AMITY LAW SCHOOL, NOIDA

RESEARCH PAPER

ON

“NSDL and CDSL: An Analysis”

SUBMITTED BY SUBMITTED TO

DR. Deepika Prakash

NEHA SACHDEVA
LLM(CB&IL)
SECT I O N A
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A3268622025

The Main objective of the study are:

1) To understand the basic concepts behind the depository system as well as CDSL and NSDL in
lucid form.

2) To study the Organizational frame work, Operational policies, Problems and Prospects and
financial performance of Company in India with respect to investment law.

RESEARCH QUESTIONS OR PROBLEM

1. What is the idea and concept behind CDSL and NSDL...?

2. What is the scope, legal position and critical analysis of depository system in India with
respect to Investment Law...?

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Introduction:
Technology has changed the face of the Indian stock markets in the post-liberalization era. Competition
amongst the stock exchanges, increase in the number of players and changes in the trading system led to a
tremendous increase in the volume of activity. The traditional settlement and clearing system has been
proved inadequate due to operational inefficiencies, delay in transfer, registration, fake certificates and
forgery, non-availability of depositories, impeding the healthy growth of the capital market. To overcome
the problems regarding the stock markets world over, many task forces were setup inducing group of 30
to suggest an alternative for the exiting settlement system, which involved physical movement of
securities. The depository system was initiated by Stock Holding Corporation of India Limited (SHCIL)
in July 1992, when it prepared a concept on paper on "National Clearance and Depository System "in
collaboration with Price Water House under a program sponsored by the US Agency for International
Development. Thereafter, Government of India promulgated the Depositories Ordinance in September
1995, thus paving the way for setting up of depositories in the country 1. SEBI notified regulations under
the Ordinance in May 1996 in order to provide the regulatory framework for the depositories.
Accordingly, the Government of India enacted the Depositories Act 1996 to start depository’s services in
India. The depository system revolves around the concept of paperless or free trading because the shares
in a depository are held in the form of electronic accounts, i.e. de-materialized form Presently, there
are two such depositories in India, viz. National Securities Depository Limited (NSDL) and Central
Depository Services (India) Limited (CDSL). NSDL was set up as the first depository company in the
country which is sponsored by the Unit Trust of India (UTI), NSE, State Bank of India, HDFC Bank and
Citi Bank; and managed by Board of Directors as a public limited company. The Mumbai Stock
Exchange (BSE) in association with the Bank of India, Bank of Baroda, State Bank of India and HDFC
Bank promoted CDSL as the second depository in India for dealing in the securities in the electronic
form, by the name of Central Depository Services (India) Limited (CDSL). The major objective of these
depositories is the growth of free trading, protection to the individual investor's participation in the
depository and to enhance liquidity.2

1
Company Law, Avtar Singh (Eastern Book Company 16th Edition, New Delhi.)
2
depository system in india - a comparative study of nsdl and cdsl; international journal of research in commerce,
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economics & management; volume no: 1 (2011), issue no. 3 (july); issn 2231-4245

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Likewise, a depository holds shares, debentures, bonds and units etc of an investor in electronic
form and offers their transactional services towards selling and buying of shares/stocks in stock
market also in a transparent manner.3

Significant of Depository System4

This is to be sponsored by public financial institutions and banks and will have a minimum net
worth of Rs. 50-100 crores as proposed by the SEBI. This central depository can be connected to
a number of share depositories for effecting transfer in book entries. The Foreign financial
institutions agencies, NRI’s etc have for long required the depository of this type for facilitating
their trade in the Indian stock markets. These foreign security firms who were linked by the
SEBI are operating in India, but physical custody of the Indian securities has to be handled by
Indian custodian such as a bank which taken converted into depository participants.

The Central Depository system aims at immobilization of physical certificates.

To overcome these deficiencies, 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. The
first depository set up in India is National Securities Depository Limited (NSDL) and is
promoted by IDBI, UTI and NSE.5

3
A Study on Depositories and their Role in the Indian Capital Market Dr. Pawan Verma1, Dr. Shiv Ram Singh
Jhajharia; Assistant Professor, OPJS University, Churu ; Professor, NDB Govt. PG College Nohar, Hanumangarh
4
www.investopedia.com

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onstituents of Depository System6:

i) Depository : Depository functions like a securities bank, where the dematerialized

physical securities are traded and held in custody. This facilitates faster risk free and
low cost settlement. Depository is much like a bank and performs many activities that
are similar to a bank depository:

Depository, operating in India, shall have a net worth of rupees one hundred crore and
instruments for which depository mode is open need not be a security as defined in the Securities
Contract (Regulations) Act 1956. The depository, holding securities, shall maintain ownership
records in the name of each participant. Despite the fact that legal ownership is with depository,
it does not have any voting right against the securities held by it. Rights are intact with investors.
There are two depositories inIndia at present, i.e.

