STUDY NOTES

M.Com. Semester-IV

Subject: Financial Services

Chapter: Depository and Custodial Services

Prepared by: Dr. Sukumar Pal

Associate Professor in Commerce
Sree Chaitanya Mahavidyalaya
 Depository and Custodial Services
Definition and Meaning of Depository
Indian capital market has been witnessing rapid growth in recent past. However, this growth has not
watched with supporting infrastructure to handle the growing volume of paper that has flooded the market,
choking our existing system. This has caused problems like delay in transfers, long settlement period, high
levels of failed trade and bad deliveries, high-risk exposure etc. These characteristics were normally the
attributes of an under developed market. To overcome delay in settlement of certificates, mutilation of
certificates, loss in transit, stolen certificates, litigation etc. a new system of trading, viz. Depository system
was introduced, which facilitates investor to hold securities in electronic form and to trade in these
securities.
Depository system essentially aims at eliminating the voluminous and cumbersome paper work
involved in the scrip-based system and offers scope for ‘paperless’ trading through state-of-the-art
technology. It is an institution which maintains an electronic record of ownership or securities. The storage
and handling of certificates is hence immediately eliminated which generates a reduction in costs like back
office cost for handling, transporting and storing certificates.
On the simplest level, depository is used to refer to any place where something is deposited for
storage or security purposes. More specifically, it can refer to a company, bank or an institution that holds
and facilitates the exchange of securities, or a depository can refer to an institution that is allowed to accept
monetary deposits from customers. Depository is an institution or a kind of organization which holds
securities with it, in which trading is done among shares, debentures, mutual funds, derivatives, Future &
Options (F&O) and commodities.
The term depository is defined as ‘a central location for keeping securities on deposit’. It is also
defined as ‘a facility for holding securities, either in certificated or uncertificated form to enable book entry
transfer of securities.’ In recent times, the volume of securities and the size of the business handled have
increased manifold. Hence, the present day depositories are fully automated to serve the customers faster and
accurate.
As per The Bank for International Settlements (BIS), depository is “a facility for holding securities
which enables securities transactions to be processed by book entry. Physical securities may be immobilized
by the depository or securities may be dematerialized (so that they exist only as electronic records)”. In
simple terms depository is an organization where securities of an investor are held in electronic form.
According to Section 2(e) of the Depositories Act, 1996. “Depository means a company formed and
registered under the Companies Act, 2013 and which has been granted a certificate of registration under
Section 12(1A) of the SEBI Act, 1992”.
Therefore, a Depository is an organization like a Central Bank where the securities of a shareholder
are held in the electronic form at the request of the shareholder through the medium of a Depository
Participant. To utilize the services offered by a Depository, the investor has to open an account with the
Depository through a Depository Participant.
A depository cannot act as a depository unless it obtains a certificate of commencement of business
from SEBI. There are two Depositories functioning in India, namely the National Securities Depository
Limited (NSDL) and the Central Depository Services (India) Limited (CDSL). Under the provisions of the
Depositories Act, these Depositories provide various services to investors and other Participants in the
capital market, such as, clearing members, stock exchanges, investment institutions, banks and issuing
corporates. These include basic facilities like account opening, dematerialization, dematerialization,
settlement of trades and advanced facilities like pledging, distribution of non-cash corporate actions,
distribution of securities to allottees in case of public issues, etc.
 All the securities held by a depository shall be dematerialized and shall be in a fungible form. To
utilize the services offered by a depository, the investor has to open an account with the depository through a
participant, similar to the opening of an account with any of the bank branches to utilize services of that
bank. Registration of the depository is required under SEBI (Depositories and Participants) Regulations,
1996 and is a precondition to the functioning of the depository. Depository and depository participant both
are regulated by SEBI.

Depository System
In the depository system, share certificates belonging to the investors are to be dematerialized and
their names are required to be entered in the records of depository as beneficial owners. Consequent to these
changes, the investors’ names in the companies’ register are replaced by the name of depository as the
registered owner of the securities. The depository, however, does not have any voting rights or other
economic rights in respect of the shares as a registered owner. The beneficial owner continues to enjoy all
the rights and benefits and is subject to all the liabilities in respect of the securities held by a depository.
Shares in the depository mode are fungible and cease to have distinctive numbers. The transfer of ownership
changes in the depository is done automatically on the basis of delivery payment.
In the Depository mode, corporate actions such as IPOs, rights, conversions, bonus,
mergers/amalgamations, subdivisions & consolidations are carried out without the movement of papers,
saving both cost & time. Information of beneficiary owners is readily available. The issuer gets information
on changes in shareholding pattern on a regular basis, which enables the issuer to efficiently monitor the
changes in shareholdings.
The Depository system links the issuing corporates, Depository Participants (DPs), the Depositories
and clearing corporation/clearing house of stock exchanges. This network facilitates holding of securities in
the soft form and effects transfers by means of account transfers.

Services provided by a Depository

Depository provides following services to the investors through a DP:
(1) Opening a demat account.
(2) Dematerialization: It is a process of conversion of physical share – certificate into electronic – form.
So, when a shareholder uses the dematerialization facility, company take back the shares, through
depository – system and equal numbers of shares are credited in his account in e-form.
(3) Rematerialisation: Rematerialisation is the exact reverse of Dematerialization. It refers to the process
of issuing physical securities in place of the securities held electronically in book-entry form with a
depository.
Other Services:
a) Pledging Dematerialized Shares: Dematerialized shares could be pledged; in fact, this is more
advantageous as compared to pledging share certificates. After loan is repaid one can request for a
closure of pledge by instructing one’s DP through a standard format. The pledgee on receiving the
repayment as well as the request for closure of pledge will instruct his DP accordingly. Even the locked-
in securities can be pledged. The pledger continues to remain the beneficiary holder of those securities
even after the securities are pledged.
b) Initial Public Offerings: Credits for public offers can be directly received into demat account. In the
public issue application form of depository eligible companies, there will be a provision to indicate the
manner in which securities should be allotted to the applicant. One is to mention one’s client account
number and the name and identification number of DP. All allotment due to investor will be credited
into required account.
c) Receipt of Cash/non-cash Benefits: When any corporate event such as rights or bonus or dividend is
announced for a particular security, depository will give the details of all the clients having electronic
holdings in that security as of the record date to the registrar. The registrar will then calculate the
 corporate benefits due to all the shareholders. The disbursement of cash benefits such as dividend/
interest will be done directly by the registrar. In case of non-cash benefits, depository will directly credit
the securities entitlements in the depository accounts of all those clients who have opted for electronic
allotment based on the information provided by the registrar.
d) Stock Lending and Borrowing: Through the depository account securities in the demat form can be
easily lent/ borrowed. Securities can be lent or borrowed in electronic form through an approved
intermediary, who has opened a special ‘intermediary’ account with a DP. Instructions are to be given to
DP through a standard format (which is available with DP) to deposit securities with the intermediary.
Similarly to borrow securities from the intermediary, one has to instruct DP through a standard format
(which is available with your DP).
e) Transmission of Securities: Transmission of securities due to death, lunacy, bankruptcy, insolvency or
by any other lawful means other than transfer is also possible in the depository system. In the case of
transmission, the claimant will have to fill in a transmission request form, (which is available with the
DP) supported by valid documents.
f) Freezing Account with DP: If at any time as a security measure one wishes that no transaction should
be effected in one’s account, one may advise one’s DP accordingly. DP will ensure that account of such
investor is totally frozen until further instructions from him.
g) Settlement of trade and transactions: Depository settles trades by delivering / receiving underlying
securities from / in BO accounts. Depository also settles transactions between BOs entered outside the
Stock Exchange. Receiving electronic credit in respect of securities allotted by issuers under IPO or
otherwise on behalf of demat account holders. Receiving non cash corporate benefits, such as, allotment
of bonus and rights shares or any other non-cash corporate benefits given by the issuers in electronic
form on behalf of its demat account holders.

