DEPOSITORY

Definition
A bank or company which holds funds or securities deposited by others, and where exchanges of
these securities take place.

About NSDL

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 standards that handles most of the securities held and settled in
dematerialised form in the 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, minimise risk
and reduce costs. At NSDL, we play 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.

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 dematerialisation 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.

CDSL was promoted by Bombay Stock Exchange

Limited (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 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.
Honourable 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 clearing house of BSE,
started in July 1999.
All leading stock exchanges like the National Stock
Exchange, Calcutta Stock Exchange, Delhi Stock
Exchange, The Stock Exchange, Ahmedabad, etc have
established connectivity with CDSL.
As at the end of Dec 2007, over 5000 issuers have
admitted their securities (equities, bonds, debentures,
commercial papers), units of mutual funds, certificate
of deposits etc. into the CDSL system.
In India, a Depository Participant (DP) is described as an agent of the depository. They are the
intermediaries between the depository and the investors. The relationship between the DPs and
the depository is governed by an agreement made between the two under the Depositories Act. In
a strictly legal sense, a DP is an entity who is registered as such with SEBI under the subsecton
1A of Section 12 of the SEBI Act. As per the provisions of this Act, a DP can offer depository-
related services only after obtaining a certificate of registration from SEBI.

SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for stockbrokers,
R&T agents and non-banking finance companies (NBFC), for granting them a certificate of
registration to act as DPs. If a stockbroker seeks to act as a DP in more than one depository, he
should comply with the specified net worth criterion separately for each such depository. No
minimum net worth criterion has been prescribed for other categories of DPs; however,
depositories can fix a higher net worth criterion for their DPs.

Basics of Depository
Depository is an institution or a kind of organization which holds securities with it, in which
trading is done among shares, debentures, mutual funds, derivatives, F&O and commodities. The
intermediatories perform their actions in variety of securities at Depository on the behalf of their
clients. These intermediatories are known as Dipositories Participants. Fundamental, There are
two sorts of depositories in India. One is the National Securities Depository Limited(NSDL) and
the other is the Central Depository Service (India) Limited(CDSL). Every Depository
Participant(DP) needs to be registered under this Depository before it begins its operation or
trade in the market.

Benefits of Depository
• Bad delivery eliminated
• Immediate transfer of shares
• No stamp duty on such transfers
• Elimination of risks that are normally associated in dealing with Physical
certificates - loss / theft / mutilation due to careless handling / forgery / etc.
• Reduced transaction cost

How do Depository operate

Depository interacts with its clients / investors through its agents, called Depository Participants
normally known as DPs.

For any investor / client, to avail the services provided by the Depository, has to open Depository
account, known as Demat A/c, with any of the DPs.
Demat Account Opening

A demat account is opened on the same lines as that of a Bank Account. Prescribed Account
opening forms are available with the DP, needs to be filled in. Standard Agreements are to be
signed by the Client and the DP, which details the rights and obligations of both parties. Along
with the form the client requires to attach Photographs of Account holder, Attested copies of
proof of residence and proof of identity needs to be submitted along with the account opening
form.

In case of Corporate clients, additional attachments required are - true copy of the resolution for
Demat a/c opening along with signatories to operate the account and true copy of the
Memorandum and Articles of Association is to be attached.

Services provided by Depository

• Dematerialisation (usually known as demat) is converting physical certificates
to electronic form
• Rematerialisation, known as remat, is reverse of demat, i.e. getting physical
certificates from the electronic securities
• Transfer of securities, change of beneficial ownership
• Settlement of trades done on exchange connected to the Depository

No. of Depository in the country

Currently there are two depositories operational in the country.

1. National Securities Depository Ltd. - NSDL - Having 95 Cr. Demat A/c as on

31-03-2010 - 300 DPs in India
2. Central Depository Services Ltd. - CDSL - Having 65 laks Demat A/c as on 31-
03-2010 - 500 DPs in India

What Does Trading Account Mean?