1. NSDL: National Securities Depository limited

2. CDSL:Central Depository Services (India) Limited

ii) Depository Participants (DP):

A DP is investors’ representative in the depository system and as per the SEBI guidelines, financial
institutions/banks/custodians/stock brokers etc can become DPs provided they meet the necessary
requirements prescribed by SEBI. The relationship between the depository and the DP will be of a
principal and agent and their relation will be governed by bye-laws of the depository and the
agreement between them. Application for registration as DP is to be submitted to a depository with
which it wants to be associated As depository holding the securities shall maintain ownership
records in the name of each Depository Participants, DP in return as an agent of depository, shall
maintain ownership records of every beneficial owner (investor) in book entry form7.

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 de-materialization of shares and other electronic transactions.

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Legal provisions for eligibility criteria for depository participants:

The following entities are eligible for becoming depository participant in accordance with
Regulation 19 of the SEBI (Depositories and Participants) Regulations, 19968.

 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 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.

7
Law of Investment and Securities, Dr. S.R. Myneni, forwarded by Prof. A Laxminath, 1st Edition, Asia Law
House, Hyderabad.
8
www.sebi.gov.in/cms/sebi_data/commondocs/deppartamend_p.pdf

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  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.

 A non-banking finance company (NBFC), having a net worth of not less than rupees fifty
lakhs provided that such company shall act as a participant only on behalf of itself and
not on behalf of any other person..

 A registrar to an issue or share transfer agent who has a minimum net worth of Rs. 10
crores and who has been granted a certificate of registration by SEBI.

Characteristics of depository participant9:

 Acts as an Agent of Depository

 Directly deal with customer

 Functions like Securities Bank

 Account opening

 Facilitates dematerialization

9
CBSE – Introduction to Financial Markets – II, pg. – 113; Chapter 8 Operations of Depository Participants.

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 III) Issuer / Companies:

The issuer is the company which issues the securities. It maintains a register for recording the
names of the registered owners of securities and the depositories.

iv) Beneficial Owner/ Investor:

Beneficial owner is a person whose name is recorded as such with a depository.

Facilities offered by depository system10:

1) 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.

2) Rematerialization: Rematerialization 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.

10
S. Kanan (2008), “Market Comparable Approach”, Journal of Financial Services Research, Vol. 24, No.2-3, pp. 121- 148.

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Benefits of Depository System11:

1) This system will eliminate paper work as the book entry system does not need physical
movement of certificates for transfer process.

2) The risk of bad deliveries, fraud and misplaced, mutilated and lost share certificates will
not exist.

3) The electronic media will shorten settlement time and hence the investor can save time
and increase the velocity of security movement.

4) technology for the back office activities for all the capital market players.

11
Lectures On Company Law, K S Anantharaman (LexisNexix,12th Edition, New Delhi)

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Central Depositary Securities Limited (CSDL)12:

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 de-mat account through any DP for
dematerialization of his holdings and transferring securities.

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
 Honorable Union Finance Minister, Shri. Yashwant Sinha flagged off the operations of
CDSL on July 15, 1999.
 Settlement of trades in the de-mat mode through BOI Shareholding Limited, the clearing
house of BSE, started in July 1999.

12
www.cdslindia.com

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  All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange,
Delhi stock Exchange; The Stock Exchange, Ahmadabad, etc have established
connectivity with CDSL.
 It has over 5000 issuers which have admitted their securities (equities, bonds, debenture
and commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL
system.

Shareholders of CDSL13: 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.

