Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

RIGHTS OF PARTICIPANTS UNDER

THE DEPOSITORY ACT, 1996

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Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

INDEX

SR. NO CONTENT PAGE

NO.
1. Acknowledgement 2

2. Introduction 4

3. Participants 5-8

4. Rights of Participants 9-12

5. Conclusion 12

6. Bibliography 13

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Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

INTRODUCTION

The Depositories and participants, Act initially came into force as an ordinance viz. The
Depositories Ordinance, 1995 promulgated on 7th January 1996. It was designed to provide a
legal framework for establishment of depositories to record ownership details in book entry
form. The Act also made consequential amendments in the Companies Act, 1956; the
Securities and Exchange Board of India Act, 1992; the Indian Stamp Act, 1899; the Income
tax Act, 1961; and the Benami Transactions (Prohibition) Act.

The Depositories and Participants Act, 1996 was enacted with the objective of ensuring free
transferability of securities with speed, accuracy, and security, by making securities of public
companies freely transferable subject to certain exceptions by restricting company’s right to
use discretion in effecting the transfer securities and dispensing with the transfer deed and
other procedural requirements under the Companies Act.

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

Statement of Objects and Reasons.—Paper-based ownership and transfer of securities has

been a major drawback of the Indian securities market as this often results in delay in
settlement and transfer of securities, lead to ‘bad delivery’, theft, forgery, etc. As a result the
investor is deprived of liquidity in security and investor grievance redressal become
intractable. To pave the way for smooth and free transfer of securities it has become essential
to make a law for depositories.

2. The depositories legislation, inter alia, provides for:—

(a) a legal basis for establishment depositories to conduct the task of maintenance of
ownership records of securities and effect changes in ownership records through book entry;

(b) dematerialise securities in the depositories mode as well as giving option to an investor to
choose between holding securities as at present or hold the securities in a dematerialised from
a depository;

(c) making the securities fungible;

(d) making the shares, debentures and any interest thereon of a public limited company freely
transferable;

(e) exempting all transfers of shares within a depository from stamp duty.

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Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

PARTICIPANTS

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

Thus, participant means a person through whom the beneficial owner of the securities would
avail of the depository service. According to the guidelines placed by SEBI they are custodial
agencies like brokers, banks, insurance companies, Stock Exchange clearing cells, the
Reserve Bank of India, financial institutions, institutional managers, fund managers etc.

In India, a depository participant (DP) is described as an intermediaries or middlemen

between the depository and the investors. There is an agreement made under the Depositories
Act which governs the relationship between the two, depository participants and depository. 

As per the provisions mentioned under the SEBI Act, a depository participant can perform his
services i.e. depository-related services only after he receives a certificate of registration from
the said act. According to the report of 2012, there were 288 DPs of NSDL (National
Securities Depository Limited) and 563 DPs of CDSL (Central Depository Securities
Limited) registered under the SEBI Act.

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

1
“participant” means a person registered as such under sub-section(1A) of section 12 of the
Securities and Exchange Board of India Act, 1992 (15 of 1992);

2
No depository, 45[participant,] custodian of securities, foreign institutional investor, credit
rating agency, or any other intermediary associated with the securities market as the Board
may by notification in this behalf specify, shall buy or sell or deal in securities except under
and in accordance with the conditions of a certificate of registration obtained from the
Boardin accordance with the regulations made under this Act:
Provided that a person buying or selling securities or otherwise dealing with the securities
market as a depository, 46[participant,] custodian of securities, foreign institutional investor
or credit rating agency immediately before the commencement of the Securities Laws
(Amendment) Act, 1995, for which no certificate of registration was required prior to such
commencement, may continue to buy or sell securities or otherwise deal with the securities
market until such time regulations are made under clause (d) of sub-section (2) of section 30.

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Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

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.

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Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

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.

 One to many (ISIN wise)

 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.

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Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

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, Offmarket, 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.

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Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

RIGHTS OF PARTICIPANTS

Chapter 3 of the Act deals with rights and obligations of depositories, participants, issuers
and beneficial owners. Section 17. states that:

Rights and obligations of depositories, etc.—(1) Subject to the provisions of this Act, the
rights and obligations of the depositories, participants and the issuers whose securities are
dealt with by a depository shall be specified by the regulations.

(2) The eligibility criteria for admission of securities into the depository shall be specified by
the regulations.

The same is dealt under Chapter 5 of the SEBI (Depositories and Participants) Regulations,
2018 in sec. 28-58B.

Rights and obligations of Depositories, Participants, Issuers and Beneficial Owners are
given below:

1. Agreement between Depository and Participant:

A depository shall enter into an agreement with one or more participants as its agent in the
prescribed form (Sec. 4).

2. Services of Depository:

Any person, through a participant, may enter into an agreement, in the specified form with
any depository for availing its services (Sec. 5).

3. Surrender of Certificate of Security:

(a) Any person who has entered into an agreement with the depository will have to surrender
the certificate of security, for which he seeks to avail the services of a depository, to the
issuer; (b) The issuer, on receipt of certificate of security shall cancel the certificate of
security and substitute in its records the name of the depository as a registered owner in
respect of that security and inform the depository accordingly; and (c) the depository,
thereafter will enter the name of that person in its records, as the beneficial owner (Sec. 6).

