Executive Summary

The Indian Financial System has undergone a considerable change in the recent
past. The Financial Sector reforms, along with technological advancement have
integrated international markets, which have facilitated the scope for uninterrupted
mobility of funds in various financial markets. It has also led to efficient and low-cost
transactions related to securities. This can be seen in the Indian financial sector reforms
also, which started in the early 1990s.

Dematerialization of financial securities is the first sign of financial reforms in

India. Finance Ministry and SEBI realized the need of more efficient financial system. As
a result of this NSDL and CDSL came into picture. It aims at ensuring the safety and
soundness of Indian marketplaces by developing settlement solutions that increase
efficiency, minimize risk and reduce costs.

Our project on “Demat System in India” gave us a detailed picture of how

securities are transferred electronically in the share market. In our project we had done a
comparative study of the various Depository Participants in Ahmedabad on the basis of
their services and charges. This study helped us in finding out what additional services
other DPs provide and how the charges differ. Another aspect of our project was to get a
feedback from the clients regarding the Demat services provided at Anagram Securities
Ltd. By meeting the various clients we were able to find out the scope of improvement in
the services provided at Anagram.

It becomes increasingly important for students of management to understand the

developments in the financial infrastructure that facilitates the whole financial system.
We were fortunate enough to get an opportunity to do our summer training in such an
area as it gave us a wide understanding of the entire demat system in our country.
 SCOPE OF THE PROJECT
INTRODUCTION

As a part of our summer training undertaken at Anagram Securities Ltd., we got

an opportunity to learn and understand the process of the Demat System. The core of the
project was to understand the working of a Depository Participant and thereby get an
overall view of how the securities transfer takes place electronically in the share bazaar.

OBJECTIVE

The basic objectives of the project were as follows:

1. Firstly, the core objective of our summer training was to understand the practical
working of an organization, which so far we had only read about in the books.
This training was our first experience of working in any organization which gave
us an opportunity to look at the various aspects such as the hierarchy of
employees in the organization, functioning of various departments, HR practices,
flow of information etc.

2. The next objective was to apply the theoretical knowledge gained during our
course of MBA Programme. This involves a wide area of topics like organization
behavior, structure and design of organization, research methodologies and
application of statistical for quantitative analysis.

3. Another main objective was to get a first-hand experience of working in an

organization, which would be helpful for our future endeavor. For any MBA
student it is crucial to get a good experience during the summer training. This
gives the student a closer view of the actual working, thus maturing the view of
the student as regards to the same.
 4. To understand the financial system better, it is very necessary to understand the
mechanism that facilitates it. Considering the contemporary developments in the
Indian financial mechanism we felt that it would be better for us to understand
the Demat system of Indian securities market. So the objective of the project was
to study the various depository participants of Ahmedabad, which would give us
a better idea of the part of the financial infrastructure.

5. Under the guidance of our project mentor, we realized that the conversion of
physical securities into electronic form changed the way in which the security
holders were looking at the things. It changed security level, convenience level,
cost of holding and transacting in the securities and so on. So we decided to study
these aspects along with the other objectives. The comparative study of various
DPs followed by this enabled Anagram to take a re-look at its position regarding
various aspects vis-à-vis other DPs.

6. Moreover, we were asked to get a feedback of the services of the clients of

Anagram Securities Ltd. and to find out the scope of improvement in the same.
By doing so we were able to find out what the clients thought about the services
provided and also what additional services could be provided.

SOURCES OF INFORMATION

In our project we were given a complete view of the mechanism of the Demat
system as a base. We also gained some important knowledge about the fundamentals of
the system by referring to certain material provided by NSDL as well as got a lot of
information from the GLS library. A large amount of information on the related topics
was retrieved from the Internet without which our knowledge would have remained
shallow and incomplete.
 APPROACH

We had done the project in a group of three students. As we were required to visit
the different DPs and gather the relevant information, the approach we thought to be the
most appropriate was as follows:

 Two of us approached the DPs as students, who were interested in studying their
services. This was done by getting a questionnaire filled up by the DP in-charge.
 One of us approached the DPs as a prospective client, who was interested in
opening an account in their DP.

Another aspect of our project was to get a feedback from the clients of Anagram
Securities Ltd. with regards to the services and scope of improvement. Our approach with
regards to this was a prior appointment with the clients, which consisted mostly of the
sub-brokers, and some individual clients. Some of the clients were available at the office
of Anagram itself.

METHODOLOGY OF DATA COLLECTION

 We used the questionnaire method of data collection to get the required

information from the DPs as well as the clients.
 We had also made phone calls to the DPs to get accurate information for account
opening.
 Another method to get the information was a direct approach in which we
approached the DPs/clients and got a direct response from them.
 ANALYSIS OF DATA

After collecting the required information from all the above-mentioned sources,
what we got was raw data. Such raw data would not be of much help to anyone. As taught
in our Business Research Methodology course, we tried to organize this data into a
systematic report, which would enable the reader to understand it better.

Followed by this we tried to read between the lines and listed some important
conclusions that we could draw from the information. This analysis was very helpful in
understanding in depth the various factors that affect the working of a DP as a whole and
the inter-relationships that exist among them.

Another aspect of our analysis included a study of the type of services provided to
the clients of Anagram Securities Ltd. and the scope of improvement if any in the same.
This information would be very helpful to Anagram Securities Ltd. in improving their
services and customer satisfaction.
 DEMAT SYSTEM IN INDIA

THE WORLD OF ELECTRONIC TRANSFER OF SECURITIES

In this new era of change and transformation, where time zones have disappeared
and distance does not matter any more, each and every aspect of our life is being
governed by knowledge-driven technology and communication. Even in a developing
country like India, where nearly 33% of the population still lives below the poverty line,
we can observe the transformation of the country from an agricultural and industrial
economy, into knowledge and information-based economy.

India has had a vibrant capital market that is more than a century old, and the
Indian shareholders are very much involved in it, which has largely contributed to its
economic growth and development. Two of the major share markets in India, BSE and
NSE, are widely reflective of the pattern of growth of the Indian economy. We can see
that a large numbers of players are stepping into the share bazaar with an expectation of
reaping huge benefits – some for long-term investment purposes and others for windfall
profits. Most of these new players are tech-savvy and constantly in shortage of time.

In this new technology-driven era, can the share market be left behind?

Modernization in the trading and settlement system has been witnessed in the
capital market through automated trading mechanism of Demat. The advent of Electronic
trading and settlement has brought in transparency in trading and has eliminated risks
associated with Bad Delivery and handling huge load of paperwork. The country has
made a remarkable growth in the capital market by switching over to electronic trading.

Indian investor community has undergone sea changes in the past few years. India
now has a very large investor population and ever increasing volumes of trades.
However, this continuous growth in activities has also increased problems associated
with stock trading. Most of these problems arise due to the intrinsic nature of paper based
trading and settlement, like theft or loss of share certificates. This system requires
handling of huge volumes of paper leading to increased costs and inefficiencies. Risk
exposure of the investor also increases due to this trading in paper.

In this chapter we intend to discuss in detail the basics of a depository system, the
depository participants (DP) and the dematerialization of shares.