Benefits of Depository System

In the depository system, the ownership and transfer of securities takes place by means of electronic
book entries. At the outset, this system rids the capital market of the dangers related to handling of paper.
The system provides numerous direct and indirect benefits, like:
1. Elimination of bad deliveries - In the depository environment, once holdings of an investor are
dematerialised, the question of bad delivery does not arise i.e. they cannot be held "under objection". In
the physical environment, buyer of shares was required to take the risk of transfer and face uncertainty of
the quality of assets purchased. In a depository environment good money certainly begets good quality of
assets.
2. Elimination of all risks associated with physical certificates - Dealing in physical securities have
associated security risks of theft of stocks, mutilation of certificates, loss of certificates during movements
through and from the registrars, thus exposing the investor to the cost of obtaining duplicate certificates
and advertisements, etc. This problem does not arise in the depository environment.
3. Immediate transfer and registration of securities - In the depository environment, once the securities
are credited to the investors account on pay out, he becomes the legal owner of the securities. There is no
further need to send it to the company's registrar for registration. Having purchased securities in the
physical environment, the investor has to send it to the company's registrar so that the change of
ownership can be registered. This process usually takes around three to four months and is rarely
completed within the statutory framework of two months thus exposing the investor to opportunity cost of
delay in transfer and to risk of loss in transit. To overcome this, the normally accepted practice is to hold
the securities in street names i.e. not to register the change of ownership. However, if the investors miss a
book closure the securities are not good for delivery and the investor would also stand to loose his
corporate entitlements.
4. Faster disbursement of non-cash corporate benefits like rights, bonus, etc. – Depository system
provides for direct credit of non-cash corporate entitlements to an investors account, thereby ensuring
faster disbursement and avoiding risk of loss of certificates in transit.
5. Reduction in brokerage by many brokers for trading in dematerialized securities - Brokers provide
this benefit to investors as dealing in dematerialized securities reduces their back office cost of handling
paper and also eliminates the risk of being the introducing broker. Reduction in handling of huge volumes
of paper and periodic status reports to investors on their holdings and transactions, leading to better
controls.
6. 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.
7. Elimination of problems related to selling securities on behalf of a minor - A natural guardian is not
required to take court approval for selling demat securities on behalf of a minor.
Depository Process
Immobilisation
Immobilisation of shares is the first step in the depository process. In this process physical share
certificates are submitted to the depository and these are kept in vaults with the depository for safe custody.
Physical securities can be converted in to book entry form i.e. electronic form by way of immobilization. All
subsequent transactions in these securities take place in book entry form. The actual owner has the right to
withdraw his physical securities as and when desired. The immobilization of fresh issue may be achieved by
issuing a jumbo certificate representing the entire issue in the name of depository, as nominee of the
beneficial owners.

Dematerialisation
Dematerialization is a process by which the physical share certificates of an investor are taken back
by the Company and an equivalent number of securities are credited his account in electronic form at the
request of the investor. Therefore, in this system there is no physical scrip in existence, only electronic
records maintained by the depository. This type of system is cost effective and simple and has been adopted
in India. An investor will have to first open an account with a Depository Participant and then request for the
dematerialization of his share certificates through the Depository Participant so that the dematerialized
holdings can be credited into that account. This is very similar to opening a Bank Account.
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 from the Stock Exchange, he/she will get delivery of the shares in
demat form. Odd lot share certificates can also be dematerialized
Under the immobilization method, after giving credit of the securities in electronic form, physical
certificates are stored or lodged with an organization, which acts as a custodian – a securities depository.
Subsequent transactions in such immobilized securities take place through book-entries.
India has adopted dematerialization method whereas immobilization has been adopted by some of the
countries like Hong Kong and USA. Japan has adopted both, dematerialization as well as immobilization for
achieving a paper-less securities market.
Depository Participants
The depository participant (DP) is the link between the depositors and the owner of securities. He is
deemed an agent of the depository and he is authorized to offer depository services to investors. Financial
institutions, banks, custodians and stockbrokers complying with the requirements prescribed by SEBI/
Depositories can be registered as DP. An investor will always interact with a DP for the services and cannot
directly approach the depository for any services.
As per Depositories act and SEBI regulations, a depository cannot interact directly with Beneficial
Owners (BOs) and has to deal through its agents called Depository Participant. Every DP, before
commencement of its operation, has to obtain a certificate of registration from SEBI. The following entities
are eligible for becoming depository participant in accordance with Regulation 19 of the SEBI (Depositories
and Participants) Regulations, 1996:
 A public financial institution as defined in Section 4A of the Companies Act, 1956.
 A bank included in the second schedule of the Reserve Bank of India Act, 1934.
 A foreign bank, operating in India with the approval of Reserve Bank of India.
 A state financial corporation established under the provisions of section 3 of the State Financial
Corporations Act, 1951.
 An institution engaged in providing financial services, promoted by any of the four institutions mentioned
above.
 A custodian of securities, who has been granted a certificate of registration by SEBI under Section 12(1A)
of the SEBI Act, 1992.
 A clearing corporation or a clearing house of a stock exchange.
 A stockbroker having a minimum net worth of rupees two crores. The aggregate value of the portfolio of
securities, of the BOs, held in dematerialized form in a depository through him, shall not exceed 100
times of the net worth of the stockbroker. (Not applicable for DPs whose net worth is Rs. ten crores). In
case the stockbroker seeks to act as a participant in more than one depository, he shall comply with the
net worth criteria separately with each such depository.
 A non-banking finance company, having a net worth not less than rupees fifty crores provided that such
company shall act as a participant only on behalf of itself and not on behalf of any other person. Provided
further that a non-banking finance company may act as a participant on behalf of any other entity, if it has
a net worth of Rs. fifty crores in addition to the net worth specified by any other authority.
 A registrar to an issue or share transfer agent who has a minimum net worth of rupees ten crores and who
has been granted a certificate of registration by SEBI.

Characteristics of Depository Participant:

 Acts as an Agent of Depository
 Directly deal with customer
 Functions like Securities Bank
 Account opening
 Facilitates dematerialization
 Instant transfer on pay – out
 Credits to investor in IPO, rights, bonus
 Settles trades in electronic segment

Functions of Depository Participants

1. Beneficial Owner Accounting System
This module allows a DP to set-up accounts for various categories of investors. Details like name and
address of the BO, additional details of the BO, signatures and power of attorney can be stored in the
system. User can also modify, delete or inquire on certain information of accounts already set-up. This
module also provides facility for closing an account.
2. Dematerialisation
This module allows DP to set-up, modify or delete demat requests and monitor their status.
3. Rematerialisation
This module allows DP to set-up, modify or delete remat requests and monitor their status.
4. Transfers and Transmission
This module is used only in the event of death of an A/C holder. The balance can be moved in two ways.
1. One to many (ISIN wise)
2. One to one (All ISINs)
5. Transaction (off Market)
Transactions (Off market trades) result when securities are transferred between two accounts maintained
with CDSL DPs.
6. Inter Depository Transfers
This module is used to transfer/ receive the securities from an account in CDSL to/ from any account of
the other depository.
7. Settlement
Through this module, the DP can enter On-market instructions for delivering the securities for respective
settlements, for which the BO / CM has traded on the exchange. Facility for early pay-in is also provided
in this module.
8. Bo Upload
The DP can capture the details of the intending BOs in his back office software and then upload the files
through this option for setting up BO accounts in CDSL.
9. Upload
Similar to BO upload, this module allows a DP to upload files for transactions such as Demat, Off-
market, Inter depository, Settlements, Early pay-in etc.
10. Pledge and Unpledge
The DP can set up, modify, delete, accept or reject the pledge request for his BOs. Unpledge or
invocation of the same can also be done through this module. Unpledge / invocation can also be set up for
partial quantity.
11. Corporate Action (CA)
This module facilitates DPs to inquire the details of corporate actions set up by Issuers / RTA.
12. Initial Public Offer (IPO)
This module facilitates DPs to inquire the details of Initial public offers set up by Issuers / RTA.
13. Freeze and Unfreeze
This module allows a BO to freeze his / her account for safety purpose. Freeze can be for the whole BO
account as such or specific ISIN in the BO account or part balance of an ISIN in the BO account. Freeze
can also be initiated by DP/CDSL if instructions are received from statutory authorities such as Court /
Income tax dept. / SEBI etc. Freeze can be for only debits, only credits, or both for debits as well as
credits. There can be multiple freeze requests on a single BO a/c.