National Securities Depository Limited14:

NSDL carries out its activities through service providers such as depository participants (DPs),
issuing companies and their registrars and share transfer agents and clearing corporations/
clearing houses of stock exchanges. These entities are NSDL's business partners and are
integrated in to the NSDL depository system to provide various services to investors and clearing
members. The investor can get depository services through NSDL's depository participants. An
investor needs to open a depository account with a depository participant to avail of depository
facilities.
It is possible for a clearing member to open a special account in the depository system to settle
trades completed on stock exchanges. The clearing corporations/houses of stock exchanges also
need to be electronically linked to the depository to enable them to electronically receive and
give securities from and to clearing members.

13
Ibid.
14
https://nsdl.co.in

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An investor intending to dematerialize its securities needs to have an account with a DP. The
client has to deface and surrender the certificates registered in its name to the DP. After
intimating NSDL electronically, the DP sends the securities to the concerned Issuer/ R&T agent.

Role of NSDL in Depository System 15: In the depository system, the ownership and transfer of
securities takes place by means of electronic book entries.
NSDL provides numerous direct and indirect benefits like:
i. Elimination of bad deliveries In the depository environment, once holdings of an
investor are dematerialized, the question of bad delivery does not arise i.e. they
cannot be held "under objection
ii. 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 etc.
iii. No stamp duty for transfer of any kind of securities in the depository.
iv. 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. Having purchased securities in the physical
environment, the

International Journal of Advance Research in Computer Science and Management Studies Volume 1, Issue 7,
15

December 2013 pg.190-197

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 investor has to send it to the company's registrar so that the change of ownership can
be registered. i.e. the settlement of trades will be on the second working day from
the trade day. This will enable faster turnover of stock and more liquidity with the
investor.
v. Faster disbursement of non cash corporate benefits like rights, bonus, etc. -
NSDL 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.
vi. 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.
vii. Reduction in handling of huge volumes of paper
viii. Periodic status reports to investors on their holdings and transactions, leading to
better controls.
ix. Elimination of problems related to change of address of investor - In case of
change of address, investors are saved from undergoing the entire change procedure
with each company or registrar.
x. Elimination of problems related to transmission of de-mat shares - In case of
dematerialized holdings, the process of transmission is more convenient as the
transmission formalities for all securities held in a de-mat account can be completed
by submitting documents to the DP whereas, in case of physical securities the

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 surviving joint holder(s)/legal heirs/nominee has to correspond independently with
each company in which shares are held.
xi. Elimination of problems related to selling securities on behalf of a minor - A
natural guardian is not required to take court approval for selling de-mat securities on
behalf of a minor.
xii. Ease in portfolio monitoring since statement of account gives a consolidated
position of investments in all instruments.

There are various checks and measures in the depository system to ensure safety of the investor
holdings. These include:

i. A DP can be operational only after registration by SEBI, which is based on the

recommendation from NSDL and their own independent evaluation. SEBI has
prescribed criteria for becoming a DP in its regulations.
ii. DPs are allowed to affect any debit and credit to an account only on the basis of valid
instruction from the client.
iii. Every day, there is a system driven mandatory reconciliation between DP and NSDL.
iv. All transactions are recorded at NSDL Central System and in the databases
maintained by business partners.
v. There are periodic inspections into the activities of both DP and R&T agent by
NSDL. This also includes records based on which the debit/credit is affected.
vi. All investors have a right to receive their statement of accounts periodically from the
DP.
vii. Every month NSDL forwards statement of account to a random sample of investors
as a counter check.
viii. In the depository, the depository holds the investor accounts on trust. Therefore, if the
DP goes bankrupt the creditors of the DP will have no access to the holdings in the
name of the clients of the DP. These investors can transfer their holdings to an
account held with another DP.
ix. The data interchange between NSDL and its business partners is protected by
protection measures of international standards such as encryption hardware lock. The

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 protection measures adopted by NSDL are more than what is prescribed in the SEBI
Regulations.
Certification in Depository Operations: NSDL has introduced a Certification Programme in
Depository Operations (popularly known as NCFM certification), and it has been made
compulsory for all DPs to appoint a person qualified in this certification in each of its branches.
This way, NSDL wants to ensure that each branch of a DP that services investors has at least one
person who has thorough knowledge about depository system.

Insurance Cover: NSDL has taken a comprehensive insurance policy to help DP to

indemnifying investors for the loss accrued to them due to errors, omissions, commission or
negligence of DP.
Computer and communication infrastructure: NSDL and its business partners use hardware,
software and communication systems, which conform to industry standards. Further, the systems
are accepted by NSDL only after a rigorous testing procedure. NSDL's central system comprises
an IBM mainframe system with a back-up facility and a remote disaster back-up site.