DEPOSITORY SYSTEM

Your money may be held in the form of liquid cash at your home or may be
deposited in a bank. The bank holds your funds in the electronic form and subsequently
debits or credits the account, depending on your issuance of cheques or deposit of
cheques. The advantages of safety and convenience of dealing with a bank overweigh the
reasons for holding liquid cash in your home. Your financial assets such as Equity Shares
may be compared to the above example. You may hold physical share certificates in your
home and be exposed to the various risks of lack of safety, mutilation, loss etc.
Alternatively, you may deposit your shares in an organization called a Depository, which
holds your shares in the electronic form.

A Depository is a securities "bank," where dematerialized physical securities are

held in custody, and from where they can be traded. This facilitates faster, risk-free and
low cost settlement. Thus, a Depository is akin to a bank and performs activities similar
in nature.
 COMPARISON OF DEPOSITORY WITH BANK
Depository functions like a securities bank, where the dematerialized physical
securities are traded and held in custody. This facilitates faster, risk free and low cost
settlement. Depository is much like a bank and perform many activities that are
similar to a bank. Following table compares the two.

Bank Depository

Holds funds in accounts Holds securities in account

Transfers funds between accounts Transfers securities between accounts

Transfers without handling money Transfers without handling securities

Safekeeping of money Safekeeping of securities

COMPARISON OF DEPOSITORY SYSTEM WITH

PHYSICAL SHARE SYSTEM

 The risk of loss, mutilation is common for physical certificates and completely
removed in electronic shares.
 Handling of a large number of physical certificates is ended in the Depository
mode.

 In the electronic segment, there are no bad delivers as in physical segment.

 There is no stamp duty payable in electronic shares compared to the duty of

0.50% in the physical segment while transferring ownership.

 In loans against shares, banks usually charge a lower interest rate and margin
money than in the physical share certificates.
  Settlements in the Stock Exchanges have commenced in the electronic segment
and have proven to be far more efficient and convenient compared to physical
shares.

BENEFITS OF DEPOSITORY SYSTEM

1. Elimination of Bad Deliveries.

In the Depository environment, once holdings of an investor are dematerialized, the

question of bad delivery does not arise. Hence after dematerialization, Depository /
Depository Participants cannot hold the Dematerialized Securities " Under Objection ".

As per claims of NSDL, in the physical environment, about 20% of delivered stock
constitutes bad deliveries. Of these, about 1% is ultimately absorbed by the system as bad
delivery cost.

Rectification of objection always involves extensive follow up by the investor. This

means that in the physical environment, every fifth person taking delivery of stock gets
securities, the genuineness to which there is a doubt whereas he parts with genuine funds.

2. Elimination of all Risks of Physical Certificates.

Physical Certificates are usually exposed to security risks due to theft of Stocks. The
buyers of the Securities are also exposed to mutilation and / or loss of certificates during
movements through and from the registrars. This requires the investor to incur additional
burden for obtaining Duplicate Certificates including cost of advertisements, etc. This
problem does not arise in the Depository Environment.

3.Special concession from Govt. of India for Stamp Duty.

Section 30 of the Depositories Act, 1996, has made special provision, which exempt the
Transfer of Equity Instruments & Units of Mutual Funds in the Depository from
incidence of Stamp Duty.
In case of Physical mode of Transfer of Equity instruments & Units of Mutual Funds, the
buyers had to shell out for Stamp Duty @ 0.5% of the purchase cost.

4. Immediate Transfer and Registration of Securities.

In the Depository environment, investors (Clients) become Legal Owner of the Securities
once the Securities are credited to the investors account with the Depository Participants
on pay out, here in after the investors becomes the Beneficial Owner of the Depository.

The Depository System has relived the Buyer of the Securities from the exercise of
sending the Securities to the Issuer for getting the securities transferred to his own name
as Depository itself is the registered owner of Dematerialized Stocks is empowered to
effect transfer of Ownership.

In the Physical mode of Transfers usually takes around three to four months and is rarely
completed within the statutory framework of two months. The delay in the process might
expose the investor to opportunity cost due to delay in transfer. The Transferee is further
exposed to risk of loss of Securities in transit.

5.Shorter settlement Cycle.

The Depository affects transfers through Book Entry, and usually follows rolling
settlement cycle of T+3. In the T+3 settlement, all trades are settled on the 3rd working
day from the trade day. This enables faster turnover of stock and prompt liquidity to the
investor.

6. Pay-in and Pay-out of Securities / Funds on the same day for Demat trades.
As mentioned above, in the Demat Segments the settlement of trades (both securities and
funds) is on the 3rd working day from the trade day. This enables the Client / Buyer who
makes the payments on the 3rd working day, to receive the securities in his Accounts with
his/her D.P. on the same day in the evening and a Seller / Client who delivers the
securities on the 3rd working day to receive the funds on the same evening.

7. Faster Disbursement of Non Cash Corporate Benefits like Rights, Bonus, etc.

The Beneficial Owner who opts for Demat Credit of Securities for Bonus / Rights, these
non-cash Corporate entitlements are credited to Client's A/c with D.P. electronically. This
ensures faster disbursement of entitlements and reduces the risk of loss of certificates in
transit.

8. Reduction in Rate of interest on Loans Granted.

Some market friendly Banks / Financial institutions provide loans at confessional rates
against pledge of dematerialized securities. The pledge of dematerialized stock provides
the institution with greater control and opportunity for recovery in case of default by the
loanee. The Dematerialized Stocks further enable the institution hassle free transaction,
while getting securities registered in their (Bank / Institutions) name at the time of book
closure.

9. Reduction in Brokerage by many brokers for Trading in Dematerialize Securities

Some brokers provide concession in Brokerage for Dematerialized Stocks, as dealing in

dematerialized securities reduces Brokers back office work of handling paper and other
incidental risk.

10. Reduction in handling of huge volumes of paper.

This is due to the electronic form of the securities. The dematerialization of
 This is due to the electronic form of the securities. The dematerialization of
securities would drastically bring a reduction in the paperwork.

11. Elimination of problems related to change of address of investor,

transmission, etc.

In case of change of address or transmission of demat shares, investors are saved from
undergoing the entire change procedure with each company or registrar. Investors have to
only inform their DP with all relevant documents and the required changes are effected in
the database of all the companies, where the investor is a registered holder of securities.

12. Periodic status reports.

The investors receive the Statement of Holding and Transaction Statement regularly.
This enables them to have a better control over their operations.
 DEPOSITORY

Depository means a company formed and registered under the Companies Act,
1956 and which has been granted a certificate of registration under sub-section (1A) of
section 12 of the Securities & Exchange Board of India Act, 1992. A Depository is an
Organization which holds Securities in Dematerialized Form i.e. by way of Electronic
Records and which enables Securities Transactions to be processed by Book Entry, at the
request of the shareholder. This eliminates the physical form of holding.

A Depository can be compared to a bank, which holds securities, such as shares,

debentures, bonds, Government Securities, units etc., of investors in an electronic form.
Besides holding securities, it also provides services related to transactions in securities.

A Depository interacts with the investors through its agents called Depository
Participants (DPs). If an investor wants to avail the services offered by the Depository,
he/she has to open an account with a DP. This is similar to opening an account with any
branch of a bank, in order to utilize the bank's services.

