Disadvantages/Problems of the Depository System

Some disadvantages were about the depository system were knownbeforehand. But si
nce the advantages outweighed the shortcomings of dematerialisation, the deposit
ory system was given the go-ahead.
1.
Lack of control:
Trading in securities may become uncontrolledin case of dematerialized securitie
s.
2.
Need for greater supervision:
It is incumbent upon the capitalmarket regulator to keep a close watch on the tr
ading indematerialized securities and see to it that trading does not actas a de
triment to investors. The role of key market players incase of dematerialized se
curities, such as stock brokers, needs tobe supervised as they have the capabili
ty of manipulating themarket.
3.
Complexity of the system:
Multiple regulatory frameworkshave to be confirmed to, including the Depositorie
s Act,Regulations and the various Bye Laws of various depositories.Additionally,
agreements are entered at various levels in theprocess of dematerialization. Th
ese may cause anxiety to theinvestor desirous of simplicity in terms of transact
ions indematerialized securities.
Besides the above mentioned disadvantages, some other problems with the system h
ave been discovered subsequently. With new regulations people are finding more a
nd moreloopholes in the system. Some examples of the malpractices and fraudulent
activities thattake place are:
1.Current regulations prohibit multiple bids or applications by a single person.
Butinvestors open multiple demat accounts and make multiple applications tosubs
cribe to IPOs in the hope of getting allotment of shares.
2.Some listed companies had obtained duplicate shares after the originals were p
ledged with banks and then sold the duplicates in the secondary market to makea
profit.
3.Promoters of some companies dematerialised shares in excess of the company sissu
ed capital.
4.Certain investors pledged shares with banks and got the same shares reissued a
sduplicates.
5.There is an undue delay in the settlement of complaints by investors againstde
pository participants. This is because there is no single body that is in charge
of ensuring full compliance by these companies.