1. An account similar to a traditional bank account, holding cash and securities, and is
administered by an investment dealer.

2. An account held at a financial institution and administered by an investment dealer that the
account holder uses to employ a trading strategy rather than a buy-and-hold investment strategy.

Investopedia explains Trading Account

1. Though trading accounts are traditionally thought to hold only stocks, a trading account can
hold cash, foreign cash, securities and a number of other types of investments.

2. Investors who use a number of trading strategies or have a number of brokerage accounts may
separate their accounts in order to avoid confusion. One account may be a registered account for
their retirement savings; another account may be a buy-and-hold account for their long-
term stocks; another may be a margin account; and another may be a trading account used
for conducting day-trading activities.

What Does Brokerage Account Mean?

An arrangement between an investor and a licensed brokerage firm that allows the investor to
deposit funds with the firm and place investment orders through the brokerage, which then
carries out the transactions on the investor's behalf. The investor owns the assets contained in the
brokerage account and must usually claim as income any capital gains he or she incurs from the
account.
Investopedia explains Brokerage Account
There are several different types of brokerage accounts and brokerage firms; investors are able to
choose the type of brokerage account and broker that best suits their financial requirements.
Some full-service brokers provide extensive investment advice, charging high fees for their
efforts, while most online brokers simply provide a secure interface through which investors can
place trade orders and, therefore, charge relatively low fees for their services. Brokerage
accounts can also differ in terms of order execution speed, analysis tools used, scope of tradable
assets, and the extent to which investors can trade on margin.

What Does Margin Account Mean?

A brokerage account in which the broker lends the customer cash to purchase securities. The
loan in the account is collateralized by the securities and cash. If the value of the stock drops
sufficiently, the account holder will be required to deposit more cash or sell a portion of the
stock.

Investopedia explains Margin Account

In a margin account, you are investing with your broker's money. By using leverage in such a
way, you magnify both gains and losses.

The term Demat, in India, refers to a dematerialised account for individual Indian citizens to
trade in listed stocks or debentures, required for investors by The Securities Exchange Board of
India (SEBI). In a demat account, shares and securities are held electronically instead of the
investor taking physical possession of certificates. A Demat Account is opened by the investor
while registering with an investment broker (or sub broker). The Demat account number is
quoted for all transactions to enable electronic settlements of trades to take place.

Access to the Demat account requires an internet password and a transaction password as well as
initiating and confirming transfers or purchases of securities. Purchases and sales of securities on
the Demat account are automatically made once transactions are executed and completed.

Advantages of Demat
The demat account reduces brokerage charges, makes pledging/hypothecation of shares easier,
enables quick ownership of securities on settlement resulting in increased liquidity, avoids
confusion in the ownership title of securities, and provides easy receipt of public issue
allotments.

It also helps avoid bad deliveries caused by signature mismatch, postal delays and loss of
certificates in transit. Further, it eliminates risks associated with forgery, counterfeiting, and loss
due to damage stock certificates. Demat account holders also avoid stamp duty (as against 0.5
per cent payable on physical shares), filling up of transfer deeds, and obtain quick receipt of
benefits like stock splits and bonuses.

Indian Market Scenario

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 stock exchanges.[1] 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.

Object Of Demat System

India has adopted this system of electronic bookkeeping, eliminating the need for paper when
shares or securities are held in electronic form. Before the introduction of the depository system
by the Depository Act, 1996, the process of sale, purchase and transfer of shares was difficult
and there was a high risk of loss.

Demat Benefits
The benefits are enumerated as follows:

• It's a safe and convenient way to hold securities

• Immediate transfer of securities is there
• There is no stamp duty on transfer of securities
• Elimination of risks associated with physical certificates such as bad delivery,
fake securities, delays, thefts etc.
• There is a major reduction in paperwork involved in transfer of
securities,reduction in transaction cost etc.
• No odd lot problem, even one share can be sold thus there is advantage
• Change in address recorded with DP gets registered with all companies in
which investor holds securities

electronically eliminating the need to correspond with each of them separately;

• Transmission of securities is done by DP eliminating correspondence with

companies;
• Automatic credit into demat account of shares, arising out of
bonus/split/consolidation/merger etc.
• Holding investments in equity and debt instruments in a single account.

