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Depositories and Custodial Services2

Depositories and Custodial Services2

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Published by: vivekagrawal07 on Oct 05, 2009
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Depositories and Custodial Services
Scripless trading is the transaction of securities through a Central Depository or ElectronicBook Entry settlement system. As against conventional system where share certificates aresent by investor to brokers who then send them to clearing house of stock exchange who, inturn, arrange for the delivery to the buyer. Following chart will explain the traditionalsystem.SELLER: hands over the share certificate along with the transfer form to the seller’s broker.SELLER’S BROKER: hands over these documents to buyer’s broker directly OR throughClearing HouseBUYER’S BROKER: hands over the documents to the buyer / OR after obtaining hissignature on transfer form (as transferee) sends to the company or their Registrar & Transfer Agents for transfer of shares in the buyer’s nameThe company or their Registrars (R & T Agents) note the transfer of ownership in the nameof the buyer in their books and return the share certificates to the buyer, either directly or through his broker.This system was fraught with following defects and deficiencies.
There were occasional cases of wrong or fake delivery of shares.
Transfer form not adequately stamped, not properly signed and therefore companyrefusing to note the transfer.
Unscrupulous companies deliberately employing delaying tactics in noting thechange in ownership.
The interminable delay denying the buyer the opportunity of selling the shares whenthere was a sharp rally prior to receiving back the shares duly transferred from thecompany.
The delays inevitably led to disputes on entitlement of Rights, Bonus, Dividends etc.further leading to litigations against all parties involved.As against above there were number of advantages of scripless trading.Advantages of Scripless Trading
Speedier settlement, greater liquidity and reduction in delay in registration.
Prompt receipt of dividend and rights and bonus offers.
Faster transfer at reduced costs.
Elimination of problems and risks due to loss, forgery or mutilation of securities.
Immediate trading after allotment/buying of share possible.For companies too it provides a number of benefits in the form of reduced costs,
 better service to the shareholders especially Foreign Institutional Investors and less paper handling.There are two basic types of depository models viz. “dematerialization” and“immobilization”. In dematerialization, physical scrips are non-existent and depositorymaintains only the electronic ledger of shares/bonds or any other securities. Inimmobilization physical scrips are held in depository vaults, supported by book entryrecords kept on the computer. In case of need scrips can be converted into physical form if desired by the buyer/owner.There is lot of similarity between Banking system and Depository system.The Depository SystemDepository 1Depository 2Depository 3DepositoryParticipantsDepositoryParticipantsDepositoryParticipantsInvestorsBanking SystemClearing House
Bank 1Bank 2
Account HoldersAccount Holders
The similarity also extends to transfer of funds by one account holder to another by issue of cheques.The functions of depositories are,
To provide facilities for depositing and withdrawing securities by investors at their convenience.
On-line ledger statements and record keeping of securities which are deposited bythe investors.
On-line pledge of collateral securities.Benefits of Depositories
 For the country:
Growing and more liquid capital markets,
Inflow of international capital to Indian markets,
Reduced transaction costs,
Reduced chances of frauds, malpractices,
Simplification of clearing and settlement procedures,
Acceptance of global practices and norms.For the investors:
Enhanced liquidity due to speedier transfer of funds and liquidity,
Greater safety in trading in stock market,
Elimination of chances of financial loss due to reduced delay in transfer of securities,
More accurate entitlement of Rights/Bonus /Dividend etcFor issuing company:
Up-to-date information about the ownership details,
Reduced cost of printing of share certificates,
Improved chances of attracting foreign capital.For intermediaries:
Faster settlement due to Delivery vs. Payment (DVP) system,
 No bad deliveries and consequent hassles,
Increase in volumes of transactions and thereby higher earningsThe central Government had to amend following Acts for implementing provisions of Depositories Act.
Indian Stamp Act,
Companies Act,
Securities Contract (Regulation) Act,
Income Tax Act,
Benami Transactions (Prohibition) Act,

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