The Depository is obligated to maintain the Client Holdings, enable Demat and
Remat of eligible securities, disbursement of corporate benefits, effect settlement of
securities traded

BENEFITS OF DEPOSITORY TO THE INVESTORS

 Main concerns of the Investors, after receiving deliveries of securities is to get the
securities registered in his / her own name. However, in most of the times, investors are
exposed to Risk related to Capital Market and due to various reasons Investors are not
able to register his / her ownership.

We can broadly classify the Investor's Risks as below:

 Default by Seller of Securities relating to Transfer Deeds.

 Default by Seller of Securities relating to Share Certificates.
 Default by Purchaser of Securities to present the Securities along with duly
completed Transfer Deed within stipulated time period.
 Default by Issuer, Registrar to Register Transfer Request.
 Default by Issuer, Registrar to deliver the duly Transferred Share Certificates
to the Transferee.

The above list shows that except for one reason, buyer of the Securities is always
at Risk of losing the ownership of the share purchased, due to seller's default. To provide
much needed protection / relief to the Buyer Investors, Govt. of India had decided to
introduce the Depository System in India.

DEMATERIALIZATION - THE CORE ACTIVITY OF DEPOSITORY

The Dematerialization is back bone of the Depository .The term depository is

explained as " a depository is an Organization which holds Securities in Dematerialized
Form i.e. by way of Electronic Records & which enables Securities Transactions to be
processed by Book Entry ".

The Section 9 (1) of Depositories Act, 1996 state, " all securities held by a depository
shall be dematerialized and shall be in a fungible form ", which implies that without
dematerialization the depository cannot function.
At present, there are two Depositories in India, National Securities Depository Limited
(NSDL) and Central Depository Services (CDSL).

NATIONAL SECURITIES DEPOSITORY LTD. (NSDL)

National Securities Depositories Ltd. (NSDL) was set up as the first depository in
the country having various depository participants registered with it. NSDL was
inaugurated on 8th November 1996. It was set up with an initial capital of Rs.124 crore,
promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI),
National Stock Exchange of India Ltd. (NSEIL) and the State Bank of India (SBI). The
actual trading in dematerialized securities started at National Stock Exchange on 26th
December 1996.

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 standard that
handles most of the trading and settlement in dematerialized form in 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, minimize risk and reduce costs. NSDL plays 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.

BASIC SERVICES

Under the provisions of the Depositories Act, NSDL provides various services to
investors and other participants in the capital market like, clearing members, stock
exchanges, banks and issuers of securities. These include basic facilities like account
maintenance, dematerialization, rematerialisation, settlement of trades through market
transfers, off market transfers & inter-depository transfers, distribution of non-cash
corporate actions and nomination/transmission. The Depository System, which links the
issuers, depository participants (DPs), NSDL and clearing corporation/ clearing house of
stock exchanges, facilitates holding of securities in dematerialized form and effects
transfers by means of account transfers. This system, which facilitates scripless trading,
offers various direct and indirect benefits to the market participants.

SPECIAL SERVICES

Depository is a facility for holding securities, which enables securities

transactions to be processed by book entry. In addition to the core services of electronic
custody and trade settlement services, NSDL provides special services like pledge,
hypothecation of securities, automatic delivery of securities to clearing corporations,
distribution of cash and non-cash corporate benefits, stock lending, distribution of
securities to allottees in case of public issues, Internet-based services for clearing
members 'SPEED' & Internet based services for account holders 'SPEED-e'.

NSDL has taken the initiative for providing the facility of enabling brokers to
deliver contract notes to custodian / fund managers electronically through its STEADY
facility. STEADY (Securities Trading - information Easy Access and DeliverY) was
launched by NSDL on November 30, 2002. STEADY is a means of transmitting digitally
signed trade information with encryption across market participants electronically and
efficiently, through Internet.

JOINING NSDL
NSDL carries out its activities through service providers like Depository Participants
(DPs), Issuing companies and their Registrars and Share Transfer Agents, Clearing
corporations/ Clearing Houses of Stock Exchanges. These entities are called business
partners in NSDL terminology. These entities need to get integrated into NSDL
depository system to be able to provide various services to the investors and Clearing
Members.

The investor can obtain depository services through a depository participant of NSDL.
Just as one opens a bank account in order to avail of the services of a bank, an investor
opens a depository account with a depository participant in order to avail of depository
facilities.

A clearing member can open a special account in the depository system for the purpose of
settling trades done on stock exchanges. The clearing account enables the clearing
member to receive securities from its clients for delivery to the Clearing House/Clearing
Corporation as pay-in, and to distribute the payout to its clients received from the
Clearing-House.

Issuer can make dematerialization services available to their shareholders by signing an

agreement to that effect with NSDL. After the agreement is entered into, an electronic
link is established between NSDL, Issuer or its R & T Agent.IJHUHUH8UHUH

The clearing corporations/houses of stock exchanges also have to be electronically linked

to the depository in order to electronically receive securities delivered by clearing
members towards pay-in and to give out securities to clearing members towards pay-out.
BYE LAWS OF NSDL

Bye Law: 6.4 Provides for Rights & Obligations of Participants & Clients.
6.4.1.
Provides that no Participant shall conduct business as a Participant with its Clients unless
it has entered into an agreement with its Clients.
6.4.2.
Every Participant shall enter into an Agreement referred to above with each of its Clients
as per Annexure " B " of these Bye Laws.

Annexure " B " of NSDL Bye Law

The Annexure " B " at clause No.1 has enumerated, client obligations towards the
Participant.
Clause No.1: Stipulates that " The Client shall pay the charges to the Depository
Participant for the purpose of opening & maintaining his account, for carrying out the
instruction of the Client & for rendering such other services as may be agreed to between
the Depository Participant & the client as set out in Schedule " A ".

Schedule " A “: This Schedule has listed below mentioned charges for inclusion in this
schedule, such as:

1. Account Maintaining Charges.

2. Custody Charges.
3. Transaction Charges.
4. Rematerialisation Charges.
5. Other Charges.

NSDL & SEBI had conveniently ignored the act of DP’s to include without authority the
charges of Dematerialization in Schedule " A “ of the agreement.
Clause No.2: Inter alia it stipulates that " The Client shall have the Right to get the
Securities which have been admitted on the Depository, Dematerialized in the form &
manner laid down under the Bye Laws & Business Rules ".

Accordingly this Clause had empowered the investors the right of Dematerialization in
the form & manner laid down under the Byelaws & Business Rule.
Hence if the depository participant is providing services of Dematerialization, they are
under obligation to provide the same to the investors for which no charges can be levied.

Bye Law 9.2: Deals with Dematerialization:

Bye Law 9.2.2: Says that " A Client may convert his physical holding of securities into
Dematerialized form by making an Application to the Participant in a Dematerialization
Request Form in the form prescribed under the Business Rules along with the relevant
Securities Certificates ". Accordingly client is required to submit his securities to
Depository Participant only for Dematerialization.

SECURITY

NSDL claims to have undertaken sufficient security measures. These measures are:

 A DP can be operational only after registration by Sebi, which is based on the

recommendation from NSDL and Sebi’s own independent evaluation. Sebi has
prescribed criteria for becoming a DP in the regulations.

 DPs are allowed to affect any debit and credit to an account only on the basis of
valid instruction from the client.

