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What is meant by depository, Issuer, Participant and Beneficial

owner? Discuss their respective rights and obligations under the


Depository Act, 1996.
As per section 17 of depository Act the rights and obligations of the depositories,
participants and the issuers whose securities are dealt with by a depository shall be
specified by the regulations.

Under the Depository Act, 1996 depository means a company formed and
registered under the Companies Act, 1956, and which has been granted a
certificate of registration by SEBI under sub-section (1A) of Section 12 of the
Securities and Exchange Board of India Act, 1992). (Section 2(1) (e))

Work of Depository-
The word ‘depositary’ is defined as “the party of the institution (company)
receiving a deposit. A depository holds securities (like shares, debentures, bonds,
Government Securities, units etc.) of investors in electronic form. Besides holding
securities, a depository also provides services related to transactions in securities. It
acts as a trustee of the owner since the securities are entrusted with him in trust. He
is also the agent of the owner of the securities.

Thus 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 is 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.

Under the depository system - securities are deposit by the various investors with
the depository in demat form (e- form). This would take the form of a transfer by
the holder of securities in favour of depository. Once the shares are lodged with the
depository, their transfer would be through book entry transfers in accounts
maintained by the depository. Thus the main functions of a depository are to
dematerialize the securities and enable their transaction in book entry form.
Rights of Depositories
Right to get certificate
Right to become a registered Owner (Section 10(1, 2))
Power to make rules or byelaws

 A depository has to get enter into an agreement with participant or its agent
for dematerialisation of shares. Every depository has a right to get
certificate of commencement of business from SEBI.

 Under this Act after dematerialisation of share depository shall be


registered owner in the register of issuer (company) for the purposes of
effecting transfer of ownership of security on behalf of a beneficial owner.
But the depository as a registered owner, shall not have any voting rights or
any other rights in respect of securities held by it.
 A depository shall make bye-laws consistent with the provisions of this Act
and the regulations.

Obligation of depository
Obligation of depository to register name of Investor as Beneficial owner in its
record
Obligation to maintain the record
Obligations of depository to furnish information and records (Section 13)
Liabilities of Depositories to indemnify loss in certain cases (Section 16)
Duty of depository to register the transfer of security- (section 7)

 A depository shall, on receipt of information of issuer (company), enter the


name of the person (investor) as the beneficial owner, in its records.

 Every depository, before commencing business of dematerialisation of


shares, must have an adequate system for reviewing, monitoring and
evaluating the depository’s controls, systems, procedures and safeguards to
prevent manipulation of records and transactions. It is required to get
certificate from SEBI.

 It should conduct an annual inspection of these procedures and forward a


copy of the inspection report to SEBI.
 Every depository shall maintain a register and an index of beneficial owners
in the manner provided in the Companies Act, 1956.

 Every depository shall furnish information about the transfer of securities in


the name of beneficial owners to the issuer, at such intervals and in such
manner as may be specified by the bye-laws.
 The depository is also required to ensure that the integrity of the automatic
data processing systems is maintained at all times and take all precautions
necessary to ensure that the records are not lost, destroyed or tampered with.

 In the event of loss or destruction, sufficient back up of records should be


available at a different place.

 If any loss caused to the beneficial owner due to the negligence of the
depository or the participant, the depository shall indemnify such beneficial
owner. Where the loss due to the negligence of the participant is indemnified
by the depository, the depository shall have the right to recover the same
from such participant.

 Adequate measures should be taken, including insurance, to protect the


interests of the beneficial owners against any risks.

 Every depository is required to extend all such co-operation to the beneficial


owners, issuers, issuers’ agents, custodians of securities, other depositories
and clearing organisations, as is necessary for the effective, prompt and
accurate clearance and settlement of securities transactions and conduct of
business.

Beneficial owner
Beneficial owner means a person whose name is recorded as beneficial owner
with a depository in its record under section 2(1) (a).

Rights of Beneficial Owner


Rights of beneficial owner to get benefits of securities (Section 10(3))
Right to pledge or hypothecation of securities held in a depository (Section 12)
Right to get remat or to get certificate in respect of any security (Section 14)
Right of Beneficial owner to get indemnify or recover loss in certain cases
Right of Beneficial Owner to consider member of company (section 6)
Right to choose -Options to receive security certificate or hold securities with
depository (Section 8)

 The beneficial owner shall be entitled to all the rights and benefits in respect
of his securities held by a depository.
 A beneficial owner may with the previous approval of the depository create
a pledge or hypothecation in respect of a security owned by him through a
depository. Any entry in the records of a depository shall be evidence of a
pledge or hypothecation.
 A beneficial owner has right to go for remat in respect of any security. If a
beneficial owner seeks to opt out of a depository in respect of any security
he shall inform the depository accordingly.
 Beneficial owner is entitled to recover loss from depository if it is caused
due to the negligence of the depository or the participant, the depository
shall indemnify such beneficial owner.
 Every person, subscribing to securities offered by an issuer, shall have the
option either to receive the security certificates or hold securities with a
depository.
 Where a person opts to hold a security with a depository, the issuer shall
intimate such depository the details of allotment of the security, and on
receipt of such information the depository shall enter in its records the name
of the allottee as the beneficial owner of that security.
 To facilitate the beneficial owner of shares, on whose behalf the depository
holds the shares, to be recognized as members, Section 41(3) of the
Companies Act, provides that every person holding equity share capital of a
company and whose name is entered as a beneficial owner in the records of
a depository shall be deemed to be a member of the concerned company.

