Module 5

Role of Information technology in the investment market

With the advent of the internet and management information systems (think computers, phones and
software), businesses have been able to transform from local mom and pop shops to international
household names. In order to keep up with competition as a result of internet commercialization,
companies are increasingly turning to information technology, or hardware, software and
telecommunications networks, to streamline services and boost performance. As such, IT has become an
essential feature in the business landscape.

IT can help companies cut costs, improve communication, build recognition and release more innovative
and attractive products.

IT Streamlines Communication

Efficient communication is critical to company success. In an increasingly connected and dispersed

business landscape, recruiting, retaining, and leveraging employees requires ongoing communication and
collaboration. A key advantage of information technology lies in its ability to streamline communication
both internally and externally.

For example, online meeting and video conferencing platforms such as Skype, Zoom and GoToMeeting
provide businesses the opportunity to collaborate virtually in real-time, significantly reducing costs
associated with bringing clients on-site or communicating with staff who work remotely. In addition, IT
allows organizations to connect almost effortlessly with international suppliers and consumers.

IT Facilitates Strategic Thinking

One of the fundamental advantages of IT is its ability to enhance a company's competitive advantage in
the marketplace, by facilitating strategic thinking and knowledge transfer. Accessing and leveraging
social networks and subscription databases, for instance, has enabled companies the ability to assemble,
interpret and transfer information like never before. This has given businesses unparalleled access to
customers and consumers, enabling organizations to deliver new and enhanced products.

Therefore, when used as a strategic investment rather than as a means to an end, IT provides
organizations with the tools they need to properly evaluate the market and to implement strategies needed
for a competitive edge.

IT Stores and Safeguards Valuable Information

The storage, preservation, and maintenance of information, known as information management, is another
domain in which IT shines. Information management is essential to any business that must store and
safeguard sensitive information (such as financial data) for long periods of time. IT affords companies the
ability to store, share, and backup files for later use, as well as protecting information from unauthorized
individuals. As a result, IT gives businesses the peace of mind that the information they collect and
analyze can be properly stored and safeguarded for future use.
IT Cuts Costs and Eliminates Waste

Although IT may seem expensive when first implemented, in the long run, however, it becomes
incredibly cost-effective by streamlining a company's operational and managerial processes. The
implementation of online training programs is a classic example of IT improving an organization's
internal processes by reducing costs and employee time spent outside of work. In effect, IT enables
companies to do more with less, without sacrificing quality or value.

Functioning of DEMAT A/C portal

Your demat account holds all your shares and investments in an electronic or dematerialised form. It
holds all your government securities, bonds, shares, mutual funds, and Exchange Traded Funds (ETFs). It
is important to understand a few bodies and processes to know the complete functioning of a demat
account. The functioning of a demat account is explained here.
• Central Depository: The two major depositories in the country are Central Depository of Securities
Ltd. (CDSL) and National Depository of Securities Ltd. (NDSL). They hold the details of your account
on your behalf. This works similar to a bank.
• Unique ID: Every demat account has a unique verification number for identification. This comes in
handy in various situations. This can be used for transactions or it can be used for the stock exchange to
help the companies identify and credit the securities to your account.
• Depository Participants: The depository can be accessed only through the depository participants
(DPs). These are intermediaries between the CDSL and the investor. DPs can be banks, brokers or
financial institutions that are authorised to offer demat services.
• Portfolio Holding: Your demat account holds all your holdings and every time you check it, you can
see your account status with all its details. This is because the account is updated automatically each time
you transact (buy or sell securities).
There are hundreds of depository participants one can choose from but having a bank as a depository
participant has its own advantages. Having a demat account with a bank offers fast processing, anytime
accessibility, and online transaction facility to the investor. Banks always credit your demat account right
on the day of purchase of shares. They also credit your savings account on the 3rd day after you sell your
shares. Such processes are automatics and you do not have to follow any additional procedure for that.
Having a huge number of branches is another advantage of banks as you can open your demat account in
the nearest branch or choose a branch as per your convenience. Most private sector banks also provide
online access to your demat account.

Investment through internet and virtual banking from legal perspectives

a). Considering the legal position prevalent, there is an obligation on the part of banks not only to
establish the identity but also to make enquiries about integrity and reputation of the prospective
customer. Therefore, even though request for opening account can be accepted over Internet, accounts
should be opened only after proper introduction and physical verification of the identity of the
customer.xii
b). From a legal perspective, security procedure adopted by banks for authenticating users needs to be
recognized by law as a substitute for signature. In India, the Information Technology Act, 2000, in
Section 3(2) provides for a particular technology (viz., the asymmetric crypto system and hash function)
as a means of authenticating electronic record. Any other method used by banks for authentication should
be recognized as a source of legal risk.
c). Under the present regime there is an obligation on banks to maintain secrecy and confidentiality of
customers' accounts. In the Internet banking scenario, the risk of banks not meeting the above obligation
is high on account of several factors. Despite all reasonable precautions, banks may be exposed to
enhanced risk of liability to customers on account of breach of secrecy, denial of service etc., because of
hacking/ other technological failures. The banks should, therefore, institute adequate risk control
measures to manage such risks.
d). In Internet banking scenario there is very little scope for the banks to act on stop-payment instructions
from the customers. Hence, banks should clearly notify to the customers the timeframe and the
circumstances in which any stop-payment instructions could be accepted. The Consumer Protection Act,
1986 defines the rights of consumers in India and is applicable to banking services as well. Currently, the
rights and liabilities of customers availing of Internet banking services are being determined by bilateral
agreements between the banks and customers. Considering the banking practice and rights enjoyed by
customers in traditional banking, banks' liability to the customers on account of unauthorized transfer
through hacking, denial of service on account of technological failure etc. needs to be assessed and banks
providing Internet banking should insure themselves against such risks.
Regulatory and Supervisory Issues:
As recommended by the Group, the existing regulatory framework over banks will be extended to
Internet banking also. In this regard, it is advised that:
1. Only such banks which are licensed and supervised in India and have a physical presence in India will
be permitted to offer Internet banking products to residents of India. Thus, both banks and virtual banks
incorporated outside the country and having no physical presence in India will not, for the present, be
permitted to offer Internet banking services to Indian residents.
2. The products should be restricted to account holders only and should not be offered in other
jurisdictions.
3. The services should only include local currency products.
4. The 'in-out' scenario where customers in cross border jurisdictions are offered banking services by
Indian banks (or branches of foreign banks in India) and the 'out-in' scenario where Indian residents are
offered banking services by banks operating in cross-border jurisdictions are generally not permitted and
this approach will apply to Internet banking also. The existing exceptions for limited purposes under
FEMA i.e. where resident Indians have been permitted to continue to maintain their accounts with
overseas banks etc., will, however, be permitted.
5. Overseas branches of Indian banks will be permitted to offer Internet banking services to their overseas
customers subject to their satisfying, in addition to the host supervisor, the home supervisor.