 Every day, there is a system driven mandatory reconciliation between the DP and
NSDL.

 There are periodic inspections into the activities of both DP and R&T agent by
NSDL. This also includes records based on which the debit/ credit are affected.
  The data interchange between NSDL and its business partners is protected by
standard protection measures such as encryption. This is a SEBI requirement.

 There are no direct communication links between two business partners and all
communications between two business partners are routed through NSDL

 All investors have a right to receive their statement of accounts periodically from
the DP.

 Every month NSDL forwards statement of accounts to a random sample of

investors as a counter check.

 In the depository, the depository holds the investor holdings on trust. Therefore, if
the DP goes bankrupt the creditors of the DP will have no access to the holdings
in the name of the clients of the DP. These investors can then either dematerialize
their holdings or transfer them to a different account held with another DP.

 Investor grievance: All grievances of the investors are to be resolved by the

concerned DP. If they fail to do so the investor has the right to approach NSDL.

 Insurance Cover: NSDL has taken a comprehensive insurance policy to protect

the interest of the investors in cases of failure of the DP to resolve a genuine loss.
The details of the policy is as under:

 Upper limit per claim: Rs200mn

 Number of claims allowed: unlimited

 Minimum value of the claim: Rs150, 000
 To cover claims valued less than Rs150, 000 NSDL has an investor protection
fund in place.

Besides all these safety measures efforts have been done to make this electronic system
foolproof.
COMPUTER AND COMMUNICATION INFRASTRUCTURE OF NSDL

The systems are accepted by NSDL only after a rigorous testing procedure.

Machine level back up: The IBM mainframe situated at "Trade World" (NSDL office in
Mumbai) in which the data is processed has adequate redundancy built into its
configuration. There is a standby central processing unit (CPU) to which processing can
be switched over to in case of main system CPU failure. The disk has RAID
implementation, which ensures that a single point failure will not lead to loss in data.

System has spare disk configuration where data is automatically copied from the main
disk upon encountering the first failure (due to RAID implementation - first failure does
not result in loss of data).

All network components like router, communication controllers etc, have on-line
redundancy and thus a failure does not result in loss of transaction.

Disaster back up site: In addition, a disaster back up site equipped with a computer
identical to the mainframe computer & computing resources has been set up at a remote
location about 175 km away from Mumbai. This site has been tested for operations from
the site.

Back-up in case of power failure: Continuity in power supply to the main systems is
assured by providing for; dual uninterrupted power supply (UPS) for IBM-Mainframe
and related components wherein the two UPSs are connected in tandem. In case of failure
of primary UPS, the secondary UPS takes over instantaneously and thus, there is no
interruption in operation, and back-up diesel generator set.

If an investor looses his statement of holdings, he may inform his DP and obtain a
duplicate statement of holdings. The loss of statement of holding will not affect his actual
holdings.

If a DP goes bankrupt, there is no need for an investor to be unduly concerned as enough

provisions are there for the investor to transfer his account from the defunct DP to
another DP or get the securities rematerialized. There cannot be any lien on the account
holders’ assets by creditors belonging to the DP or NSDL and therefore the account
holders’ assets are absolutely safe. There is no credit risk in case of a defunct NSDL or its
DPs.

Depository account details are confidential. There are strict systems and procedures
established to protect the confidentiality of investor information at the depository to
ensure that these are available to only authorized persons. Even a DP other than your
own, cannot have access to your account.
 CENTRAL DEPOSITORY SERVICES LTD. (CDSL)

The second depository, Central Depository Services (India), was promoted by the
Stock Exchange, Mumbai (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 got the certificate of commencement on 8th February
1999 and commenced limited operations at Bombay Stock Exchange, of opening
accounts and processing Demat request from 22nd March 1999. The initial capital of the
company is Rs.104.50 crores.

All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange,
Delhi Stock Exchange, the Stock Exchange of Ahmedabad, etc have established
connectivity with CDSL.

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.
 Honorable 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
clearinghouse of BSE, started in July 1999.
 As at the end of July 2003, over 4600 issuers have admitted their securities
(equities, bonds, debentures, commercial papers), units of mutual funds,
certificate of deposits etc. into the CDSL system.

The following are the major benefits of having an account with CDSL.
CONVENIENCE:

Wide DP Network: CDSL has over 200 DPs spread around 114 cities/towns across the
country, offering convenience for an investor to select a DP based on his location.

On-line DP Services: The branches of a DP can also be directly connected to CDSL

thereby providing on-line and efficient depository service to investors

Wide Spectrum of Securities Available for Demat: More than 4600 companies have
admitted their equity into CDSL. Further, CDSL has also admitted an entire gamut of
debt instruments viz. bonds, debentures, commercial paper, government securities,
certificate of deposits, etc. Thus an investor can hold almost all his securities in one
account with CDSL.

Competitive Fees Structure: CDSL has kept its tariffs very competitive to provide
affordable depository services to investors. CDSL also does not collect any custody fees
or ISIN fees from its DPs.

Internet Access: A DP, which registers itself with CDSL for Internet access, can in turn
provide demat account holders with access to their account on the Internet.

DEPENDABILITY:

On-line Information to Users: CDSL's system is based on centralized database

architecture; DPs can thus provide on-line depository services with to-the-minute status
of the investor's account.
Convenient to DPs: The entire database of investors is stored centrally at CDSL. If there
are any system-related issues at DPs end, the investor is not affected, as the entire data is
available at CDSL.
Contingency Arrangements: CDSL has made provisions for contingency terminals,
which enables a DP to update transactions, in case of any system related problems at the
DP's office.

Meeting User's Requirements: Continuous updating of procedures and processes in

tune with evolving market practices is another hallmark of CDSL's services.

Audit and Inspection: CDSL conducts regular audit of its DPs to ensure compliance of
stringent operational and regulatory requirements.

Dormant Account Monitoring: CDSL has in place a mechanism for monitoring

dormant accounts.

Helpdesk: DPs and investors obtain clarifications and guidance from CDSL's prompt and
courteous help line facility.

SECURITY:

Computer Systems: CDSL has installed state-of-the-art computer system and data
storage devices. All data is stored at CDSL and is auto mirrored separately and also
transmitted to a Disaster Recovery site. Data is also backed up on digital linear tapes,
which are stored in fireproof cabinets at the main and disaster recovery sites.

Unique BO Account Number: Each BO in CDSL is allocated a unique account number,

which ensures that at the time of transfer of securities if the transferor's account number
is wrongly entered, the transaction will not go through the CDSL system, unless
corrected.
Data Security: CDSL ensures the security and integrity of all data by encrypting all
communications between CDSL and its users.
Claims on DP: If any DP of CDSL goes into liquidation, the creditors of the DP will
have no access to the holdings of the BO.

Insurance Cover: CDSL has obtained adequate insurance cover in the unlikely event of
any loss to a BO due to the negligence of CDSL or its DP.

TECHNOLOGY USED

Software:

The software is developed and supported by CMC Ltd., who has also developed the
BOLT system for BSE. The software is a modified version of the banking software-TC4
developed by a subsidiary of CMC Ltd. (in USA), which is currently being used by
several banks worldwide. The software has been customized to suit the requirement of
CDSL.

