Traditional system of scrip based

Traditional system of scrip based The

traditional system of scrip based dealing in
shares involves enormous paper work and is
time consuming. The process begins with
buying share certificates in paper form and
ends with getting the certificates endorsed
in the buyer's name.
Objective of Depository System in
India
The old trading system /Traditional Scrip Based
System was affected by a lot of problems such as:
Enormous paperwork Time consuming/longer
settlement cycles Poor infrastructure Bad deliveries
due to signature difference, mistake in completing
details in transfer deeds, litigation in respect of
shares purchased, fake certificates,
tearing/mutilation of certificates, postal delays,
processing time taken by companies. Huge
transaction cost. All these factors serve as barriers to
entry of investors in to the market. This failure gave
the idea of setting up of an electronic system with
scrip less trading and quick settlements cycle.
Definitions

Dematerialization- A process of converting physical shares into

dematerialized shares.
Rematerialization- A process of converting dematerialized shares into
physical shares.
Depository- An organization which holds securities of investors in electronic
form.
Depository Participant- An agent of depository to act as an interface
between the investor and the depository.
Beneficial Owner – The investor who enjoys the benefits of owning the
securities.
Registered Owner- A depository in whose name the securities are registered
What is depository system
A system in which securities of an investor
are held by depository on behalf, and at the
request, of an investor in an Electronic
Form . This system is also know as Scrip
Less Trading system.
Benefits of availing Depository
System
No stamp duty on transfer of shares.
Quick transfers / settlements.
Elimination of bad deliveries, forgery,
loss of certificate in transit etc.
Reduced paper work (no filling of transfer deed, affixation
of stamps and lodgment of shares for transfer with the
company. Periodic status reports to investors on their
holdings and transactions, leading to better controls.
Ease in portfolio monitoring since statement of account
gives a consolidated position of investments in all
instruments.
Constituents of Depository System
Depositories:-
NSDL
CDSL
Depository participants
Investors
A depository facilitates holding of security in the electronic form and
enables securities transactions to be processed by book entry by a
depository participant, who as an agent of the depository, offers depository
services to investors.
Who can be depository
According to SEBI regulations:
(i) a public financial institution.
(ii) a bank included for the time being in the Second Schedule to the Reserve
Bank of India Act, 1934 (2 of 1934);
(iii) a foreign bank operating in India with the approval of the Reserve Bank of
India;
(iv) a recognised stock exchange
(v) a body corporate engaged in providing financial services where not less than
seventy five per cent. of the equity capital is held by any of the institutions
mentioned in above four sub clauses, whether jointly or severally
(vi) a body corporate constituted or recognised under any law for the time being
in force in a foreign country for providing custodial, clearing or settlement
services in the securities market and approved by the Central Government; or
(vii) an institution engaged in providing financial services established outside
India and approved by the Central Government
.
Depository provides following services to the investors through
a DP: a. Opening a demat account.
b .Dematerialization, i.e. converting physical securities into electronic form.
c .Rematerialisation, i.e. converting electronic securities balances held in a
BO account into physical form.
d. To maintain record of holdings in the electronic form . Settlement of
trades by delivering / receiving underlying securities from / in BO accounts.
f. Settlement of transactions between BOs entered.
g. Receiving electronic credit in respect of securities allotted by issuers
under IPO or otherwise on behalf of demat account holders.
h. 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
Bank-Depository
Bank Depository Holds funds in an account.
Holds securities in an account.
Transfers funds between accounts on the
instruction of the account holder.
Transfers securities between accounts on the
instruction of the BO account holder.
Analogy of Bank and Depository

Bank holds funds in the account Depository holds securities in the

account
Transfer securities between accounts
Transfer funds between accounts on
on the instruction of Beneficial
the instruction of account holder
owner
Facilitates transfer without having to
Facilitates transfer of ownership
handle money
without having to handle securities
Facilitates safekeeping of securities
Facilitates safekeeping of money
Depository Participants
Depository Participants A “Depository Participant” (DP) is
an agent of the depository who is authorized to offer
depository services to investors. They are the
intermediaries between the depository and the investors.
The relationship between the DPs and the depository is
governed by an agreement made between the two under
the Depositories Act, 1996. In a strictly legal sense, a DP is
an entity who is registered as such with SEBI under the
provisions of the SEBI Act.
A DP is the first point of contact with the investor and
serves as a link between the investor and the company
through depository in dematerialization of shares and
other electronic transactions.
Acc. To SEBI, the following can apply for DP:
Public financial institutions,
scheduled commercial banks,
foreign banks operating in India with the approval of the
Reserve Bank of India,
state financial corporations,
NBFCs and registrar to an issue or share transfer agent
complying with the requirements prescribed by SEBI can
be registered as DP.
Functions of a Depository
Account Opening: An investor wishing to avail depository services must first
open an account with a depository participant registered with a depository.
The process of opening a demat account is very similar to that of a bank
account.
The account opening form must be supported by copies of any one of the
approved documents which serve as proof of identity and proof of address
as specified by SEBI. Apart from these PAN card has to be shown in original
at the time of account opening W.E.F April 01, 2006.
Dematerialisation
Introduced in India through the enactment of
the Depositories Act, 1996
It is not mandatory
One may keep its holding partly in physical
form and partly in Demat form
A select list of securities announced by SEBI
can be delivered only in demat form in the
stock exchanges connected to NSDL
DEMAT-participants

