ID DP ID and client ID are 8 digit numbers Conversion of physical certificates to electronic form.

Distributing Dividend Closing an account

Conversion of securities in DEMAT form to physical form.

Dividend issued to share holder as on cut off date.

By Rematerialization. Transferring to other DEMAT account.

First depository in India. Promoted by IDBI, UTI, NSE and SBI. Registered on 7th June, 1996 with SEBI. Commenced operations in NOV,1996. A public limited company formed under Companies Act, 1956 with a paid capital of Rs. 105 cr. Interacts with investors and clearing houses through DPs.

Maintenance of beneficial holdings in e-form Dematerialization & Rematerialization of Securities Settlement of shares Allotment of IPOs in e-form Distribution of non cash corporate actions Freezing/locking of investor accounts Pledge and hypothecation of securities

DP: An important link between NSDL and Investor

Issuing companies/Share transfer agents Clearing Corporations/Housings Clearing members

DP is an agent of the depository through which it interfaces with investor Can offer services only after getting registered with SEBI It could be: A bank, A custodian, A stockbroker Corporate Entity not allowed SHCIL was the 1st DP registered with SEBI

NSDLs computer system links 3 type of databases.

Central NSDL Those of 245 DPs Those of 6679 companies

Also monitors everything happening in the computers of its DPs. Created 3 pioneering systems:
SPEED-e (For delivery instructions) STeADY (Facilitate straight through processing) IDeAS (Enables account holders to view account balances & transactions of last 5 days)

Commenced on March 22, 1999. Second Depository set up by The BSE. The same year 765 companies signed up. Has 372 DPs in 124 cities. Net worth: Rs 104 Crores

Co-sponsored by:
State Bank Of India Bank Of India Bank of Baroda HDFC Bank

Stakes:
BSE: 45% Banks: 55%

Preferred platform by the govt. of India for carrying out actual share transactions. PSU disinvestments have been done through the CDSL systems. Every transaction is done at one e-space. Centralized system: keeps a watch on every transaction. Also attained membership of the Asia-Pacific Central Securities Depository Group (ACG).

An organization that facilitates exchange of information and promotes mutual assistance among member depositories and clearing organizations of the Asia-Pacific region. Has 22 member organizations including depositories from Japan, Hong Kong, Singapore, Malaysia and The Reserve Bank of New Zealand.

Charges at NSDL are fixed whereas they are variable in the case of CDSL. The amount payable by the DPs to the NSDL for the debit transaction have been reduced from Rs 10 to Rs 8effective from January 2004. To hold shares in DEMAT form, an investor has to pay DPs an account opening fee of Rs 50 to Rs 100 and an annual fee of Rs 100 to Rs 150. For each scrip the investor DEMAT, he has to pay Rs 2 to Rs 3 per share.

Depositories need to make their rates more affordable to investors. The SEBI constituted a panel to recommend a DEMAT fee structure of depositories.

NSDL

Custody fee 0.50/month Rs 6/ annum Purchase NIL Sale Rs 8/transaction Pledge creation: Rs 25 Annual fee: NIL Rematerialization: Rs 10/Certificate Rate Structure: Fixed

Custody fee NIL Purchase NIL Sale 0.01% of the transaction value

CDSL

(Min: Rs 5, Max: Rs 12)

Pledge creation: Rs 12 Annual fee: NIL Rematerialization: Rs 10/Certificate Rate Structure: Advalorem

Increase in number of clients: 77.76 lakh in June 2007 from 25.30 lakh in May 2000. Increase in the number of scrips by SEBI: 2335 in June 2001 from 12 in January 1999. Increasing trend in commercial papers and bonds was witnessed during 2005-06. The total value of shares settled through DEMAT mode in NDSL and CDSL rose by 63.1% and 53.4% respectively in 2005-06.

Almost 95% of the issued capital in the market is converted into electronic form. April 2006 Scam led to a large number of cornered shares. Depositories and DPs were blamed for the IPO scam. SEBI levied on both NDSL and CDSL Rs 116 crore as part of its disgorgement order. Ratio of dematerialization to floating stock in the market is around 100%. No. of stocks available in June 2002 4252. Increase in DEMAT quantities(No. of Securities) 88.3 billion in 2005 from 16.39 billion in 2000.

Definition
Helps register and safeguard the securities of its clients.

Also provides ancillary services such as:

Physical transfer of share certificates Collecting dividends and interest warrants Conforming to transfer regulations

For these services, they charge a fee of 1% of the total volume.

Why do we need custodian?