Hardware:

Hewlett Packard provides the hardware. HP 9000 (64 Bit) Enterprise server system (super
computer technology with a robustness of enterprise class), is the highest performing
RISC/UNIX server system available in the marketplace.

This system is connected to a near fault tolerant storage system from EMC2 Corporation
featuring multiple RAID levels and intelligent diagnostics (automatic disk fault finding
system). This is the world's best storage system and the first of its kind to be installed in
India; imported from United States of America after due certification by the relevant US
Agency and installation at our site was also subject to inspection by the US Consulate.
The load handling capacity of Unix systems used is virtually limitless.
Database Architecture:

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 dematerialization 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.

By looking at the spread of their operations, one would find out that the NSDL is way
ahead of CDSL. This is because of various reasons- the major reason being that NSDL
started much earlier in 1996, as compared to CDSL, which started operating from 1999.
Many believe that the over-all set-up of the infrastructure developed by NSDL for DPs is
much superior to that of CDSL. For example, it is a known fact that NSDL has a much
better back-up system than CDSL.
 DEPOSITORY PARTICIPANTS

The operations in the Depository System involve the participation of a

Depository, Depository Participants, Company/Registrars and Investors. NSDL provides
its services to investors through its intermediary called depository participants (DPs). A
Depository Participant is the agent of the Depository and is the medium through which
the shares are held in the electronic form. They are also the representatives of the
investor, providing the link between the investor and the company through the
Depository.

These agents are appointed by NSDL with the approval of SEBI. According to SEBI
regulations, amongst others, three categories of entities i.e. Banks, Financial Institutions
and Members of Stock Exchanges [brokers] registered with SEBI can become DPs. All
the DPs are appointed subject to fulfillment of uniform requirements of SEBI
(Depositories and Participants) Regulations, 1996 and requirements of NSDL. However,
the type of services offered and the service standards may differ among various DPs. For
example, a DP branch having direct connectivity with the main office having depository
set-up may be in a position to execute instructions faster.

You can select your DP to open a Demat account just like you select a bank for opening a
savings account. Some of the important factors for selection of a DP can be:

1.Convenience - Proximity to your office/residence, business hours.

2.Comfort - Reputation of the DP, past association with the organization, whether the DP
is in a position to give the specific service you may need?
3.Cost - The service charges levied by DP and the service standards.

There are no restrictions on the number of DPs you can open accounts with. Just as you
can have savings or current accounts with more than one bank, you can open accounts
with more than one DP.
NSDL requirements for the DPs:

The Participant shall have the discretion to charge any fees to its Clients. Further, the
Participant may charge different types of fees to its various Clients.

The Depository on Dematerialization Requests shall charge no Fee. However, in case of

Rematerialisation, a flat fee of Rs. 10 per Certificate will be charged.

Moreover, an issuer may pay a one-time custody fee to NSDL and consequent upon such
payment, NSDL shall not levy any custody fee on the Participants.

This necessarily concludes that the Depository Participants are neither empowered to
collect the Demat charges nor morally recover excess Custody Charges from the Clients.
The charges prescribed by the NSDL for the DPs are as follows:

1. Account Opening Charges.

2. Custody Charges.
3. Transaction Charges.
4. Rematerialisation Charges.
5. Other Charges.

We will now examine different types of charges collected by Depository Participants

against actual provision in this regard:

1. Account Opening Charges.

Clause No.1 stipulates that the client shall pay the charges to the Depository Participant
for the purpose of opening & maintaining his account.
(a) Account Maintaining Charges.
This clearly means that charges paid by the clients for Opening of Accounts also covers
Account Maintaining Charges as well. Depository Participants can collect either
Accounts Opening Charges or Account Maintain Charges. But in no case Client should
be made liable to pay both the Charges that to Account Maintenance Charges on
Periodically.

(b) Annual Membership Charges: Without clearly specifying the difference between
Accounts Maintenance Charges, the same charge is recovered under the different
nomenclature as Annual Membership Charges.Depository Environment had actually
provided Depository Participants with free hand to Charge same Charge time & again
under different nomenclature as per their own will.

2. Custody Charges:
No periodicity for collecting these charges is fixed by the NSDL. Hence some Depository
Participants are collecting Custody Charges at Quarterly Interval & some are collecting at
Yearly Interval. Collection at Quarterly Interval has an effect of compounding nature.
Again at NSDL " scale of Custody Charges varies from one Depository Participant to
another Depository Participant ". As per our contention the Custody Charges are
recovered twice from the Beneficial Account Holder.

First, through issuer where in the Beneficial Account Holder is a Share-Holder & when
this issuer pays to the Depository One Time Custody Charges. Secondly, in spite of
paying one time custody charges, the Beneficial Account holder are again made to pay
custody charges to the Depository Participants as a Client. The absolute minimum
custody charge is another ploy to recover much more than the applicable rate.
3. Transaction Charges.

The DP levies these charges for effecting Credit or Debit to the Clients Accounts.
A) Non-Scheduled Charges of Dematerialization. The Schedule " A " at Annexure " B "
has not prescribed this sort of Charges, which referred as Charges of Dematerialization.
The NSDL business rule has prescribed fee for dematerialization & rematerialisation as
under: The Depository on Dematerialization requests shall charge no fee. However, in
case of Rematerialisation, a fee at the rate of 0.10% of the value of the securities
requested for rematerialisation or Rs.10/- per certificate, whichever is higher will be
charged.

4. Rematerialisation Charges.

This charges becomes payable at the time of Beneficial Owner Opting to withdraw from
the Depository Environment & requires his Securities in Physical Mode.

5. Other Charges
These Charges are actually designed to carter need of Depository Participants , for
providing extra facilities i.e. more than & out side statutory obligation to the Client.
Some banks which are also Depository Participants are asking the Account Holder to
keep Fixed Deposit linked with Depository Account , before opening of accounts in
depository. This clearly shows that in reality , with the protection of Business Rule : 5.3 ,
each & every charges out side the prescribed set of charges at Annexure " B " - Schedule
" A " is classified under this head. Use Link For Complete Annexure " B " with Schedule
" A " as prescribed by NSDL. Only solidarity of Beneficial Owner will provide the justice
from " Other Charges " .
 DEMATERIALIZATION

Demat is a commonly used abbreviation of Dematerialization, which is a process

whereby securities like shares, debentures are converted from the "material" (paper
documents) into electronic data and stored in the computers of an electronic Depository.

Securities registered in your name are surrendered to depository participant (DP) and
these are sent to the respective companies who will cancel them after "Dematerialization"
and credit your depository account with the DP. The securities on Dematerialization
appear as balances in your depository account. These balances are transferable like
physical shares. If at a later date, you wish to have these "Demat" securities converted
back into paper certificates, the Depository helps you to do this by a process called
Rematerialization.

By dematerialization of shares the cumbersome process of paper work is eliminated. It

offers scope for paperless trading through state-of-the-art technology, whereby share
transactions and transfers are processed electronically without involving any share
certificate or transfer deed after the share certificates have been converted from physical
form to electronic form.

Dematerialization of shares is optional and an investor can still hold shares in physical
form. However, he/she has to Demat the shares if he/she wishes to sell the same through
the Stock Exchanges. Similarly, if an investor purchases shares, he/she will get delivery
of the shares in Demat form.