Participants:
• Investors
• The Depository
• NSDL [national securities depository ltd.]
• CDSL[central depository of securities ltd.]
• The Depository Participants
• The Issuing Company
Procedure of Demat- for
an investor

Fill DRF(Demat Request Submit the DRF and

Form) available with DP Share Certificates to DP
Deface the share DP would forward them
certificate(s) one wants to the issuer/their
Registrar & Transfer
to dematerialise by Agent
writing across
“Surrendered for Investor’s depository
Dematerialisation” a/c would be credited
with the dematerialised
securities
Physical vs. Dematerialization
1. Paper based trading
2. Manual transfer of securities
which was a time consuming
factor
3. Possibilities of bad delivery,
fake certificates, signature
differences, etc.
4. Burden of filling of transfer
form, affixing share transfer
stamps
5. Threat of loss of securities and
fraudulent interception of
certificates in transit
1. Paperless trading
2. Immediate transfer of securities
3. No problem of bad delivery,
fake certificates, signature
differences, etc.
4. No requirement of filling of
transfer form and affixing share
transfer stamps
5. No threat of loss of securities
and fraudulent interception of
certificates in transit
A depositary receipt is a negotiable financial instrument issued by a bank to
represent a foreign company's publicly traded securities. The depositary
receipt trades on a local stock exchange. DR listed and traded in the US
economy are known as American Depositary Receipts.
Depositary receipts make it easier to buy shares in foreign companies
because the shares of the company do not have to leave the home state.
When the depositary bank is in the U.S., the instruments are known
as (ADRs).
European banks issue (EDRs), and
other banks issue (GDRs).
Depository Receipt
Negotiable (transferable) financial security

Foreign publicly listed company

COMPANY SHARE
Physical certificate

TYPES - ADR
DEPOSITARY BANK
GDR
IDR

INVESTOR
What is ADR
ADR- American Depositary Receipts
A negotiable certificate issued by a U.S.
bank
 First Introduced in 1927
Represents a specified number of shares of
a foreign company
ADRs are denominated in U.S. dollars.
How does ADR/GDR work ?
Let us take Reliance example – trades on the Indian stock at around
Rs.2000/-
This is equivalent to US$ 40 – assume for explanation
Now a US bank purchases 10000 shares of Reliance and issues them in
US in the ratio of 10:1
This means each ADR purchased is worth 10 reliance shares.
means 1 ADR = US $400
Once ADR are priced and sold, its subsequent price is determined by
supply and demand factors, like any ordinary shares.
Process for ADR/GDR
Releases Equity Shares

Requests the bank Gives Instructions to

to release of equity Issue ADRs/ GDRs
Shares

Requests for buying Issue

ADR/GDR ADRs/GDRs
Types of ADR

Types of
ADRs

Unsponsored Sponsored

Private
Level I Level II Level III
placement
GDR – CUSTODIAN BANK – DEPOSITORY
BANK

Custodian Bank located in same country

Works with the Depository Bank and follows instructions
from the depository bank.
Collects, remits dividends and forwards notices
received from the depository bank.
GDR MARKET
GDRs can be created or cancelled depending on demand and suply
When shares are created, more corporate stock is placed in the
custodian bank in the depositary bank account
The depositary bank then issues the new GDRs

Factors governing GDR prices are company track record, analysts

recommendations, relative valuations, market conditions and also
international status of the company
GDR Listing

London Stock Exchange

Luxembourg Stock Exchange
DIFX
Singapore Exchange
Hong Kong Exchange
Difference between ADR and GDR
Both ADR and GDR are depository receipts, and represent a claim on
the underlying shares. The only difference is the location where they
are traded.

Depositary receipts traded in USA – ADR

Depositary receipts traded in a country other than USA - GDR

India- ADR and GDR
ADRs and GDRs are an excellent means of investment for NRIs and
foreign nationals wanting to invest in India
By buying these, they can invest directly in Indian companies without
going through the hassle of understanding the rules and working of
the Indian financial market – since ADRs and GDRs are traded like any
other stock
NRIs and foreigners can buy these using their regular equity trading
accounts
Indian Companies using ADR/GDR
COMPANY ADR GDR

Bajaj Auto No Yes

Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes
Infosys Technologies Yes Yes
ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No
Ranbaxy Laboratories No Yes
Tata Motors Yes No
State Bank of India No Yes
VSNL Yes Yes
WIPRO Yes Yes
IDR
As per the definition given in the Companies (Issue of Indian
Depository Receipts) Rules, 2004, IDR is an instrument in the form of
a Depository Receipt created by the Indian depository in India
against the underlying equity shares of the issuing company. In an
IDR, foreign companies would issue shares, to an Indian Depository
(say National Security Depository Limited – NSDL), which would in
turn issue depository receipts to investors in India. The actual shares
underlying the IDRs would be held by an Overseas Custodian, which
shall authorise the Indian Depository to issue the IDRs. The IDRs
would have following features:
Overseas Custodian : It is a foreign bank having branches in India and
requires approval from Finance Ministry for acting as custodian and Indian
depository has to be registered with SEBI.
Approvals for issue of IDRs : IDR issue will require approval from SEBI and
application can be made for this purpose 90 days before the issue opening
date.
Listing : These IDRs would be listed on stock exchanges in India and would
be freely transferable.

Euro receipts
SEBI guideline on depositories