Beneficial Owner (BO)

Beneficial owner is a person whose name is recorded as such with a depository. It means a person who
is engaged in buying and selling of securities issued by the companies and is registered his/ her securities
with the depository in the form of book entry. When physical shares are converted in to electronic form, the
depository becomes ‘Registered owner” in the books of the company and investors name is removed from
books of the company. Depository is holding shares in its records on behalf of the investors who have
opened a demat account with the depository. Hence all benefits are given to the actual investor who is called
as a “Beneficial Owner” (BO) of the securities. The beneficial owner is the real owner of the security.
He/she has all rights and liabilities associated with the securities.

Issuer
“Issuer” means any entity, such as corporate / state or central government organizations, issuing
securities which can be held in depository in electronic form. It maintains a register for recording the names
of the registered owners of securities and the depositories. The issuer sends a list of shareholders who opt for
the depository system. And only that co.’s can issue the securities which are registered under stock
exchanges. The issuer first gives the investors a choice of holding their securities either in the physical form
or the scripless form (through the depository). The investors make their choice and communicate to the
issuing company at the time of initial offer itself. Thereafter, the issuing company intimates the depository
details about the allotment of securities. The depository in turn records the names of allottees of the
securities in their records as the beneficial owners. The name of the depository is entered by the issuer as the
registered holder of the securities.

RTA
An RTA i.e. Registrar and Transfer Agent is an agent of the issuer. RTA act as an intermediary
between the issuer and depository for providing services such as Dematerialization; Rematerialisation; Initial
Public Offers; and Corporate actions.

ISIN (International Securities Identification Number)

“ISIN” is a unique 12 digit alphanumeric code given to a security, shares, Debentures, Bonds etc.
when the security is admitted in the depository system. First two digits of the ISIN code indicate country of
registration for the security. All securities registered on depository in India, first two digits of the ISIN code
are ‘IN’.
Each security issued bears a unique ISIN issued by the International Standards Organisation (ISO). In India,
the task of issuing ISIN of various securities has been assigned by SEBI to NSDL. For Government
securities, allotment of ISIN is done by Reserve Bank of India. Each member country has a different code
according to the ISIN Standard (ISO 6166).
ISIN is a twelve-character long identification mark. It has three components – a pre-fix, a basic number and
a check digit.
 The pre-fix is a two digit country code as stated under ISO 3166 (IN for India).
 The basic number is made up of nine alphanumeric characters (digits and/or alphabets).
 The check digit at the end of the ISIN is computed to check the validity of the ISIN. It is calculated
according to the modulus 10 “Double Add Double Check”.
Distinct ISINs are allotted to securities issued by the same company, issued at different times or carrying
different rights of different terms and conditions. Different ISINs are issued to physical and dematerialized
securities of the same issue.
To understand it in a better manner, let’s take an example:
ISIN INE 475C 01 012 has the following break up:
IN - India
E - Company
475C - Company serial number
01 - Equity (it can be mutual fund units, debt or government securities)
01 - Issue number
2 - Check digit
The third character represents the Issuer Type (E in the above example). It is as follows:
A - Central government security
B - State government security
C - Municipal corporation
D - Union Territories
E - Company, Statutory Corporation, Banking Company
F - Mutual funds including UTI
Maximum issuer types can be 35 (A to Z and 0 to 8.)
The characters fourth to seventh represents company identity. The first three characters are numeric and the
fourth character is an alpha character.
The eighth and the ninth character represent security type for a given issuer. Both the characters are
numeric.
Security Type Code
Equity 01
Non-Voting Equity 02
Convertible Preference Shares 03
Non-Convertible Preference Shares 04
Mutual Fund Units – Close ended 05
Mutual Fund Units – Open ended 06
Secured Debentures 07
Unsecured Debentures 08
Regular Return Bonds – Promissory Notes 09
Floating Rate Bonds 10
Deep Discount Bonds 11
Step Discount Bonds 12
Warrants 13
The tenth and the eleventh characters are serially issued for each security of the issuer entering the system.
The last number is double-add-double check digit.

Dematerialisation Process:

1. Appointing DP
Any investor who intends to transact through depository system has to engage one depository participant
(DP). He can approach a DP of his choice and open an account with him just like one opens an account
with a bank. Investor gets an identification number called Client ID (just as one gets ones bank account
number) which serves as a reference point for all his transactions with D.P.
Every investor before getting his holding dematerialised has to enter into an agreement with the
depository through a participant. This step is necessary whether investor already has securities or
securities are yet to be issued in a fresh issue. The investor contracts only with that depository which
accepts his security in ‘depository mode’ since it is not necessary that all eligible securities must be in
depository mode and with all the depositories. The decision on whether or not to hold securities within
the depository mode and if in depository mode, with which depository or participants, would be entirely
with the investor.
2. Request for ‘Demat’
After any agreement is entered for getting securities dematerialised and his account is opened, the
investor makes an application to depository participants in form called ‘Dematerialisation Request Form’
(DRF) to be provided by the DP and hands over his share certificates duly cancelled by writing’
surrendered for dematerialisation’ to them for demat. The DP will accept certificates registered only in
investor’s name. The request for dematerialisation with the depository participants is sent to the
 depository through depository network with which DP is connected. Simultaneously DP submits the
securities certificates to the issuer company or it’s Registrar of transfer.
3. Approach the Company or Registrar of Transfer
The depository will electronically intimate the issuer or its ‘Registrar and transfer agent’ of the
dematerialisation request. The issuer or the ‘Registrar and transfer Agent’ has to verify the validity of the
security certificates as well as the fact that the DRF has been made by the person recorded as a member in
its Register of Members. If the issuer or its Registrar is satisfied, it dematerialises the scrip and updates its
record.
4. Confirmation of Demat
The Registrar to transfer or the concerned company when satisfied with the case of demat has to inform
the depository of the completion of dematerialisation authorising an electronic credit for that security in
favour of the investor.
5. Crediting the Client’s Account
DP credits investor’s account with the number of shares so dematerialised and thereafter investor hold the
securities in electronic form. If there is rejection of demat request then such credit is not given. After
crediting the account, the client is sending the necessary information in form of a statement like we get
bank statement after bank transactions.
Re materialisation process:
Rematerialisation is a process of converting electronic holdings of investor back into share
certificates in paper form. The process of rematerialisation is also carried out through DP and the process has
to be completed within a period of 30 days. Thus, once security is dematerialised it is not necessary that
investor is to continue in depository mode for all times to come. He can switch over to remat whereby he
gets back physical possession of security scripts. The client of DP has to submit a request for remat. This
request is forwarded for necessary action to depository. The depository confirms the rematerialisation
request to the Registrar and Transfer Agents. The Registrar updates the accounts and prints the desired
certificate. The depository is informed by Registrar and certificate is sent to the investor. The depository
updates its records and communicates to DP to incorporate necessary changes in the account of the client.