In Probir Kumar Misra v. Ramani Ramaswamy it was held that after the
Depositories Act, 1996, such depositors who are holding equity share capital of the
company and whose name is entered as beneficial owner are also deemed to be
members of the company, thus making them members under the Act.
In the case of Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd. it
was contended that only persons holding equity shares can be members of the
Company in terms of Section 41(3) of the Act. This was rejected by Court and it
was stated that Sub-section (3) of Section 41 is therefore only in addition to
Section 41(1) and Section 41(2) and not in derogation or substitution of the first
two subsections. The word ’shareholder’ and ‘member’ is used in the same
connotation under the Act and the Section covers the third category of equity
shareholders who are neither subscribers as contemplated by Sub-section (1) nor
whose names are entered in the register of members as contemplated under Sub-
section (2) of Section 41.

Obligations of beneficial owner


Obligations in respect to securities (Section 10(3))
Obligations of beneficial owner to intimate depository, issuer
Obligations of beneficial owner to intimate about pledge of securities (Section
12)
Duty to inform issuer
 The beneficial owner shall be subjected to all the liabilities in respect of his
securities held by a depository.

 Beneficial owner shall intimate the depository. The depository shall, on


receipt of intimation, make appropriate entries in its records and shall inform
the issuer. Every issuer shall, within 30 days of the receipt of intimation
from the depository and on fulfilment of prescribed conditions and on
payment of prescribed fees, issue the certificate of securities to the beneficial
owner or the transferee, as the case may be.
 Every beneficial owner shall give intimation to the depository about pledge
or hypothecation of securities and such depository shall thereupon make
entries in its records accordingly.

 If a beneficial owner or a transferee of any security seeks to have custody of


such security the depository shall inform the issuer accordingly.

Issuer
Issuer means any person making an issue of securities (section 2(1)(f) )
Any person, who seeks to avail the services of a depository, has to enter into an
agreement with depository (section 5) and shall surrender the certificate of security
to the issuer. On receipt of certificate of security, the issuer (company) shall cancel
the certificate of security and substitute in its records the name of the depository as
a registered owner in respect of that security and inform the depository
accordingly. A depository shall, on receipt of information of issuer (company),
enter the name of the person referred as the beneficial owner, in its records.
Obligations of issuer
Obligation to arrange copy of record
Duty to record name of registered owner
Every issuer shall make available to the depository copies of the relevant records in
respect of securities held by such depository.

Participant
Participant (Section 2(1) (g) ) means a person registered as participant by SEBI
under sub-section (1A) of Section 12 of the Securities and Exchange Board of
India Act, 1992, popularly known as depository participant. The participant is a
person through whom the beneficial owner of the securities would avail the
depository service and is the custodial agencies like banks, financial institutions as
well as large corporate brokerage firms. Depository Participants includes brokers,
banks, insurance companies, Stock Exchange clearing cells, the Reserve Bank of
India, financial institutions, institutional managers, fund mangers etc.

Obligation of Participant, depositor and Issuer


Obligation to enter into agreement
Duty to redress investors' grievances
Duty to dematerialisation of shares or issue of certificate of securities in time
Duty to reconcile records

A depository shall enter into an agreement with one or more participants (DPs) as
its agent. Any person, through a participant, may enter into an agreement, with any
depository for availing its services. The relationship and dealings between the
depository and the participant will be governed by an agreement and the
participant is an agent of the depository vides Section 4 (1) of the Act.
 If a depository or participant or any issuer or its agent, who is registered as
an intermediary under the provisions of section 12 of SEBI Act, 1992, and is
required to enter into an agreement, fails to enter into such agreement, such
depository or participant or issuer or its agent or intermediary shall be liable
to a penalty (sec. 19B).
 If any depository or participant or any issuer, is bound to redress the
grievances of the investors within the time specified, on the call of SEBI, if
they fails to redress such grievances within the time specified by the Board,
such depository or participant or issuer or its agents or intermediary shall be
liable to a penalty (sec. 19C).

 Issuer has obligation to dematerialise or issue the certificate of securities on


opting out of a depository by the investors, within the time specified under
this Act or regulations. If Issuer abets in delaying the process of
dematerialisation or issue the certificate of securities on opting out of a
depository of securities, such issuer shall be liable to a penalty (sec. 19D).

 Depository or participant or any issuer has duty to reconcile the records of


dematerialised securities with all the securities issued by the issuer as
specified in the regulations, such depository or participant or issuer shall be
liable to a penalty .(section 19E)

CONCLUSION:
Regulation 26 of the SEBI (Depositories and Participants) Regulations, 1996 states
that depositories, participants, issuers, and issuers agent, in addition to the rights
and obligations laid down in the Depositories Act and the bye laws shall have the
rights and obligations arising from the agreements entered into by them.