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 certificates, 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.
Benefits 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.

Demat conversion
Converting physical records of investments into electronic records is called dematerialising
securities. In order to dematerialise physical securities investors must fill in a DRF (Demat
Request Form) which is available with the DP and submit the same along with physical
certificates. Separate DRFs must be filled for each ISIN Number. The complete process of
dematerialisation is outlined below:

• Surrender certificates for dematerialisation to your depository participant.

• Depository participant intimates Depository of the request through the
system.
• Depository participant submits the certificates to the registrar of the Issuer
Company.
• Registrar confirms the dematerialisation request from depository.
• After dematerialising the certificates, Registrar updates accounts and informs
depository of the completion of dematerialisation.
• Depository updates its accounts and informs the depository participant.
• Depository participant updates the demat account of the investor.

Demat Options
Banks score over others Around 200 “depository participants” (DPs) offer the demat account
facility. A comparison of the fees charged by different DPs is detailed below. But there are three
distinct advantages of having a demat account with a bank — quick processing, accessibility and
online transaction. Generally, banks credit your demat account with shares in case of purchase,
or credit your savings accounts with the proceeds of a sale on the third day. Banks are also
advantageous because of the number of branches they have. Some banks give the option of
opening a demat account in any branch, while others restrict themselves to a select set of
branches. Some private banks also provide online access to the demat account. So, you can check
on your holdings, transactions and status of requests through the net banking facility. A broker
who acts as a DP may not be able to provide these services.

Fees Involved
There are four major charges usually levied on a demat account: Account opening fee, annual
maintenance fee, custodian fee and transaction fee. All the charges vary from DP to DP.
 Account-opening fee

Depending on the DP, there may or may not be an opening account fee. Private banks, such as
HDFC Bank and UTI Bank, do not have one. However, players such as ICICI Bank, Globe
Capital, Karvy Consultants and the State Bank of India to do so. But most players levy this when
you re-open a demat account, though the Stock Holding Corporation offers a lifetime account
opening fee, which allows you to hold on to your demat account over a long period. This fee is
refundable.

Annual maintenance fee

This is also known as folio maintenance charges, and is generally levied in advance.

Custodian fee

This fee is charged monthly and depends on the number of securities (international securities
identification numbers — ISIN) held in the account. It generally ranges between Rs 0.5 to Rs 1
per ISIN per month. DPs will not charge custody fee for ISIN on which the companies have paid
one-time custody charges to the depository.

Transaction fee

The transaction fee is charged for crediting/debiting securities to and from the account on a
monthly basis. While some DPs, such as SBI, charge a flat fee per transaction, HDFC Bank and
ICICI Bank peg the fee to the transaction value, subject to a minimum amount. The fee also
differs based on the kind of transaction (buying or selling). Some DPs charge only for debiting
the securities while others charge for both. The DPs also charge if your instruction to buy/sell
fails or is rejected. In addition, service tax is also charged by the DPs.

In addition to the other fees, the DP also charges a fee for converting the shares from the
physical to the electronic form or vice-versa. This fee varies for both demat and remat requests.
For demat, some DPs charge a flat fee per request in addition to the variable fee per certificate,
while others charge only the variable fee.