Similarities and differences between a Bank and a Depository

A bank and a depository are similar in several ways, as under:

A Bank A Depository (like CDSL)

Promoted by persons and institutions of repute and
good standing.
Renders services like safe keeping of the money
(funds) of customers in book entry form.
Has an administrative Central Office and renders
services (like account opening), generally, through
branches.
Is required to verify the identity and address of the
customer before opening a bank account.
The bank is entitled to charge some fees for the
services like account maintenance, remittances, safe
custody etc.
Facilitates transfer of funds within the bank
(transfer) and also between two banking institutions
(through clearing).
Promoted by persons and institutions of repute and
good standing.
Renders services like safe keeping of securities
(shares, bonds, debentures etc.) of the customers in
book entry form.
Has an administrative Central Office and renders
services through Depository Participants (DPs) and
their branches.
Is required to verify the identity and address of the
investor before opening a demat account.
The depository is entitled to charge some fees for the
services like account maintenance, dematerialization,
pledging, transaction charges etc.
Facilitates transfer of ownership of securities within
the depository (transfer) and also between two
depositories (Inter Depository transfer).
Currency notes held in physical form are specific and Securities held in physical form are specific and have
have distinctive identification features and numbers. distinctive identification features and numbers.
However, the funds (say, Indian Rupees or U S However, the securities (say, Equity Shares, bonds,
Dollars) lying in a bank account are fungible (i.e. debentures, Government Securities etc.) lying in a
exactly similar, inseparable and without any demat account are fungible (i.e. exactly similar,
identification number). inseparable and without any identification number).
A bank needs express written consent of the A depository needs express written consent (Debit
customer (like a cheque) for debiting his account. Instruction Slip) of the account holder for debiting
his account.
Power of attorney holder can operate a bank account. A demat account can be operated by power of
attorney holder.
A bank customer is entitled to get a statement of An account holder is entitled to get a statement of
account from the branch periodically. demat account periodically from the DP.
Nomination facility is available in the bank account. Nomination facility is available in case of demat
accounts also.

A bank and a depository are though similar yet different in several ways, as under:

A Bank A Depository (like CDSL)

For opening a bank account, such as a savings bank A demat account is opened by an investor without
account, a minimum balance has to be deposited any securities, i.e. with zero balance.
along with the account opening form.
A customer having an account with a bank is called An account holder of the depository is called as
as an Account Holder. Beneficial Owner (of the securities).
A bank is entitled to use funds lying in the savings or A depository is not entitled to use the securities lying
current deposit accounts of the customers in the in the demat accounts of the customers and hence
normal course of business and pays interest to them does not pay any interest to them.
for the use.
A bank account can be operated upon “jointly”, or, A demat account can be opened, operated upon only
by “either or survivor” of the account holders or by by ALL the account holders JOINTLY, at present.
“any one/two/three of", the joint account holders.
In the bank account, addition or deletion of name(s)
In the demat account, addition or deletion of name(s)
of one or more of the account holders is permitted.
of one or more of the account holders (beneficial
owners) is NOT permitted.
In the bank account, there is no requirement of In demat account, the beneficial owners is required
execution of an agreement between the bank and to sign a DP-BO agreement before opening the
account holder at the time of opening the account demat account.

Legal Framework
The legal framework for a depository system has been laid down by the Depositories Act, 1996 and is
regulated by SEBI. The depository business in India is regulated by –
– The Depositories Act, 1996
– The SEBI (Depositories and Participants) Regulations, 1996
– Bye-laws of Depository
– Business Rules of Depository.
Apart from the above, Depositories are also governed by certain provisions of:
– The Companies Act, 2013
– The Indian Stamp Act, 1899
– Securities and Exchange Board of India Act, 1992
– Securities Contracts (Regulation) Act, 1956
– Benami Transaction (Prohibition) Act, 1988
– Income Tax Act, 1961
– Bankers’ Books Evidence Act, 1891

The legal framework for depository system in the Depositories Act, 1996 provides for the establishment of
single or multiple depositories. Anybody to be eligible for providing depository services must be formed and
registered as a company under the Companies Act, 2013 and seek registration with SEBI and obtain a
Certificate of Commencement of Business from SEBI on fulfilment of the prescribed conditions. The
investors opting to join depository mode are required to enter into an agreement with depository through a
participant who acts as an agent of depository. The agencies such as custodians, banks, financial institutions,
large corporate brokerage firms, non-banking financial companies etc. act as participants of depositories.
The companies issuing securities are also required to enter into an agreement with the Depository.
THE DEPOSITORIES ACT, 1996
Objectives
The depositories legislation as per the Statement of Objects and Reasons appended to the Depositories Act,
1996 aims at providing for:
– A legal basis for establishment of depositories to conduct the task of maintenance of ownership records of
securities and effect changes in ownership records through book entry;
– Dematerialisation of securities in the depositories mode as well as giving option to an investor to choose
between holding securities in physical mode and holding securities in a dematerialized form in a
depository;
– Making the securities fungible;
– Making the shares, debentures and any interest thereon of a public limited company freely transferable;
– Exempting all transfers of shares within a depository from stamp duty.

Eligibility Condition for Depository Services

Any company or other institution to be eligible to provide depository services must:
– be formed and registered as a company under the Companies Act, 2013.
– be registered with SEBI as a depository under SEBI Act, 1992.
– has framed bye-laws with the previous approval of SEBI.
– has one or more participants to render depository services on its behalf.
-- has adequate systems and safeguards to prevent manipulation of records and transactions to the
satisfaction of SEBI.
– complies with Depositories Act, 1996 and SEBI (Depositories and Participants) Regulations, 1996.
– meets eligibility criteria in terms of constitution, network, etc.

Eligible Securities required to be in the Depository Mode

Section 8 of the Depositories Act gives the option to the investors to receive securities in physical form or in
depository mode.
It is not necessary that all eligible securities must be in the depository mode. In the scheme of the
Depositories legislation, the investor has been given supremacy. The investors have the choice of holding
physical securities or opt for a depository based ownership record.
However in case of fresh issue of securities all securities issued have to be in dematerialized form. However
after that investor will also have the freedom to switch from depository mode to non-depository mode and
vice versa. The decision as to whether or not to hold securities within the depository mode and if in
depository mode, which depository or participant, would be entirely with the investor.

Fungibility
Section 9 states that securities in depositories shall be in fungible form. The Act envisages that all securities
held in depository shall be fungible i.e. all certificates of the same security shall become interchangeable in
the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into
depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of
the currencies.
Immobilisation of securities in a depository mode refers to a situation where the depository holds securities
in the form of physical paper side by side with electronic evidence of ownership. In such a case the transfers
are not accompanied by physical movement of securities but securities are in existence in the custody of the
depository. However, the Depositories Act, envisages dematerialisation in the depository mode. In such a
case the securities held in a depository shall be dematerialized and the ownership of the securities shall be
reflected through book entry only. The securities outside the depository shall be represented by physical
scrips. Hence, the depository legislation envisages partial dematerialisation, i.e. a portion of the securities in
dematerialized form and the other portion in physical form. (Sections 89 and 186 of Companies Act, 2013
shall not apply to a depository in respect of shares held on behalf of beneficial owners in depositories).

Rights of Depositories and Beneficial Owner

A depository should be deemed to be the registered owner for the purposes of effecting transfer of ownership
of security on behalf of a beneficial owner. The depository as a registered owner should not have any voting
rights or any other rights in respect of securities held by it. The beneficial owner is entitled to all the rights
and benefits and be subjected to all the liabilities in respect of his securities held by a depository.

Register of Beneficial Owner

Every depository is required to maintain a register and an index of beneficial owners in the manner provided
in the Companies Act, 2013.

Pledge or Hypothecation of Securities Held in 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. Every beneficial owner should give intimation of
such pledge or hypothecation to the depository participant and such depository is required to make entries in
its records accordingly. Any entry in the records of a depository should be evidence of a pledge or
hypothecation.

Furnishing of Information and Records by Depository and Issuer

Every depository shall furnish to the issuer information about the transfer of securities in the name of
beneficial owners at such intervals and in such manner as may be specified by the bye-laws. Every issuer
shall make available to the depository copies of the relevant records in respect of securities held by such
depository.

