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Concept of Demat

Concept of Demat

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Published by: pratik_nr99 on Dec 08, 2009
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07/23/2010

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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 entriesin the book of depositories. Essentially, unlike the traditional method ofpossessing a share certificate to the effect of ownership of shares, in the dematsystem, the shares are held in a dematerialized form. This system works through adepository who is registered with the Securities and Exchange Board of India(SEBI) to perform the functions of a depository as regulated by SEBI. UnderSection 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 listedcompany in the excess of Rs. 10 Crores has to be issued in dematerialized form bycomplying with the requisite provisions of the Depositories Act, 1996.BackgroundIndian capital market has seen unprecedented boom in its activity in the last 15years in terms of number of stock exchanges, listed companies, trade volumes,market intermediaries, investor population, etc. However, this surge in activityhas brought with it numerous problems that threaten the very survival of thecapital markets in the long run, most of which are due to the large volume ofpaper work involved and paper based trading, clearing and settlement.Until the late eighties, the common man kept away from capital market and thus thequantum of funds mobilized through the market was meager. A major problem,however, continued to plague the market. The Indian markets were drowned in sharesin the form of paper and hence it was problematic to handle them. Fake and stolenshares, fake signatures and signature mismatch, duplication and mutilation ofshares, transfer problems, etc. The investors were scared and were undercompensated for the risk borne by them. The century old system of trading andsettlement requires handling of huge volumes of paper work. This has made theinvestors, both retail and institutional, wary of entering the capital market.However, lack of modernization become a hindrance to growth and resulted increation of cumbersome procedures and paper work.However, the real growth and change occurred from mid-eighties in the wake ofliberalization initiatives of the Government. The reforms in the financial sectorwere envisaged in the banking sector, capital market, securities marketregulation, mutual funds, foreign investments and Government control. Theseinstitutions and stock exchanges experienced that the certificates are the maincause of investors` disputes and arbitration cases. Since the paper work was notmatching the rapid growth so there was a need for a better system to ensureremoval of these impediments.Government of India decided to set up a fully automated and high technology basedmodel exchange that could offer screen-based trading and depositories as theultimate answer to all such reforms and eliminate various bottlenecks in thecapital market, particularly, the clearing and settlement system in stockexchanges.[1] A depository in very simple terms is a pool of pre-verified sharesheld in electronic mode which offers settlement of transactions in an efficientand effective way.Meaning of DematerializationDematerialization is a process by which physical certificates of an investor areconverted into electronic form and credited to the account of the depositoryparticipant. Dematted securities do not have any certificate numbers ordistinctive numbers and are dealt only in quantity, i.e., the securities arereplaceable.Investors can dematerialize only those certificates that are already registered intheir names and are in the list of securities admitted for dematerialization.
 
These are: shares, scrips, stocks, bonds, debentures, stock or other marketablesecurities of a like nature in or of any incorporated company or other bodycorporate, units of mutual funds, rights under collective investment schemes andventure capital funds, commercial paper, certificate of deposit, securities debt,money market instruments and unlisted securities, underlying sharing of AmericanDepository Receipts and Global Depository Receipts issued to non-resident holders.[2] Dematerialization is the process of converting physical holdings intoelectronic form with the depository wherein the share certificates are shreddedand corresponding entry of the number of shares is done in the opened with thedepository.dThe securities held in dematerialized form are fungible; that is, they do not bearany notable feature like distinctive number, folio number or certificate number.Once shares get dematerialized, they lose their identity in terms of sharecertificate distinctive numbers and folio numbers.cFollowing requisites are necessary for dematerialization of securities:1. Investors should have a depository account.2. Securities should be from the eligible list of securities issued by thedepository.[3]3. Securities must be in the name of the account holders and owned by him.4. Separate demat requisition form is required for each issuer company.5. DRF[4] should be signed by all the holders so as to match specimen signature.5Object Of Demat SystemIndia has adopted this system in which book entry is done electronically. It isthe system where no paper is involved. Physical form is extinguished and shares orsecurities are held in electronic mode. Before the introduction of the depositorysystem by the Depository Act, 1996, the process of sale, purchase and transfer ofshares was a huge problem and the safety perspective was zero.sDemat has the following advantages:Demat system not only provides smooth and hassle-free way of dealing in shares, italso does away with all the associated tensions.Bad deliveries are minimizedPostal delays and loss of shares in transit is preventedImmediate transfer of sharesNo stamp duty on transferLess paper work (reduction in huge volumes).Faster settlement cycles and payouts.The demat system totally avoids the associated heartburns arising from theft ofshares, mutilation, forgery, counterfeit shares and loss of shares during anatural calamity.nThe Depository system has the following benefits to different groups:Benefit to the CountryThe depository system helps the capital market to be more liquid, attracting moreforeign investors and is in compliance with international standards, as it createsefficient and risk-free trading environment.It minimises the settlement risks and frauds in carrying out transactions incapital markets and thus can restore faith of investors in capital markets.It helps to reduce delay in trading practices creating investor friendlyatmosphere in the capital markets.aBenefit to the CompanyThe depository system helps in reducing the cost of new issues due to lessprinting 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 withshareholders, investor etc.sBenefit to the InvestorThe 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.It provides more acceptability and liquidity of securities.IBenefit to BrokersThe 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.IAgency in DepositoriesIndia has chosen the concept of multi-depositories.[5] Presently, there are twodepositories registered with SEBI;National Securities Depository Limited (NSDL)Central Depository Service (India) Limited (CDSL)CNational Securities Depository Limited (NSDL)Both agencies are linked with each other. NSDL is a public limited companyincorporated under the Companies Act, 1956. Four renowned institutions participatein it. Unit Trust of India (UTI), Industrial Development Bank of India (IDBI),National Stock Exchange of India (NSE), State Bank of India (SBI).UTI is thelargest mutual fund of India and IDBI is the largest development bank, NSE is thelargest stock exchange of India and SBI is the largest commercial bank of Indiahaving clearing facility. HDFC and Citibank also share in this system.[6] NSDL ismanaged by Board of directors headed by a managing director. It is governed by itsbye-laws and its business operations are regulated by business rules. NSDLinterfaces with the investors through players or business partners. Constituentsof depository compromise of clearing corporation, brokers, clearing member,registrar and transfer agents, company or issuer, stock exchange, bank depositoryparticipant and investors. All are electronically linked to the main depositoryfor the settlement of trades and to perform a daily reconciliation of all accountsheld with NSDL.hCentral Depository Service (India) Limited (CDSL)Second agency is CDSL - Central Depository Service (India) Limited. Main functionsof this agency are centralized database and accounting. Major participant inCDSL[7] are LIC, GIC and BSE. This agency is set up with the object to keep inmind to accelerate growth of scripless trading, with major thrust of individualparticipation and creating competitive environment, responsible to the usersinterests and demands to enhance liquidity. CDSL aims to retain the entire data ofthe investors in the central database of CDSL. It has opted for it with thefollowing objectives:fWithin time information is available to issuers/registrars and share transfer
 agents.aCompanies can monitor critical holdings, e.g., holding of FIIs and FIs, investment

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