Difficult to handle large volume of transactions Decrease in paper work Provide infrastructure facilities that ease the
post issue Post trade Settlement work

Involved in the process of clearance but not trading Settle trades on behalf of trading members SHCIL & SBI Share Holding Corp. most prominent custodians in India

Established to provide well developed and fully automated infrastructural facilities like trading, clearance, settlement etc Promoted by seven fin. Institutions like IDBI,ICICI,IFCI,IRBI,UTI,LIC,GIC & its subsidiaries incorporated in 1986 Operational from 1988 First registered with NSDL and subsequently with CDSL

Market Operations Corporate Actions Safekeeping Custodian Management Registration Transfer & Reporting Collects dividends on behalf of sponsoring institutions Divided into five groups
Clearing Services Registration/Transfer Processing Safekeeping Corporate Actions

Pledge Services Stock Direct

Keeping all stock broking, clearance, settlement process under one roof

Sell-n-cash
Realizing sale proceeds within 24 hours

GOI Bonds Fund Invest

Topic Introduction to Credit Rating Importance of Credit Rating Origin and growth Rating Methodology Rating Symbols and Rating Fee SEBI Regulations CRISIL ICRA CARE Limitations of Credit Ratings in India

Name

Credit rating is assessment of borrowers credit quality. Credit rating agencies have come into existence to assist the investors in their investment decisions. It is indicator of current opinion of the relative capacity of the borrowing entity. An agency performing rating is known as credit rating agency.

It helps in development of financial markets. It enables investors to draw up credit-risk profile and assess the adequacy of the riskpremium offered by the market. Saves time, enables the investor to take a quick decision, provide better choices from various available opportunities, can raise funds at cheaper rate(issuers with high credit rating) thus decreasing cost of capital.

It is a marketing tool, enhances companys reputation and recognition. It helps market regulators in promoting stability and efficiency in securities market. It is a tool employed for taking decisions relating to lending and investments. It makes market more efficient and transparent, it plays a significant role in the growth of financial markets.

Originated in U.S. in 1909 A.D., Moodys Investor service, by John Moody. Then came Standard and Poors. Rating since 1916, its nearest competitor is Fitch Investors Service. Initially ratings were published free of charge but then with the growing popularity they began to charge issuers for ratings.

Diversified portfolio to rating of asset backed securities, commercial papers, bank loans and other financial products. India first in developing world to set up credit rating agency CRISIL in 1988 ICRA in 1990, CARE in 1993 and then came Fitch Ratings India Private Limited. These are the prominent rating agencies in India.

In India the process of obtaining a rating is quite lengthy and time-consuming. The rating of the financial instruments require a thorough analysis of relevant factors that affect the creditworthiness of the issuer. The analytical framework for rating consists of the following 4 broad areas:-

Business Analysis It covers an analysis of industry risk, market position of the company in the economy, operating efficiency of the company and legal position. 2) Financial Analysis It includes an analysis of accounting quality , earnings protection, cash flow adequacy and financial flexibility. 3)Management evaluation It includes study of track record of management , the managements capacity to overcome adverse
1)

situations, goals , philosophies and strategies. 4)Fundamental Analysis This covers an analysis of liquidity management, asset quality , profitability and interest , and tax sensitivity.

Agencies use symbols such as AAA ,AA, BBB, B, C, D to convey safety in terms of timely payment of interest and principle to investor. + or - signs are used to show the certainty of timely payment and also to show comparative position of the instrument within the group.

Classified into 3 grades : high investment grades investment grades High investment grades Speculative grades speculative grades
AAA AA A BB B C

BBB

The issuer of instrument pays the rating fee to the agencies Major source of revenue of the rating agency In India, rating agencies charge 0.1 % of instrument size as rating fee. They also charge an annual surveillance fee at 0.03% to monitor the instrument during its life.

SEBI (credit rating agencies) regulations, 1999

Rating agency required to have minimum net worth of 5 crore.

it cannot assess the financial instruments of their promoters who have more than 10% stake in them.

It cannot rate a security issued by an entity which is a borrower of or a subsidiary or an associate of its promoter if there are common chairmen, directors, employees
It cannot rate a security of its associate or subsidiary if there are common chairmen, directors, employees Non compliance with provisions of the act results into suspension or cancellation of the certificate of registration

CREDIT RATING AGENCIES IN INDIA

CRISIL CARE ICRA

Credit Rating Information Services of India Limited Fourth largest credit rating agency globally

Set up in January 1988 as first credit rating agency n India It rates rupee denominated debt instruments of Indian companies, preference shares, FDs, commercial papers and structured obligations.