Option to Opt Out in respect of any Security

Section 14 of the Act provides that if a beneficial owner seeks to opt out of a depository in respect of any
security he should inform the depository accordingly. After the receipt of intimation the depository should
make appropriate entries in its records and also inform the issuer. Every issuer may, within thirty days of the
receipt of intimation from the depository and on fulfillment of such conditions and on payment of such fees
as may be specified by the regulations, issue the certificate of securities to the beneficial owner or the
transferee, as the case may be.

Depositories to Indemnify Loss in Certain Cases

Any loss caused to the beneficial owner due to the negligence of the depository or the participant, would be
indemnified by the depository to such beneficial owner. Where the loss due to the negligence of the
participant is indemnified by the depository, the depository has the right to recover the same from such
participant.

POWER OF SEBI
Section 18 of the Act provides that SEBI in the public interest or in the interest of investors may by order in
writing to call upon any issuer, depository, participant or beneficial owner to furnish in writing such
information relating to the securities held in a depository as it may require; or authorise any person to make
an enquiry or inspection in relation to the affairs of the issuer, beneficial owner, depository or participant,
who shall submit a report of such enquiry or inspection to it within such period as may be specified in the
order.
Sub-section (2) to Section 18 provides that every director, manager, partner, secretary, officer or employee
of the depository or issuer or the participant or beneficial owner shall on demand produce before the person
making the enquiry or inspection all information or such records and other documents in his custody having
a bearing on the subject matter of such enquiry or inspection.
If after making or causing to be made an enquiry or inspection, SEBI is satisfied that it is necessary in the
interest of investors, or orderly development of securities market; or to prevent the affairs of any depository
or participant being conducted in the manner detrimental to the interests of investors or securities market,
SEBI may issue such directions to any depository or participant or any person associated with the securities
market; or to any issuer as may be appropriate in the interest of investors or the securities market.

Power of SEBI to give directions

Section 19 provides that SEBI after making or causing to be made an enquiry or inspection SEBI is satisfied
that it is necessary in the interest of investors or the securities market or to prevent the affairs of any
depository or participant being conducted in the manner detrimental to the interests of investors or the
securities market.
it may issue such directions, –
(a) to any depository or participant or any person associated with the securities market; or
(b) to any issuer, as may be appropriate in the interest of investors or the securities market
Explanation – For the removal of doubts, it is hereby declared that the power to issue directions under this
section shall include and always be deemed to have been included the power to direct any person, who made
profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act
or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted
by such contravention.

Penalty for failure to furnish Information/Return etc.

Section 19A provides that any person, who is required under Depositories Act or any rules or regulations or
bye-laws made there under –
(a) to furnish any information, document, books, returns or report to the Board, fails to furnish the same
within the time specified therefor fails to furnish the same within specified time;
(b) to file any return or furnish any information, books or other documents within the time specified therefor
in the regulations or bye-laws, fails to file return or furnish the same within the time specified therefor,
fails to file such return or furnish the required information within the specified time;
(c) to maintain books of account or records, fails to maintain the same; he shall be liable to a penalty of one
lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

Penalty for failure to enter into agreement

Section 19B provides that if a depository or participant or any issuer or its agent or any person, who is a
registered intermediary and is required under this Act or any rules or regulations made there under, to enter
into an agreement, fails to enter into such agreement, such intermediary shall be liable to a penalty of one
lakh rupees for each day during which such failure continues or one crore rupees, whichever is less for every
such failure.

Penalty for failure to Redress Investors' Grievances

Section 19C provides that if any depository or participant or any issuer or its agent or any person, who is
registered as a registered intermediary, after having been called upon by the SEBI in writing, to redress the
grievances of the investors, fails to redress such grievances within the time specified, such depository or
participant or issuer or its agents or intermediary shall be liable to a penalty of one lakh rupees for each day
during which such failure continues or one crore rupees, whichever is less.

Penalty for delay in Dematerialisation or Issue of Certificate of Securities

Section 19D provides that if any issuer or its agent or any person, who is a registered intermediary, fails 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 or bye-laws made there under or abets in delaying the process of
dematerialisation or issue the certificate of securities on opting out of a depository of securities, such
intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues
or one crore rupees, whichever is less.

Penalty for failure to reconcile records

Section 19E provides that if a depository or participant or any issuer or its agent or any person, who is a
registered intermediary, fails to reconcile the records of dematerialised securities with all the securities
issued by the issuer as specified in the regulations, such intermediary shall be liable to a penalty of one lakh
rupees for each day during which such failure continues or one crore rupees, whichever is less.

Penalty for failure to comply with directions issued by SEBI

Section 19F requires that if any person fails to comply with the directions issued by SEBI under section 19,
within the time specified by it, he shall be liable to a penalty of one lakh rupees for each day during which
such failure continues or one crore rupees, whichever is less.

Penalty for contravention where no separate penalty has been provided

Section 19G provides that whoever fails to comply with any provision of this Act, the rules or the
regulations or bye-laws made or directions issued by SEBI thereunder for which no separate penalty has
been provided, shall be liable to a penalty which may extend to one crore rupees.

POWER TO ADJUDICATE
Section 19H provides that for the purpose of adjudging SEBI shall appoint any officer not below the rank of
a Division Chief of SEBI to be an adjudicating officer for holding an inquiry in the prescribed manner after
giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any
penalty. While holding an inquiry, the adjudicating officer shall have power to summon and enforce the
attendance of any person acquainted with the facts and circumstances of the case to give evidence or to
produce any document, which in the opinion of the adjudicating officer, may be useful for or relevant to the
subject matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with
the provisions of any of the sections specified in this Act, he may impose such penalty as he thinks fit in
accordance with the provisions of any of those sections.
Section 19H (3) empowered SEBI to call for and examine the record of any proceedings under this section
and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the
interest of the securities market, it may, after making or causing to be made such inquiry as it deems
necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify.
Provided that no such order shall be passed unless the person concerned has been given an opportunity of
being heard in the matter. Further nothing contained in this sub-section shall be applicable after an expiry of
a period of three months from the date of the order passed by the adjudicating officer or disposal of the
appeal under section 23A, whichever is earlier.

Factors to be taken into account by Adjudicating Officer

Section 19 I requires that while adjudging the quantum of penalty under section 19H, the adjudicating officer
shall have due regard to the following factors, namely–(a) the amount of disproportionate gain or unfair
advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an
investor or group of investors as a result of the default; (c) the repetitive nature of the default.