PROCESS OF DEMATERIALIZATION

Prescribed Demat Request Form (DRF) needs to be filled in by the client who wishes to
convert the physical shares into Demat form. Client should verify whether the scrip, he
wishes to Demat, is listed on NSDL or not. Only those scrips that are listed can be given
for dematerialization. The list of tentative scrips listed on NSDL is made available to the
branch. The same can be downloaded from NSDL's Internet site also, viz. www.nsdl.com.

The client should also deface the share certificates with the rubber stamp stating
'SURRENDERED FOR DEMATERIALISATION'. The said stamp is made available to
the branch to facilitate the client to use the same. Also the said shares should be punched
with minimum two holes on / near the name of the Company.

Separate DRF needs to be filled in per account per scrip. The said DRF, received by the
branch from the client, should be verified for mandatory requirements in the DRF and
also should verify the Physical shares. The details mentioned on DRF needs to tally with
the physical shares and that the said shares are properly defaced with the required stamp
and holes. The complete form with share certificates should be send to Ho for further
processing. Normal process of completion of the Demat is 20 to 30 days.
As per NSDL Bye Law, Client in relation to a Participant means a Beneficial Owner who
has opened an account with the participant & has entered into the agreement in
accordance with the provision of Chapter 6 of NSDL Bye Laws.

MANDATORY REQUIREMENTS
Firstly the client has to open an account with a Depository Participant and get a unique
Client ID number. Thereafter, he has to fill the Dematerialization Request Form (DRF)
provided by the DP and surrender the shares in physical form to the DP. The Depository
participant on receipt of the above documents will send an electronic request to the
companies through the Depository for confirmation of demat. Each request will bear a
unique transaction number. The DP will surrender the DRF and the above-mentioned
documents with a covering letter requesting the company to confirm Demat. The
company will confirm Demat to the Depository after necessary verification. This
depository will confirm the Dematerialization to DP, which is holding the account. Then
DP will credit the account with the shares so dematerialized.

SETTLEMENTS: THE NEW ORDER

 Seller’s Shares Buyer’s Funds

SECURITIES FUNDS
PAY-IN PAY-IN

Depository Broker

Broker Clearing Bank

Clearing
Corp.
SECURITIES FUNDS PAY-
PAY-OUT OUT

Depository Clearing Bank

Broker Broker

Buyer gets Shares Seller gets Money

 A CLIENTS’ PERSPECTIVE

ANALYSIS OF A CLIENTS’ PERSPECTIVE

After understanding and analyzing the different aspects of various DPs, we were
given a task to analyze the clients’ perspective towards DPs. For that we chose a sample
of 30 clients of Anagram Securities Ltd. These clients are very important for Anagram
Securities Ltd. , as most of them are brokers of Anagram and some are big investors. We
chose the questionnaire method for this task. This second stage of our study has become
equally important for us as it gives us the other side of the picture.

(1) BROKER – DP & CONVENIENCE

As we discussed earlier also, it makes sense for prime brokerage firms to provide
dematerialization service as well. It works as a supporting service and a one-stop shop for
clients. We observed in our study that major clients like brokers, sub-brokers prefer their
principal which also provides demat service. It is because it would become easy for them
to settle any problems regarding pay-in. Thus it would save their time and would provide
them with more flexibility in their work.

(2) LOCATION

When clients decide about the DP, there are many issues on their mind. They also
consider many implicit costs. For example many clients would prefer a DP which is
nearer to their home/office because it would give them convenience. We found out in our
study that many individual clients consider this issue important while choosing a DP. It
doesn’t make much difference to big brokers and sub-brokers as they have far greater
volumes and so they give more importance to the charges, relationships and so on.
(3) CHARGES

All the clients, whether an individual, a sub-broker or a main broker, would consider
charges closely while choosing a DP. This is the most important factor which influences
the clients’ choice of DP. There are two types of charges in demat, namely, fixed and
variable. The major fixed charge is annual maintenance charge and the major variable
charge is the transaction (buy/sell) charge. Active clients would look at variable charges
closely while selecting a DP. On the other hand, those clients who are not so active
would look at annual maintenance charge closely.

(4) CUSTOMER SERVICE

Customer service is one of the most important issues for clients. It includes a variety of
things, starting from the sending of the statement of holding and the transaction statement
on time, to providing the latest internet-based SPEED-e and IDeAS facilities. The clients
look for that DP which matches their need of services. Certain clients require the
Statements more frequently than other clients and may find it cumbersome to visit the DP
everyday for the same. Now-a-days, the number of internet-friendly clients is increasing
due to the Information revolution. At present there may not be many clients willing to use
the Internet, but this number is only set to rise in future, and this could provide a wide
scope of improvement.

(5) RELIABILITY

It is very important for DPs to provide satisfactory level of services with consistency.
This means that the quality of service should not keep changing from time to time. The
client should be able to estimate the timings and functioning of the services with a fair
level of accuracy. By providing services with consistency creates reliability. One
important aspect here is that the client should be assured that their transactions are all
valid and safe as far as the services of the DP are concerned.
(6) GOODWILL

Many clients also consider goodwill of the DPs, because ultimately they are putting their
securities with the DPs and therefore taking risk. So the clients would prefer well-
established DPs. We observed that clients have positive perceptions regarding Anagram’s
goodwill, the key reason behind this is the goodwill of Lalbhai Group in the industry. It
takes time, money and loads of efforts in building a good reputation for a company. The
clients should be convinced of the credibility and the reliability of the organization.
Anagram passes this test with flying colors as almost 90% of the clients are happy and
satisfied with it.

(7) FAMILIARITY WITH THE ORGANIZATION

Familiarity with the organization is also one of the key issues for clients. We found out
that some of Anagram’s clients have very good relationship with the staff members.
Clients become aware of the culture, people, procedures etc of the organization over a
period of time. So this also influences the clients’ decision. Familiarity with the
organization gives certain level of comfort to the clients. We can say that a good
relationship will lead to good business. In any organization, maintaining relationships is
of utmost importance. As some of the clients have been dealing with Anagram since its
inception, it is like a second home to them. This is a very positive sign for Anagram. Such
satisfied clients spread through word of mouth the goodwill of Anagram, thus attracting
more clients.

(8) TIMINGS FOR INSTRUCTION SLIP SUBMISSION

Timings for submission of instruction slip is not the critical issue, still for many clients it
is not a non-issue either. Generally clients would prefer some flexibility on the part of
DPs to accept the instruction slips. Most DPs are quite flexible in this regard and have no
problems in adjusting to the requirements of the clients. Anagram too is pretty much
flexible in this regard.
 DEMAT SYSTEM - PROBLEMS & SCOPE

PROBLEMS AND SCOPE OF DEMAT

Like they say, ‘Every coin has two sides’. Despite all the efficiencies brought-in by the
demat system, there are certain drawbacks to which your attention needs to be drawn.

The Indian systemic inefficiency has actually turned the virtual queue into a reality. The
dematerialization process for paperless trading of shares has created a virtual queue,
which will take months, if not years, to process. It highlights several inefficiencies in the
new system and has thrown up an important new tax issue.