For instance, Stock Holding Corporation charges Rs 25 as the request fee and Rs 3 per certificate
as the variable fee. However, SBI charges only the variable fee, which is Rs 3 per certificate.
Remat requests also have charges akin to that of demat. However, variable charges for remat are
generally higher than demat. Some of the additional features (usually offered by banks) are as
follows.Some DPs offer a frequent trader account, where they charge frequent traders at lower
rates than the standard charges.Demat account holders are generally required to pay the DP an
advance fee for each account which will be adjusted against the various service charges. The
account holder needs to raise the balance when it falls below a certain amount prescribed by the
DP. However, if you also hold a savings account with the DP you can provide a debit
authorisation to the DP for paying this charge.Finally, once you choose your DP, it will be
prudent to keep all your accounts with that DP, so that tracking your capital gains liability is
easier. This is because, for calculating capital gains tax, the period of holding will be determined
by the DP and different DPs follow different methods. For instance, ICICI Bank uses the first in
first out (FIFO) method to compute the period of holding. The proof of the cost of acquisition
will be the contract note. The computation of capital gains is done account-wise.

Opening an account
Steps involved in opening a demat account First an investor has to approach a DP and fill up an
account opening form. The account opening form must be supported by copies of any one of the
approved documents to serve as proof of identity (POI) and proof of address (POA) as specified
by SEBI. Besides, production of PAN card in original at the time of opening of account has been
made mandatory effective from April 1, 2006.

All applicants should carry original documents for verification by an authorized official of the
depository participant, under his signature. Further, the investor has to sign an agreement with
DP in a depository prescribed standard format, which details rights and duties of investor and
DP. DP should provide the investor with a copy of the agreement and schedule of charges for
their future reference. The DP will open the account in the system and give an account number,
which is also called BO ID (Beneficiary Owner Identification number). The DP may revise the
charges by giving 30 days notice in advance. SEBI has rationalised the cost structure for
dematerialisation by removing account opening charges, transaction charges for credit of
securities, and custody charges vide circular dated January 28, 2005. Further, SEBI has vide
circular dated November 9, 2005 advised that with effect from January 9, 2006, no charges shall
be levied by a depository on DP and consequently, by a DP on a Beneficiary Owner (BO) when
a BO transfers all the securities lying in his account to another branch of the same DP or to
another DP of the same depository or another depository, provided the BO Account/s at
transferee DP and at transferor DP are one and the same, i.e. identical in all respects. In case the
BO Account at transferor DP is a joint account, the BO Account at transferee DP should also be
a joint account in the same sequence of ownership.

Disadvantages of Demat
The disadvantages of dematerialization of securities can be summarised as follows:

Trading in securities may become uncontrolled in case of dematerialized securities.

It is incumbent upon the capital market regulator to keep a close watch on the trading in
dematerialized securities and see to it that trading does not act as a detriment to investors.

The role of key market players in case of dematerialized securities, such as stock-brokers, needs
to be supervised as they have the capability of manipulating the market.
Multiple regulatory frameworks have to be confirmed to, including the Depositories Act,
Regulations and the various By-Laws of various depositories.

Additionally, agreements are entered at various levels in the process of dematerialization. These
may cause anxiety to the investor desirous of simplicity.

Transfer of Shares between DPs

To transfer shares, we need to fill the Depository Instruction Slip Book (DIS). Firstly we need to
check, whether both Demat account's Depository Participant is same or not(CDSL or NSDL) If
both of them are different, then we need an INTER Depository Slip (Inter DIS). If they are same,
then we need INTRA Depository Slip (Intra DIS).

For example: If we have one Demat account with CDSL and other Demat account with NSDL,
then we need an Inter DIS.

Generally, brokers issue Intra DIS, so do check with broker.

Once we identify the correct DIS, fill the relevant information like

scrip name
INE number
quantity in words and figures

and submit that DIS for the transfer to the broker with signatures. The transferor broker shall
accept that DIS in duplicate and acknowledge receipt of DIS on duplicate copy.

Do try to submit that DIS when market is on. Accordingly, date of submission of DIS and date of
execution of DIS can be same or a difference of one day is also acceptable.

For transfer, you shall also pay the broker some charges.

Remember: DIS is almost like a cheque book. Accordingly, it can be misused if issued blank.
So deposit only a completely filled in Slip to broker. Do cut out unfilled rows so that none can
fill them later on.