4. Registration of Transfer of Securities with Depository:

Every depository shall, on receipt of intimation from a participant, register the transfer of
security in the name of the transferee. Further, if a beneficial owner or a transferee of any
security seeks to have custody of such security, the depository shall inform the issuer
accordingly (Sec. 7).

5. Options to Receive Security Certificate or Hold Securities with Depository:

Every person subscribing to securities offered by an issuer shall have the option either to
receive the security certificates or hold securities with a depository (Sec. 8).

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Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

6. Securities in Depositories to be in Fungible Form:

All securities held by a depository shall be dematerialised and shall be in a fungible form
(Sec. 9).

7. Rights of Depositories and Beneficial Owner:

A depository shall 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 shall not have any voting rights or any other rights in respect of securities held by it.
The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the
liabilities in respect of his securities held by a depository (Sec. 10).

8. Register of Beneficial Owner:

Every depository shall maintain a register and an index of beneficial owners in the manner
provided in Section 150, Section 151 and Section 152 of the Companies Act, 1956 (Sec. 11).

9. 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 shall give intimation of such pledge or hypothecation to the
depository and such depository shall thereupon make entries in its records accordingly (Sec.
12).

10. Furnishing of Information and Records by Depository and Issuer:

Every depository is required to 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 also has to make available to the depository copies of
the relevant records in respect of securities held by such depository (Sec. 13).

11. Option to opt out in Respect of any Security:

If a beneficial owner seeks to opt out of a depository in respect of any security, he shall
inform the depository accordingly who will make appropriate entries in its records and shall
inform the issuer (Sec. 14).

12. Depositories to Indemnify Loss in Certain Cases:

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

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 Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

13. Systems and Procedures:

Every depository shall have systems and procedures which will enable it to co-ordinate with
the issuer or its agent, and the participants, to reconcile the records of ownership of securities
with the issuer or its agent, as the case may be, and with participants, on a daily basis.
(Regulation 30 of SEBI)

14. Internal monitoring, review and evaluation of systems and controls:

Every depository shall have adequate mechanisms for the purposes of reviewing, monitoring
and evaluating the depository’s controls, systems, procedures and safeguards.

15. External monitoring, review and evaluation of systems and controls:

Every depository shall cause an inspection of its controls, systems, procedures and safeguards
to be carried out annually and forward a copy of the report to the SEBI.

Obligation of Participant, depositor and Issuer:

1. Obligation to enter into agreement

2. Duty to redress investors' grievances
3. Duty to dematerialisation of shares or issue of certificate of securities in time
4. Duty to reconcile records

A depository shall enter into an agreement with one or more participants (DPs) as its agent.
Any person, through a participant, may enter into an agreement, with any depository for
availing its services. The relationship and dealings between the depository and the participant
will be governed by an agreement and the participant is an agent of the depository vides
Section 4 (1) of the Act.

1. If a depository or participant or any issuer or its agent, who isregistered as an intermediary

under the provisions of section 12 of SEBI Act, 1992, and isrequired to enterinto an
agreement, fails to enter into such agreement, such depository orparticipant or issuer or its
agent or intermediary shall be liable to a penalty (sec. 19B).

2. If any depository or participant or any issuer, is boundto redress the grievances of the
investors within the time specified, on the call of SEBI, if they failsto redress such grievances
within the time specified by the Board, such depository or participant or issuer or its agents or
intermediary shall be liableto a penalty (sec. 19C).

3. Issuer has obligation to dematerialise or issue the certificate ofsecurities on opting out of a
depository by the investors, within the timespecified under this Act or regulations.If Issuer
abetsin delaying the process of dematerialisation or issue the certificate ofsecurities on opting
out of a depository of securities, such issuer shall be liable to a penalty (sec. 19D).

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4. Depository or participant or any issuer  has duty to reconcile the records of dematerialised
securities with all the securities issuedby the issuer as specified in the regulations, such
depository or participant orissuer shall be liable to a penalty .(section 19E)

CONCLUSION
Depository participant (DP) shall be bound by the provisions of the Depositories Act, 1996,
SEBI (Depositories and Participants) Regulations, 1996, Rules and Regulations of Securities
and Exchange Board of India (SEBI), Circulars/Notifications/Guidelines issued there under,
Bye Laws and Business Rules/Operating Instructions issued by the Depositories and relevant
notifications of Government Authorities as may be in force from time to time.Regulation 26
of the SEBI (Depositories and Participants) Regulations, 1996 states that depositories,
participants, issuers, and issuers agent, in addition to the rights and obligations laid down in
the Depositories Act and the bye laws shall have the rights and obligations arising from the
agreements entered into by them.

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Financial Market Regulation Project, Rights of Participants under the Depository Act, 1996

 BIBLOGRAPHY

BOOKS AND DIGESTS

1) Aggarwal, V. K. and Dixit, S. K. (1996), “The Depositories Legislation: A Critical

Evaluation," Chartered Secretary
2) The Depositories Act, 1996
3) The SEBI (Depositories and Participants) Regulations, 2018

WEBSITES:

1) Securities and Exchange Board of India, https://www.sebi.gov.in/ last accessed on

21st April 2021
2) Role of Depositories , Published on 26th June 2017,
https://www.managementpedia.com/threads/role-of-depositories.199944/ last
accessed on 21st April 2021
3) Insight into Depositories Act, https://rna-cs.com/an-insight-into-the-depositories-act-
1996/ last accessed on 21st April 2021

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