Demat ought to take care of many inefficiencies. The tedious process of physically
transferring ownership of shares is shortened. Instead of several months, ownership is
supposed to change hands instantly. The chance of a bad transfer because a signature
doesn't match is reduced to zero. So are the opportunities of thievery in the mail or forged
share certificates. The twin problems of odd lots and jumbo lots both disappear since it is
possible to trade either a single demat share or lakhs at a shot.

So demat solves various familiar problems that plague every stock market that operates
with physical paper. No wonder when SEBI initiated the process of demat it was
welcomed wholeheartedly by most investors.

Some insecure company managements dislike rapid, unsupervised transfer of ownership.

The odd unscrupulous investor who deliberately messed up his signature and gave bad
delivery in order to obtain interest-free cash also dislikes demat. But the vast majority
welcomed it. One instantly beneficial effect was the easing of brokerage rates. Another
was a vast increase in institutional volumes. When you buy physical shares from the
stock market, you could never be certain of the validity of the title of shares. There were
many reasons- the sellers' signature did not match, or the certificates were fake, forged or
stolen, and so on.
Demat shares are supposed to obviate these problems. Buying shares in the demat form
always guarantees you a good title as soon as the settlement is over. The biggest
attraction of trading in demat shares is that the shares you buy come with a clean title and
immediately after the settlement on the relevant stock exchange.

But then problems started surfacing. First of all, the demand for demat services was
severely under-estimated. According to estimates, there are now 9 million pending
individual applications for demat accounts. The system has been overloaded and reached
a breaking point. As a result, somebody opening a demat account can expect to spend
several months waiting for the paperwork to be completed.

Meanwhile, a physical trading route does exist for the individual investor who needs to
raise cash in a hurry. But while a physical sale is possible, all transfers (in the shares of
designated companies) now involve a compulsory demat. Since the buyer of physical
securities must factor in a long waiting period, there is a wide differential between paper
trade quotes and demat quotes. The discount on physical paper is now around 15 percent,
or more.

The amount of paperwork involved in the demat process is also seriously painful. Some
of it is absurd. For example, if Mr and Mrs Haridoss Paul hold some shares in the name
of Mr & Mrs Haridoss Paul and a second batch in the name of Mrs & Mr Haridoss Paul,
they will need to open two demat joint accounts with their names reversed! There are
other niggling little details.

Brokers and banks are therefore quite reluctant to initiate the process for their clients.
Some refuse outright. Others disregard the SEBI directives and insist that demat clients
open low-interest or zero-interest accounts as a sort of extra fee. At a minimum deposit of
Rs 1,000 per demat account and 9 million individual accounts, the amount already
blocked in these low-interest or zero-interest accounts adds up to around Rs.900 crore.
Assuming this trend continues, and given that there are more than 23 million individual
investors, the eventual cost of demat would include sub-optimal returns on about Rs
2,300 crore. That is a large and unforeseen opportunity cost for any new system.
There are further problems. The simple fraud of stealing a share certificate out of the mail
and selling it in the kerb is no longer possible with a demat account. But the only proof of
ownership for demat shares is a receipt. Trades and transfers are carried out on the basis
of that piece of paper. Anybody who has the account number and knows the details can
order a transfer of shares from one account to the other very easily.

Forgery is actually easier. The receipt itself isn't too difficult to duplicate either. Frauds
of this nature haven't started happening yet at least on a large enough scale to draw
attention. But it is something that gives the investor pause for serious thought. It's bound
to occur sooner or later. And given the lack of a paper trail, it will be difficult to establish
the fraud, let alone prosecute and offer relief to victims.

Another problem lies in the tax treatment of demat shares. With dated physical transfer
certificates, it is fairly easy to calculate Capital Gains Tax (CGT) liability. Demat shares
are fungible and don’t have distinctive numbers. It is not easy to track the sale or trade of
shares after they are dematerialized.

Suppose the investor has two lots of shares of the same company. One lot was bought
several years ago and is hence, liable only to long-term capital gains tax, in case of a sale.
This is levied at 10 per cent flat or an inflation-indexed at 22 per cent whichever is lower.
The second lot was, however, bought within the last fiscal. This is liable to 33 per cent
short-term CGT in the event of a sale.

All this has of course changed, with the Budget 2004-2005 announced on 8th of July by
the Finance Minister, Shri P. Chidambaram. There will be no more long-term capital
gains tax, and a flat rate of 10% short-term capital gains tax.

If you sold a physical lot, presumably you would deliver the older set to minimize the
payout. But in case of a demat, there is an extremely grey area about which CGT rate
should be levied. The Central Board of Direct Taxes hasn't worked out a clear procedure
for distinguishing the earlier lot from the later lot. You could find yourself locked in a
dispute and facing a demand for short-term capital gains tax. This is obviously of major
significance.
There are several more niggling problems. In theory, the demat is supposed to be within
24 hours. However, PSU bank timings don't conveniently overlap trading times. Banking
hours close at 2 pm while trading continues till 4.30 pm. On average, a transfer will take
48 hours or more. On occasion, the demat account may be temporarily credited with
shares pending confirmation of a transfer. An unwary investor who sells without ensuring
that he has actually received a confirmed transfer is open to everything starting from
severe embarrassment and ending with charges of fraud.

None of these problems are insurmountable. But it will require a coordinated effort from
various agencies to sort them out. SEBI and RBI have to come up with a way of
streamlining the demat process and regularizing the status of deposits accepted, if any.
The NSDL and CSDL will have to speed up their registration procedures and devise a
more foolproof system of receipt and transfer. Banks and stock exchanges will have to
coordinate working hours and the use of temporary entries. The CBDT will have to come
up with clear tax guidelines.

None of these are processes, which needed to be ratified or mandated by Parliament. So

the excuse of political instability cannot be trotted out for delays. Demat has already been
in progress for a year.

Rule 100 of market regulator SEBI determines whether the shares delivered in a
settlement, are good or not. Under rule 100, the shares that have been transferred any
number of times can still be withdrawn by the company, if a transfer is found to be
invalid for any reason.

Suppose A sells physical shares to B and B gets them dematerialized. Later B sells the
shares in the stock exchange and C buys them. Meanwhile A discovers that his share
certificates were stolen and fraudulently sold by someone else. He gets a court order
restraining the company from further transferring the shares and attaching them
(currently in possession of C). This is known as 'stop transfer'. So C who has bought
dematerialized shares is now struck with the shares. He cannot sell these shares since
they would be frozen in his account
In demat shares, pre-demat problems about the validity of a share do not effect the
interest of the buyers after dematerialization. Shares go through a verification process at
the registrars' before they are dematerialized.

Therefore the responsibility lies with the registrar. The registrar must find a remedy if the
original transfer of shares, before their dematerialization comers under doubt. But there is
a catch. The company and its registrars are not responsible if the reasons for original
transfer being invalid were not available at the time of dematerialization. Matters have to
be dealt with on a case to case basis. Which means that even demat buyer may find that
his shares have been frozen in his demat account. This kind of case has to be contested in
court by the parties involved.

This issue is not directly addressed in The Depositories Act, 1996. SEBI’s regulations on
depositories and depository participants also do not mention the issue. Matters get more
complex if an investor has traded further in shares of the same company in his demat
account.