Settlement of Administrative Civil Proceedings

Section 19-IA provides that any person, against whom any proceedings have been initiated or may be
initiated under section 19, section 19H, as the case may be, may file an application in writing to SEBI
proposing for settlement of the proceedings initiated or to be initiated for the alleged defaults.
Sub-section 2 authorises that SEBI may, after taking into consideration the nature, gravity and impact of
defaults, agree to the proposal for settlement, on payment of such sum by the defaulter or on such other
terms as may be determined by SEBI in accordance with the regulations made under the SEBI Act, 1992.
Sub-section 3 lays down that for the purpose of settlement under this section, the procedure specified by
SEBI under the SEBI Act, 1992 shall apply. Further Sub-section 4 provides that no appeal shall lie under
section 23A against any order passed by SEBI or the adjudicating officer, as the case may be, under this
section.
Recovery of amounts
Section 19-IB deals with recovery of amounts by SEBI.
If a person fails to pay the penalty imposed by the adjudicating officer or fails to comply with a direction of
disgorgement order issued under Section 19 or fails to pay any fees due to SEBI, the Recovery Officer may
draw up under his signature a statement in the specified form specifying the amount due from the person
(such statement being hereafter in this Chapter referred to as certificate) and shall proceed to recover from
such person the amount specified in the certificate by one or more of the following modes, namely:-
(a) attachment and sale of the person’s movable property;
(b) attachment of the person’s bank accounts;
(c) attachment and sale of the person’s immovable property;
(d) arrest of the person and his detention in prison;
(e) appointing a receiver for the management of the person’s movable and immovable properties,
and for this purpose, the provisions of section 221 to 227, 228A, 229, 232, the Second and Third Schedules
to the Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time
to time, in so far as may be, apply with necessary modifications as if the said provisions and the rules
thereunder were the provisions of this Act and referred to the amount due under this Act instead of to
income-tax under the Income-tax Act, 1961.
Explanation 1 – For the purpose of this sub-section, the person’s movable or immovable property or monies
held in bank accounts shall include any property or monies held in bank accounts which has been transferred
directly or indirectly on or after the date when the amount specified in certificate had become due, by the
person to his spouse or minor child or son’s wife or son’s minor child, otherwise than for adequate
consideration, and which is held by, or stands in the name of, any of the persons aforesaid; and so far as the
movable or immovable property or monies held in bank accounts so transferred to his minor child or his
son’s minor child is concerned, it shall, even after the date of attainment of majority by such minor child or
son’s minor child, as the case may be, continue to be included in the person’s movable or immovable
property or monies held in bank accounts for recovering any amount due from the person under this Act.
Explanation 2 – Any reference under the provisions of the Second and Third Schedules to the Income-tax
Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962 to the assessee shall be construed as a
reference
to the person specified in the certificate.
Explanation 3 – Any reference to appeal in Chapter XVIID and the Second Schedule to the Income-tax Act,
1961, shall be construed as a reference to appeal before the Securities Appellate Tribunal under Section 23A
of this Act.
Sub-section (2) empowers the Recovery Officer to seek the assistance of the local district administration
while exercising the powers under sub-section (1).
Sub-section (30 provides that the recovery of amounts by a Recovery Officer under sub-section (1), pursuant
to non-compliance with any direction issued by SEBI under section 19, shall have precedence over any other
claim against such person.
The expression “Recovery Officer” means any officer of SEBI who may be authorised, by general or special
order in writing, to exercise the powers of a Recovery Officer.

Crediting of Penalties to Consolidated Fund of India

Section 19J provides that all sums realised by way of penalties under this Act shall be credited to the
Consolidated Fund of India.

Offences
Section 20 provides that without prejudice to any award of penalty by the adjudicating officer under this Act,
if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act
or of any rules or regulations or bye-laws made there under, he shall be punishable with imprisonment for a
term which may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or with
both. If any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of
his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than one
month but which may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or
with both.

Offences by Companies
Section 21 provides that where an offence under this Act has been committed by a company, every person
who at the time the offence was committed was in charge of, and was responsible to, the company for the
conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly. The proviso to the section also
provides that nothing contained in this sub-section shall render any such person liable to any punishment
provided in this Act, if he proves that the offence was committed without his knowledge or that he had
exercised all due diligence to prevent the commission of such offence. Where an offence under this Act has
been committed by a company and it is proved that the offence has been committed with the consent or
connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other
officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of
the offence and shall be liable to be proceeded against and punished accordingly.

Cognizance of offences by Courts

Section 22 provides that no court shall take cognizance of any offence punishable under this Act or any rules
or regulations or bye-laws made there under except on a complaint made by the Central Government or State
Government or the SEBI or by any person.

COMPOSITION OF CERTAIN OFFENCES

Section 22A provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973, any
offence punishable under this Act, not being an offence punishable with imprisonment only, or with
imprisonment and also with fine, may either before or after the institution of any proceeding, be
compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.
Power to grant Immunity
Section 22B empowers the Central Government to grant immunity, on recommendation by the SEBI, if the
Central Government is satisfied, that any person, who is alleged to have violated any of the provisions of this
Act or the rules or the regulations made there under, has made a full and true disclosure in respect of alleged
violation, grant to such person, subject to such conditions as it may think fit to impose, immunity from
prosecution for any offence under this Act, or the rules or the regulations made there under or also from the
imposition of any penalty under this Act with respect to the alleged violation. No such immunity shall be
granted by the Central Government in cases where the proceedings for the prosecution for any such offence
have been instituted before the date of receipt of application for grant of such immunity. Recommendation of
SEBI under this subsection is not binding upon the Central Government.
The immunity granted to a person may, at any time, be withdrawn by the Central Government, if it is
satisfied that such person had, in the course of the proceedings, not complied with the condition on which
the immunity was granted or had given false evidence, and thereupon such person may be tried for the
offence with respect to which the immunity was granted or for any other offence of which he appears to have
been guilty in connection with the contravention and shall also become liable to the imposition of any
penalty under this Act to which such person would have been liable, had not such immunity been granted.

Appeal and Revision

Section 22E authorises the High Court to exercise, so far as may be applicable, all the powers conferred by
Chapters XXIX and XXX of the Code of Criminal Procedure, 1973 on a High Court, as if a Special Court
within
the local limits of the jurisdiction of the High Court were a Court of Session trying cases within the local
limits of
the jurisdiction of the High Court.

Application of Code to proceedings before Special Court

Section 22 lays down that the provisions of the Code of Criminal Procedure, 1973 shall apply to the
proceedings before a Special Court and for the purposes of the said provisions, the Special Court shall be
deemed to be a Court of Session and the person conducting prosecution before a Special Court shall be
deemed to be a Public Prosecutor within the meaning of clause (u) of section 2 of the Code of Criminal
Procedure, 1973. The person conducting prosecution under this section should have been in practice as an
Advocate for not less than seven years or should have held a post, for a period of not less than seven years,
under the Union or a State requiring special knowledge of law.
Transitional provisions
Section 22G stipulates that any offence committed under this Act, which is triable by a Special Court shall,
until a Special Court is established, be taken cognizance of and tried by a Court of Session exercising
jurisdiction over the area, notwithstanding anything contained in the Code of Criminal Procedure, 1973.
However, nothing contained in this section shall affect the powers of the High Court, under section 407 of
the Code to transfer any case or class of cases taken cognizance by a Court of Session under this Section.
Appeals
Section 23 deals with appeal to Central Govt. Any person aggrieved by an order of SEBI under this Act, or
the regulations made thereunder may prefer an appeal to the Central Government within such time as may be
prescribed. No appeal shall be admitted if it is preferred after the expiry of the period prescribed therefor.
Provided that an appeal may be admitted after the expiry of the period prescribed therefor if the appellant
satisfies the Central Government that he had sufficient cause for not preferring the appeal within the
prescribed period. Every appeal made under this section shall be made in such form and shall be
accompanied by a copy of the order appealed against and by such fees as may be prescribed. The procedure
for disposing of an appeal shall be such as may be prescribed. Provided that before disposing of an appeal,
the appellant shall be given a reasonable opportunity of being heard.
Appeal to Securities Appellate Tribunal
Section 23A provides that, any person aggrieved by an order of SEBI under this Act, or the regulations made
There under or an order made by an adjudicating officer under this Act may prefer an appeal to a Securities
Appellate Tribunal having jurisdiction in the matter. Every appeal shall be filed within a period of forty-five
days from the date on which a copy of the order made by SEBI is received by the person and it shall be in
such form and be accompanied by such fee as may be prescribed:
Provided that the Securities Appellate Tribunal may entertain an appeal after the expiry of the said period of
forty-five days if it is satisfied that there was sufficient cause for not filing it within that period.
On receipt of an appeal, the Securities Appellate Tribunal may, after giving the parties to the appeal an
opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside
the order appealed against.
The Securities Appellate Tribunal shall send a copy of every order made by it to SEBI and parties to the
appeal. The appeal filed before the Securities Appellate Tribunal shall be dealt with by it as expeditiously as
possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date
of receipt of the appeal.
Procedure and Powers of Securities Appellate Tribunal
Section 23B provides that the Securities Appellate Tribunal shall not be bound by the procedure laid down
by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and, subject to
the other provisions of this Act and of any rules, the Securities Appellate Tribunal shall have powers to
regulate their own procedure including the places at which they shall have their sittings. The Securities
Appellate Tribunal shall have, for the purpose of discharging their functions under this Act, the same powers
as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the
following matters, namely–
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default or any order passed by it ex parte; and
(h) any other matter which may be prescribed.
Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding
within the meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code
and the Securities Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195
and Chapter XXVI of the Code of Criminal Procedure, 1973.
Appeal to Supreme Court
Section 23F provides that any person aggrieved by any decision or order of the Securities Appellate Tribunal
may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or
order of the Securities Appellate Tribunal to him on any question of law arising out of such order. Provided
that the Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing
the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.
Bye-laws of a Depository
Section 26 deals with the power of depository to make bye-law. Depository is required to frame its bye-laws
with the prior approval of SEBI, consistent with the provisions of the Act and the regulations made by SEBI
thereunder. SEBI has, however, the power to direct the depository to amend or revoke any bye-laws already
made, wherever it considers expedient to do so. If the depository fails or neglects to comply with the
directions of SEBI, SEBI may make the bye-laws or amend or revoke the bye-laws on its own.
Contents of the Bye-laws
As per Sub-section 2 of Section 26 of the Act, the bye-laws of a depository would include:
– the eligibility criteria for admission and removal of securities in the depository.
– the conditions subject to which the securities shall be dealt with.
– the eligibility criteria for admission of any person as a participant.
– the manner and procedure for dematerialisation of securities.
– the procedure for transactions within the depository.
– the manner in which securities are to be dealt with or withdrawn from a depository.
– the procedure for ensuring safeguards to protect the interests of participants and beneficial owners.
– the conditions of admission into and withdrawal from a participant by a beneficial owner.
– the procedure for conveying information to the participants and beneficial owners on dividend declaration,
shareholder meetings and other matters of interest to the beneficial owners.
– the manner of distribution of dividends, interest and monetary benefits received from the company among
beneficial owners.
– the manner of creating pledge or hypothecation in respect of securities held with a depository.
– inter-se rights and obligations among the depository, issuer, participants and beneficial owners.
– the manner and the periodicity of furnishing information to SEBI, issuer and other persons.
– the procedure for resolving disputes involving depository, issuer company or a beneficial owner.
– the procedure for proceeding against the participant committing breach of the regulations and provisions
for suspension and expulsion of participants from the depository and cancellation of agreements entered
with the depository.
– the internal control standards including procedure for auditing, reviewing and monitoring.