Offers a comprehensive range of products and service offerings- real time news, analysed data, incisive insights and opinion and expert advice Only rating agency in India to operate on the basis of sectoral specialisation
Major functions Provider of rating and advisory services Provides corporate reports regularly on public sector companies and private sector companies Undertakes industry studies on requests on topics such as structure of industry, competition and demand and supply estimates

CRIS infac (Crisil research and information services)

provides macro and micro level information and analysis Helps in credit and investment decisions to its clients Extensive research base on over 80 industries, 300 commodities and 3000 companies Comprehensive mutual funds research for various market participants Launched products like CRISIL composite performance ranking : quarterly ranking of mutual fund schemes based on the last two years performance Mutual funds indices : launched 4 indices CRISIL MF portfolio tracker : tracks monthly portfolio of schemes along with the changes over the previous period CRISIL gilt valuer : decomposes the schemes, returns and risks in various ways

CRISILs subsidiaries (contd)

CRISIL market wire

Covers fixed income , money market and capital markets Provides Live market service across 600 terminals Helps clients in pricing and investment decisions

Global data services of India limited(GDS)

Focuses on high quality in depth financial analysis of a company Launched CRIS finalyssis

CRISIL infrastructure advisory

Policy, regulatory and transaction level advice to government and leading organisation across sectors Helps the clients in competitive bid process management and ensures the success of project undertaken

Gas strategies group limited of gas information and solutions

Leading providers of business advice and information services to the energy and gas industry, serving global majors, leading international banks Focuses on market studies, project finance, regulation and liberalisation of markets, pipeline financial and demand studies

CRISIL centre for economic research: analysis of India's policy and business decisions CRISILs investment and risk management services: risk management solutions to banks and corporates

India Index Services and products limited (IISL) only specialised organisation which provides stock index products and services

Irevna

provides high end customised equity research to the financial institutions, investment banks, private equity firms and consulting companies

cariCRIS CRISIL : worlds first regional credit rating agency

Investment Information and Credit Rating Agency of India Limited

Incorporated as an independent body on 16th January,1991. Leading credit rating agency providing investment information and credit rating services. Promoted by Industrial Finance Corporation of India jointly with other leading investment institutions, commercial banks and financial services companies. ICRA has tied up with Moodys Investor Services which is one of the major shareholders in ICRA.

To provide Information and guidance to investors/creditors for determining the credit risk associated with a debt instrument/credit obligation. Major Services offered:
Rating Services Information grading and Research services Advisory services Economic Research Outsourcing

Rates rupee-denominated debt instruments(long term, short term and mid term) Launched two services in 1992:
Credit Assessment: Rating given to companies to enable them to avail credit General Assessment: General assessment of companies done on request of banks and other potential users

Rating of equity instruments. Its Earnings Prospects and Risk Analysis(EPRA) group offers two different services:
Equity Assessment: Done at the instance of investors Equity grading/rating: Done at the instance of the issuer

Evaluates/rates parallel marketers of LPG and kerosene. Development of highly specialized evaluation methodologies for grading of construction, real estate, healthcare and mutual fund entities. Corporate governance rating services which focuses on corporates, business practices and quality of disclosures. Quarterly publication named Money and Finance that analyses contemporary developments in Indian money and capital markets. Appointed as consultant to Disinvestment Commission.

Credit Analysis and Research Limited

Launched in November 1993 Credit rating and Information services agency. Setup by IDBI in collaboration with some banks and financial institutions. Has tied up with Fitch Ratings-worlds third largest rating agency

To provide investors and risk managers with timely and insightful credit opinions based on in-depth detailed research. Major services offered:
Rating Services Information and Advisory services Equity Research

Credit rating of debentures/ preference shares/fixed deposits/ commercial papers. Provides advisory services related to securitization transactions, structuring financial instruments, financing of infrastructure projects, M&A, and financial restructuring. Rating of parallel marketers of LPG and superior kerosene oil. Rating of collective investment schemes of plantation companies

Has an advanced service division on power sector and municipal finances. Prepares credit reports of companies on request Undertakes credit assessment of companies on request of banks and other financial institutions Assists the Disinvestment Commission in equity valuation.

Credibility of ratings is questionable Frequent upgrading or downgrading of ratings may create confusion in the minds of the investor Rating agencies do not perform an audit but rely only on information provided by the issuer. Scope for bias Non-acceptance by the clients Failure to correctly predict the borrowers financial health in the short term.