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Role of NSDL & CDSL in Process of Dematerialization

Role of NSDL & CDSL in Process of Dematerialization

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08/25/2015

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ROLE

OF

NSDL & CDSL
PROCESS OF

IN

DEMATERIALIZATION.

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Prepared By:
Name of Group Members Ruchit Turakhia Ankita Mamaniya Krusha Tankaria Pratik Rambhia Kinjal Kuvadia Punit Bafna Roll No 47 21 45 56 20 59

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INTRODUCTION TO DEPOSITORY
The Depositories Act
The Depositories Act, 1996, ushered in an era of efficient capital market infrastructure, improved investor protection, reduced risks and increased transparency of transactions in the securities market. It also immensely benefited the issuer companies, in terms of reduced costs and the effort expended in managing their shareholder populace. Perhaps, no other single act other than the Depositories Act has had such profound all round impact on every single stakeholder in the Indian capital markets. This legislation envisaged multiple depositories in India to ensure benefits of competition for the users of the depository system. The Depositories Act which facilitated establishment of depositories (like CDSL) in India sought to effectively curb irregularities in the capital market, and protect the interests of the investors, and paved a way for an orderly conduct of the financial markets through free transferability of securities with speed, accuracy, transparency etc. Due to the introduction of the depository system, the investors are able to enjoy many benefits like free and instant transferability in a secured manner at lower costs, free from the problems like bad deliveries, odd-lots etc. Today the tradable lot is reduced to “one unit” hence even a common man is able to invest money in one equity share or bond or debenture. The investor is able to save a lot on account of stamp duty as government has exempted stamp duty on transfer of securities at present. Investors are also spared from the problems of preserving the securities held in physical form.
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(REF: BSE—BCCD study material v3)

What is a Depository?
The Depositories Act defines a depository as “a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under subsection (1A) of section 12 of Securities and Exchange Board of India Act, 1992.” The main function of a depository is to dematerialize securities and enable their transactions in book entry form. As per The Bank for International Settlements (BIS), depository is “a facility for holding securities which enables securities transactions to be processed by book entry. Physical securities may be immobilized by the depository or securities may be dematerialized (so that they exist only as electronic records)”. In simple terms depository is an organization where securities of an investor are held in electronic form.
(REF: BSE—BCCD study material v3)

Who is a Depository Participant?
A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services. Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as DP. Banking services can be availed through a branch whereas depository services can be availed through a DP. As on September 30, 2008, a total of 711 DPs (266 NSDL, 445 CDSL) are registered with SEBI.

(REF: http://investor.sebi.gov.in/faq/dematfaq.html)

Number of Depositories in India
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At present two Depositories viz.

National Securities Depository Limited (NSDL)
NSDL is a public limited company incorporated under the Companies Act, 1956. Four renowned institutions participate in 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 the largest mutual fund of India and IDBI is the largest development bank, NSE is the largest stock exchange of India and SBI is the largest commercial bank of India having clearing facility. HDFC and Citibank also share in this system. NSDL is managed by Board of directors headed by a managing director. It is governed by its bye-laws and its business operations are regulated by business rules. NSDL interfaces with the investors through players or business partners. Constituents of depository compromise of clearing corporation, brokers, clearing member, registrar and transfer agents, company or issuer, stock exchange, bank depository participant and investors. All are electronically linked to the main depository for the settlement of trades and to perform a daily reconciliation of all accounts held with NSDL.

Central Depository Services (India) Limited (CDSL)
Second agency is CDSL - Central Depository Service (India) Limited. Main functions of this agency are centralized database and accounting. Major participant in CDSL are LIC, GIC and BSE. This agency is set up with the object to keep in mind to accelerate growth of scripless trading, with major thrust of individual participation and creating competitive environment, responsible to the user’s interests and demands to enhance liquidity. CDSL aims to retain the entire data of the investors in the central database of CDSL.