National Securities Depository Limited:

In a span of about nine years, investors have switched over to electronic [demat] settlement and
National Securities Depository Limited (NSDL) stands at the centre of this change. In order to provide
quality service to the users of depository, NSDL launched a certification programme in depository
operations in May 1999. This certification is conducted using NCFM infrastructure created by NSE and is
called "NSDL - Depository Operations Module". The programme is aimed at certifying whether an
individual has adequate knowledge of depository operations, to be able to service investors. Depository
Participants are required to appoint at least one person who has qualified in the certification programme at
each of their service centres. This handbook is meant to help the candidates in their preparation for the
certification programme.
National Securities Depository Limited is the first depository to be set-up in India. It was
incorporated on December 12, 1995. The Industrial Development Bank of India (IDBI) - the largest
development bank in India, Unit Trust of India (UTI) - the largest Indian mutual fund and the National Stock
Exchange (NSE) - the largest stock exchange in India, sponsored the setting up of NSDL and subscribed to
the initial capital. NSDL commenced operations on November 8, 1996.
Ownership
NSDL is a public limited company incorporated under the Companies Act, 1956. NSDL had a paidup
equity capital of Rs. 105 crore. The paid up capital has been reduced to Rs. 80 crore since NSDL has bought
back its shares of the face value of Rs. 25 crore in the year 2000. However, its net worth is above the Rs. 100
crore, as required by SEBI regulations.
The following organisations are shareholders of NSDL as on March 31, 2005.
1. Industrial Development Bank of India
2. Administrator of the Specified Undertaking of the Unit Trust of India - DRF
3. National Stock Exchange
4. State Bank of India
5. Oriental Bank of Commerce
6. Citibank N.A.
7. Standard Chartered Bank
8. HDFC Bank Limited
9. The Hongkong and Shanghai Banking Corporation Limited
10. Deutsche Bank A.G.
11. Dena Bank
12. Canara Bank
Management of NSDL:
NSDL is a public limited company managed by a professional Board of Directors. The day-today operations
are conducted by the Chairman & Managing Director (CMD). To assist the CMD in his functions, the Board
appoints an Executive Committee (EC) of not more than 15 members. The eligibility criteria and period of
nomination, etc. are governed by the Bye-Laws of NSDL in this regard.
Bye-Laws of NSDL:
Bye-Laws of National Securities Depository Limited have been framed under powers conferred under
section 26 of the Depositories Act, 1996 and approved by Securities and Exchange Board of India. The Bye-
Laws contain fourteen chapters and pertain to the areas listed below:
1. Short title and commencement
2. Definitions
3. Board of Directors
4. Executive Committee
5. Business Rules
6. Participants
7. Safeguards to protect interest of clients and participants.
8. Securities
9. Accounts/transactions by book entry
10. Reconciliation, accounts and audit
11. Disciplinary action
12. Appeals
13. Conciliation
Arbitration Amendments to NSDL Bye-Laws require the approval of the Board of Directors of NSDL and
SEBI.
Business Rules of NSDL
Amendments to NSDL Business Rules require the approval of NSDL Executive Committee andfiling of the
same with SEBI at least a day before the effective date for the amendments.
Functions:
 NSDL performs the following functions through depository participants:
 Enables the surrender and withdrawal of securities to and from the depository (dematerialisation and
rematerialisation).
 Maintains investor holdings in the electronic form.
 Effects settlement of securities traded on the exchanges.
 Carries out settlement of trades not done on the stock exchange (off-market trades).
 Transfer of securities.
 Pledging/hypothecation of dematerialised securities.
 Electronic credit in public offerings of companies or corporate actions.
 Receipt of non-cash corporate benefits like bonus rights, etc. in electronic form.
 Stock Lending and Borrowing.

Services Offered by NSDL:

NSDL offers a host of services to the investors through its network of DPs:
 Maintenance of beneficiary holdings through DPs
 Dematerialisation
 Off-market Trades
 Settlement in dematerialised securities
 Receipt of allotment in the dematerialised form
 Distribution of corporate benefits
 Rematerialisation
 Pledging and hypothecation facilities
 Freezing/locking of investor's account
 Stock lending and borrowing facilities