Investors do not like receiving physical share certificate because the process of getting
the shares converted into dematerialised form takes anywhere between four to six weeks.
Many investors look to sell immediately on listing especially a stock that is up 60 per
cent on listing. Of course, if 25 per cent of all investors are barred from trading because
they hold physical shares it automatically reduces the floating stock and potentially
creates a perfect situation for stock prices to remain artificially high.
 SUGGESTIONS & RECOMMENDATION

Based on the our first study done on the various depository participants in Ahmedabad
and on clients perspective, we came to know about Anagram’s status vis-à-vis other DPs.

We focused on key areas too for comparison. We have made following suggestions which
will help Anagram to rethink about different aspects.

(1) CHARGES

NSDL charges its DPs for the various services and the DPs in turn charge their
clients on the basis of their own standards, thus differentiating themselves from their
competitors. Based on our observations we can say that the annual maintenance charge of
ACML is the least, which stands at Rs. 150/-. They also charge the least for buy and sell
transaction, which charges nothing for purchase transactions and Rs. 13 for sell
transaction. Thus, those clients who consider the charges to be a major factor might go
for ACML. We have ranked the DPs that we studied on the basis of their AMC (The DP
charging the least gets the first rank and so on)

Rank Name of DP AMC

1 ACML Rs.150/-
2 Nutan Nagrik, Rs.200/-
Pravin Ratilal
3 KCCB Rs.225/-
4 Goldmine Securities Rs.250/-
5 Khandwala, Rs.300/-
Shah Investors,
Investmentor,
Infinite Securitiies.
We suggest that Anagram Securities remain with more or less with the same charges or at
the most discriminate among some of the clients while charging for the same services. It
should charge less to more active clients to retain them.

(2) SERVICES

In today’s world service to the customers forms the major aspect of

differentiation and every organization strives to offer its customers maximum services in
order to increase their satisfaction. In our study we observed that many brokers/DPs offer
many other services like financial advice, asset management etc. It would give the clients
the one-stop solutions for all the financial worries. So we recommend Anagram to also
provide financial consulting to the clients. These other services include financial advice,
asset management, MF schemes etc. It would be very helpful in the long term to retain
the clients.

(3) MODE OF COMMUNICATION

Various DPs provide Transaction Statements and Statement of Holdings through

different modes. The basic objective behind this is to give options to the clients which
will take care of their convenience and flexibility in the operations. Some DPs provide
these statements through courier, e-mail, phone(HI), phone(A), website etc. Hereunder
we have listed some of the DPs’ name and their offerings to the clients.
 Serial Name of DP Courier E- Phone Phone Website Fax
mail
No. (HI) (A)
1 Shah Investors   -  - 

2 Ratnakar  -  -  -
Securities
3 Goldmine Stocks  -  - - -

4 Pravin Ratilal   -  - -

5 UTI   -  - -

Now it is becoming increasingly important for Anagram to come up with various options
of providing TS and SoH to the clients. Currently Anagram provides it through courier
only but in our opinion they should provide options to the clients. It should also consider
providing TS and SoH on demand. It might charge reasonable amount for the same,
which as per our calculations comes in the range of Rs.3/- to Rs.5/-. This, we think,
would be competitive enough.

(4) SPEED-e & IDeAS

We observed in our study that many DPs have started providing IDeAS and SPEED-e
services. This makes these DPs more competitive in terms of attracting those clients who
are internet savvy. We felt after reasonable observation that it would be quite necessary
for Anagram Securities to survive and compete in the long-run. So here, we strongly
recommend them to provide SPEED-e and IDeAS services. This is the area where they
can differentiate their services from others. One major thing which supports this
argument is the increasing trend of doing online transactions. So it is quite obvious that
the future in this area looks good.
The data of some of the competitors which have already started providing these services
in Ahmedabad is given below. HDFC and Khandwala Securities provide both the
services.
Serial Name of DP SPEED-e IDeAS
No.
1 Khandwal Int. Fin Services Pvt Ltd  
2 Ratnakar Securities Pvt Ltd - 
3 Goldmine Stocks Pvt Ltd - 
4 ACML - 
5 Pravin Ratilal Share & Stockbrokers Ltd.  -
6 HDFC  

(5) DELIVERY IS THE KEY

Ultimately how you provide the services matters the most. Services should be fast,
reliable and with fair degree of consistency. In our survey we asked the clients to rate the
different parameters which they consider relevant while choosing their DP. We have
included in our survey different aspects like location/ proximity, charges, customer
service, security level, reliability, goodwill etc. in our survey we got that customer service
is the most important aspect for clients. 25 out of 30 clients have rated it very high while
choosing the DP.

Serial Factor Very High Medium Low Very

No. High Low
1 Location/Proximity 14 6 6 4 -
 2 Timings for Instruction Slip 15 8 7 - -
Submission
3 Charges 20 5 3 2 -

4 Customer Service 25 4 1 - -

5 Security System 14 9 7 - -

6 Reliability 18 10 2 - -

7 Goodwill 15 14 1 - -

8 Others’ Reference 6 5 10 7 2

9 Familiarity with 16 10 4 - -
The Organization

In our study we found that most of the clients of Anagram Securities are fairly satisfied
with the demat services of it. But the problem is when it comes to settlement of their dues
as majority of them are sub-brokers. So the actual problem is not the demat services but
the its more about on broker- sub broker relationship. So at the end we recommend to
Anagram to continue providing high level of customer services. And should take care of
some minor things which we found out in during the study like sending TS and SoH on
time.

Apart form the above recommendations, some of the clients have given suggestions for
the scope of improvement in services for Anagram as a whole. They are as follows:

 Anagram should focus on the retention of the existing clients by improving the
services rather than trying to increase the number of clients. This would ensure
client satisfaction and also increase its goodwill.
  The website of Anagram should provide the latest information and it should make
sure that authentic information with respect to their research is available.
 The major focus of Anagram has been on equity so far and it has done quite well.
Similarly it should try to concentrate on Mutual Funds which is an emerging area
in the financial market.
 They should set up a committee that concentrates on the clients and their activities
and accordingly makes suggestions to the clients as per their risk- taking ability
and other requirements.

BIBLIOGRAPHY

Books
Avadhani, V.A. Marketing of Financial Services and Markets. Mumbai: Himalaya
Publishing House,1999. 639 pp.
Cooper, Donald R.; and Schindler, Pamela S. Business Research Methods. 6th edn. New
Delhi: Tata Mc Graw-Hill Publishing Company Limited, 2002. 703 pp.

Dalton, John M. How the Stock Market Works. 2nd edn. New Delhi: Prentice Hall of
India Limited, 1997. 325 pp.

Literature provided by NSDL.

Pathak, Bharati V. Indian Financial System. Delhi: Pearson Education (Singapore) Pte.
Ltd., 2003. 592 pp.

Pandian, Punithavathy. Security analysis and Portfolio Management. New Delhi: Vikas
Publishing House Ltd., 2001. 464 pp.

Rao, S. Sreenivas. Handbook For Writers and Editors. Ahmedabad: Ahmedabad

Management Association, 2002. 139 pp.

Sharma, A.K. Indian Stock Market Regulation, Performance and Perspective. New
Delhi: Deep and Deep Publications Pvt. Ltd., 2001. 154 pp.

Internet Documents
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www.indiainfoline.com
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