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NSDL and CDSL essentially perform the following functions through their various participants
1. Enable surrender and withdrawal of securities to and from the depository. 2. Maintain investor holdings in the electronic form. 3. Effect settlement of securities traded on the Exchanges. 4. Carry out settlement of trades not done on the Stock Exchanges i.e. Off Market Trades. 5. Coordination of benefits accruing on the depository accounts of investors.
(REF: https://www.ilfsdp.com/faq_general.htm)

Dematerialization
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Meaning of Dematerialization
Dematerialization is a process by which physical certificates of an investor are converted into electronic form and credited to the account of the depository participant. Dematted securities do not have any certificate numbers or distinctive numbers and are dealt only in quantity, i.e., the securities are replaceable.

Investors can dematerialize only those certificates that are already registered in their names and are in the list of securities admitted for dematerialization. These are: shares, scrip’s, stocks, bonds, debentures, stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securities debt, money market instruments and unlisted securities, underlying sharing of American Depository Receipts and Global Depository Receipts issued to non-resident holders. Dematerialization is the process of converting physical holdings into electronic form with the depository wherein the share certificates are shredded and corresponding entry of the number of shares is done in the opened with the depository.

The securities held in dematerialized form are fungible; that is, they do not bear any notable feature like distinctive number, folio number or certificate number. Once shares get dematerialized, they lose their identity in terms of share certificate distinctive numbers and folio numbers.

Following 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 the depository.
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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. Dematerialization Request Form (DRF) should be signed by all the holders so as to match specimen signature.

Object Of Demat System
India has adopted this system in which book entry is done electronically. It is the system where no paper is involved. Physical form is extinguished and shares or securities are held in electronic mode. Before the introduction of the depository system by the Depository Act, 1996, the process of sale, purchase and transfer of shares was a huge problem and the safety perspective was zero.

Securities that can be dematerialized
The entire depository system in India is governed by the rules made by the market regulator - SEBI. According to the SEBI (Depositories and Participants) Regulations, 1996, the following securities are eligible for holding in dematerialized form. 1. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of similar nature of any incorporated company or other body corporate, including underlying shares of ADRs and GDRs. 2. Units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securitised debt, money market instruments, government securities, national saving certificates, kisan vikas patra and unlisted securities.

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Process of Dematerialization
A holder of eligible securities in the depository system may get his physical holdings converted into electronic form by making a request through the DP with whom he has his beneficiary account.

Prerequisites for Dematerialization Request
1. The registered holder of the securities should make the request. 2. Securities to be dematerialized must be recognised by NSDL/CDSL as eligible. In other words, only those securities whose ISIN has been activated by NSDL/CDSL, can be dematerialized in the NSDL/CDSL system. 3. The company/Issuer should have established connectivity with NSDL/CDSL. Only after such connectivity is established, the securities of that company/Issuer are recognised to be "available for dematerialization" in the NSDL/CDSL system. 4. The holder of securities should have a beneficiary account in the same name as it appears on the security certificates to be dematerialized. 5. The request should be made in the prescribed dematerialization request form.
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Dematerialization Request Form

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Steps involved in Dematerialization Process
1. Client/ Investor submits the DRF (Demat Request Form) and physical certificates to DP. DP checks whether the securities are available for demat. Client defaces the certificate by stamping ' Surrendered for Dematerialization'. DP punches two holes on the name of the company and draws two parallel lines across the face of the certificate. 2. DP enters the demat request in his system to be sent to NSDL/CDSL.

Investo r

1

DP
2 A

2 3

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R&T Agent

NSDL/ CDSL

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2A. DP dispatches the physical certificates along with the DRF to the R&T Agent. 3. NSDL/CDSL records the details of the electronic request in the system and forwards the request to the R&T Agent. 4. R&T Agent, on receiving the physical documents and the electronic request, verifies and checks them. Once the R&T Agent is satisfied, dematerialization of the concerned securities is electronically confirmed to NSDL/CDSL.
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5.

NSDL/CDSL credits the dematerialized securities to the beneficiary account of the investor and intimates the DP electronically. The DP issues a statement of transaction to the client. (REF: NSE—F 017-07 NSDL handbook-III)

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