Fee Structure of NSDL

NSDL charges the DPs and not the investors directly. These charges are fixed. The DPs in turn, are free to
charge their clients, i.e., the investors for their services. Thus, there is a two tier fee structure.
Inspection, Accounting and Internal Audit
NSDL obtains audited financial reports from all its DPs once every year. NSDL also carries out periodic
visits to the offices of its constituents - R&T agents, DPs and clearing corporations – to review the operating
procedures, systems maintenance and compliance with the Bye-Laws, Business Rules and SEBI
Regulations.
Additionally, DPs are required to submit to NSDL, internal audit reports every quarter. Internal audit has to
be conducted by a chartered accountant or a company secretary in practice.
The Board of Directors appoints a Disciplinary Action Committee (DAC) to deal with any matter relating to
DPs clients, Issuers and R&T agents. The DAC is empowered to suspend or expel a DP, declare a security as
ineligible on the NSDL system, freeze a DP account and conduct inspection or call for records and issue
notices.
If a DP is aggrieved by the action of the DAC, it has the right to appeal to the EC against the action of the
DAC. This has to be done within 30 days of the action by DAC. The EC has to hear the appeal within two
months from the date of filing the appeal. The EC has the power to stay the operation of the orders passed by
the DAC. The information on all such actions has to be furnished to SEBI.
Settlement of Disputes:
All disputes, differences and claims arising out of any dealings on the NSDL, irrespective of whether NSDL
is a party to it or not, have to be settled under the Arbitration and Conciliation Act 1996.
System View of NSDL Depository System:
Account holders (investors) open account with the DPs. The account details, entered in a computer system
maintained by Depository Participants called DPM, are electronically conveyed to the central system of
NSDL called DM. Companies who have agreed to offer demat facility to their shareholders use a computer
system called DPM (SHR) to connect to the NSDL central system. DPM (SHR) may be installed by the
company itself or through its R&T Agent. This system is used to electronically receive demat requests,
confirm such requests or to receive beneficial owner data (Benpos) from the depository. Stock exchanges
receive pay-in (receiving securities against sales made by brokers) or to payout (giving securities to brokers
against their purchases) using a computer system connected to NSDL called DPM (CC).
All the computer systems installed by DPs (DPM-DP), companies (DPM-SHRs), and stock exchanges
(DPM-CC) are connected to NSDL central system (DM) through V-SAT (very small aperture terminal) or
leased lines. These are collectively called Business Partner Systems. Any transaction conducted by any
computer system in the NSDL depository system which is targetted to reach any other computer system first
gets recorded in DM and then will reach the target. No two business partners' systems can communicate to
each other without passing through the DM.
Maintenance of Accounts at the Central System:
The NSDL central system known as DM maintains accounts of all account holders in the depository system.
All the transactions entered at any point in the computer system connected to it are first effected in the
central system and subsequently at these computers. Thus, the central system of NSDL has the records of all
details of every transaction conducted in the depository system.
Distributed Database:
Each of the computer systems connected to NSDL system has its own database relating to its clients. This
helps in giving prompt and accurate service to the clients. However each of the databases is reconciled with
the data at the central system every day in order to ensure that the data in the distributed database tallies with
the central database.
Common Software:
NSDL develops software required by depository participants, companies, R&T Agents and clearing
corporations for conducting depository operations. Thus, the computer systems used by all the entities will
have common software given by NSDL. However, depending on the business potential, branch networks and
any other specific features, DPs may develop software of their own for co-ordination, communication and
control and provide service to their clients. Such exclusive software is called "back office software". DPM
system given by NSDL gives "export and import" facility to take out the transaction details to be used by
back office software and to feed in transaction details generated from the back office software.
Connectivity:
The computer system used by DPs, companies, R&T Agents and stock exchanges may be connected to
NSDL central system through V-SAT network or leased line network. NSDL uses NSE's V-SAT network
for the connectivity purposes. Thus, V-SATs used by NSE brokers can connect to NSDL if the software
supplied by NSDL is used. V-SAT uses satellites for communication purposes. Some business partners may
connect using leased lines provided by MTNL/ BSNL. V-SAT or leased line connections are called primary
connectivity. If primary connectivity fails for any reason, BPs must have the ability to connect through other
means. Such other means are PSTN lines, ISDN lines, POP lines (normal telephone lines) through which
they can dial in to the NSDL system and conduct their transactions.

Central Depositary Securities Limited:

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 dematerialisation 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.
Central Depository Services (India) Limited (CDSL) registered in Feb 1999, has been promoted by
leading Indian banks and stock exchanges. CDSL views this broad-based participation as an indicator of its
wider acceptance, as a source of inspiration and intellectual input for all round development. CDSL
commenced operations on March 22, 1999. CDSL was promoted by Bombay Stock Exchange Limited
(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 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
 Honourable 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 clearing house of
BSE, started in July 1999.
 All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange, Delhi stock
Exchange, The Stock Exchange, Ahmedabad, etc have established connectivity with CDSL.
 o As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities, bonds,
debentures, commercial papers), units of mutual funds, certificate of deposits etc. into the
CDSL system.
Shareholders of CDSL:
CDSL was promoted by Bombay Stock Exchange Limited (BSE) in association with Bank of India, Bank of
Baroda, State Bank of India and HDFC Bank. BSE has been involved with this venture right from the
inception and has contributed overwhelmingly to the fruition of the project. The initial capital of the
company is Rs.104.50 crores. The list of shareholders with effect from 11th December, 2008 is as under.
A professional Board of Directors with vast and varied experience in capital markets and banking is at the
helm of affairs at CDSL.

Depository Participant of CDSL

CDSL's demat services are extended through its agents called Depository Participants (DP). The DP is the
link between the investor and CDSL. An investor who opens a demat account with a DP can utilise the
services offered by CDSL. While the DP processes the instructions of the investor, the account and records
thereof is maintained with CDSL. A DP is thus a "Point of Service" for the investor.
CDSL's system is based on centralised database architecture with on-line connectivity with DPs. Because of
this centralised architecture, the cost for setting up a DP outfit under CDSL system is significantly lower.
Similarly, the recurring costs to be incurred by a CDSL-DP in terms of maintaining back-ups and the related
data storage are minimal. This enables a CDSL-DP to offer depository services to investors at an attractive
price and at the same time achieve break-even faster at much lower volumes. The centralised architecture
also allows CDSL-DP to make available to the investors a to-the-minute status of their account and
transactions.
CDSL-DPs can also set up branches with direct electronic connectivity with CDSL.
CDSL -DPs can also extend service to investors through their various service centres connected through
their back office.

Services of Depository Participant of CDSL

The Depository Participant (DP) is the link between the investor, the company and CDSL and provides the
following services:
Account Opening
To utilise the services offered by a depository, any person having investment in any security or intending to
invest in securities needs to have a demat account with a CDSL-DP. The holder of such demat account is
called as "Beneficial Owner (BO)". A BO can maintain a demat account with zero balance in such account.
A BO can open more than one account with the same or multiple DPs, in the same name/s and order, if
he/she desires so. The investor can approach any DP/s of his/her choice to open a demat account.
Dematerialisation
Dematerialisation is a process by which physical certificates (of shares / debentures / other securities) are
converted into electronic balances. A BO has to submit the request for dematerialisation by submitting the
demat request form (DRF) duly completed along with the concerned physical certificates, to his/her DP.
Processing Delivery & Receipt Instructions
To settle trades done on a stock exchange (on-market trades) and trades, which are directly settled between
two BOs (off-market trades), BOs submit duly completed delivery instructions in the prescribed form to DP.
For receipt of securities into his/her account, a BO can give one time "standing instruction" to DP. Once
such a standing instruction is given to the DP, there is no need to submit separate instructions for receipt
every time the investor buys securities.
Account Statement
Generally a DP sends to the BO, a statement of his account, monthly, if there is any transaction in the
account or every quarter if the account is not operated during that period. The balances and transactions can
also be viewed by the BOs through CDSL web based facility 'easi'.
Rematerialisation
Rematerialisation is the process by which the electronic balances held in the demat account can be converted
back into physical certificates.

Pledging
If the BO decides to pledge any securities in his BO account, he can avail of the same by submitting the
pledge creation form duly completed, to his DP.
Nomination
Individual BOs have a facility for nomination in favour of an individual. If the sole or all the joint holders
are deceased, the shares of different companies held in the demat account will be transmitted easily to the
demat account of the nominee on submission of the death certificate and transmission form.
It may be noted that in the event of the death of one of the joint holders, the securities will be transmitted in
the demat account of the surviving holders.
Transmission of securities
CDSL offers a facility for transmission of balances held in BO account/s (to other BO account/s) if so
required due to death, lunacy, bankruptcy, insolvency or required due to operation of any law.
Change in Address
A BO who wishes to register his change in address submits his/her request in writing to his/her DP. The
changes entered by the DP in the CDSL system will be automatically downloaded to all the companies in
which the BO is holding securities. This facility offered by CDSL saves money, time and effort for the BO.
Bank Account Details
SEBI has made it mandatory for companies to print details of bank account of the BO on dividend/interest
warrants etc. to prevent possibilities of misuse of the warrants. All BOs should submit a request in writing to
the DP if they wish to record / change their bank account details.
SMS
CDSL sends SMS regarding transactions and modifications in account details to the mobile number
registered in the account