NSDL offers the following facilities16: -

16
International Journal of Scientific and Research Publications, Volume 6, Issue 12, December 2016 135
ISSN 2250-3153

i. =

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Management of NSDL17:

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). =

Bye-Laws of NSDL18: 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:

www.ijsrp.org
17
www.nsdlindia.com
18
Ibid.

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Arbitration Amendments to NSDL Bye-Laws require the approval of the Board of Directors of
NSDL and SEBI.

Inspection, Accounting and Internal Audit19

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.

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.

19
www.investopedia.com

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Settlement of Disputes20: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.

Disadvantage of Depository System21:

i. Discrimination between dematerialized and physical shares will affect transactions in

the market. This has to be avoided.
ii. Lack of control.
iii. Depository system is not effectively regulated by SEBI. This is evident from the fact
that the Clearing and Settlement Corporation is not effectively handled by the SEBI.

20
www.nsdlindia.com
21
2nd International Conference on Multidisciplinary Research & Practice

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Suggestions and Conclusion
Investors in securities must be assured that they will be given afair deal and protected adequately
against the risks. In order to avoid thetime gap in settlement and also the possibility of default by
players, majorstep in this direction has been taken by introducing the T+2 settlement systems on
the stock exchanges. The risk in transactions done on stock exchange arising due to the time gap
between the executions of the tradeand its settlements has been minimized with the introduction
of rolling settlement and this has become possible only due to the introduction of De-mat system
in India.

To eliminate or to minimize these problems, the suggestions are given below:

i) Uniformity in practices of both the Depositories

There are two Depositories in our country. One is NSDL and the other is CSDL. Both these
Depositories are following different patterns of allotting account number and they have different
pricing structures.

ii) Charges for transferring securities to self should be abolished

In the De-mat system, one is allowed to maintain any number of accounts with any of the
Depository Participant.

iii) Rematerialization should not be discouraged

As per Depository Regulations, one can opt for Rematerialization any time he wants. In this
process, electronic shares are converted into physical shares, and the client can keep these
physical shares with him.

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iv) Uniformity of codes of Securities
In Stock Exchanges, securities have different codes and in Depositories, securities have ISIN
number. Steps can be taken to ensure that the uniform codes are followed in every institution of
the country.

v) Framing of Stringent rules

There are Companies, which are not following the procedures, laid down in the Depository
Agreement. These Companies don't send the Dematerialized shares in the account for months.
Together, they are shaking the confidence of the investors in the whole system.

vi) Increase the Applicability

The regulator should ensure that all the companies adopt the De-mat System. There are
Companies, which have not entered into the agreement with any of the Depositories. Steps
should be taken to ensure that these Companies also enter into the agreement at the earliest.

vii) Training of Staff

The staff of the Depository Participants should be properlytrained to serve the needs of the
investors.

viii) Online Connectivity

Every DP is not having online connectivity at every branch. It is considered to be very costly
affair to have the connectivity at every branch/center. But it is important from the investor’s
point of view.

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ix)Awareness of the Websites
The regulator and the NSDL should ensure that the investors are properly educated about the use
of the websites. Websites offer a lot of information and accessing that information is cost
effective also.

x) Custody fee for non - tradable securities should be abolished

This is another problem caused by the malfunctioning of the Companies. In case, a client has got
some shares and that are not traded in Stock Exchanges for one reason or the other, in that case,
the securities are worthless but at the same time, the client has to pay custody fee on those
securities every month.

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Bibliography:

Books/Statutes Reffered

 Company Law, Avtar Singh (Eastern Book Company 16th Edition, New Delhi.)

 Law of Investment and Securities, Dr. S.R. Myneni, forwarded by Prof. A

Laxminath, 1st Edition, Asia Law House, Hyderabad.

 Lectures On Company Law, K S Anantharaman (LexisNexix,12th Edition, New

Delhi)

 Company Law and Practice, A K Majumdar and Dr.G K Kapoor (Taxmann

Publications (P) Ltd., 17th Edition New Delhi)

 Taxmann’s Company Law, University Edition (19th Edition), Taxmann

Publication Pvt. Ltd.

Law Journals/Website Referred

 All India Reporter

 www.manupatra.com

 www.sebi.com

 www.legalindiaservices.com

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