Depository System in

India

Rajat Dixit
 Who can buy Shares

Investor

Non- institutional
Institutional Investor
Investor

Retail
FII DII HNI
Investor
 Where we can buy the shares?

Capital Market/
Share Market

Primary Market Secondary Market

 Primary Market
Shares

Acceptance

DEMAT A/C
Minimum 1 Lot

Amount Block from Bank A/c Bank A/C

Rejection

Money
 Depository

Registered owner of Shares

Beneficial owner of Shares

Maintain a Register
 Secondary Market

Order T+1 Order

Shareholder Interested Buyer

T+2
Depositories in India
 Models of Depositories

Immobilization Dematerialization
 System prior to Depositories

● Based On paper (Physical)

● Share Certificate is the Proof of Ownership.
● Transfer Deed is required for the transfer of Ownership.
● Registration by the Company/Transfer Agent is Required.
● Too much Dependent On infrastructure.
● Stamp-duty of 0.5% of market value is to be paid
● Bad Deliveries
● Delayed Transfers (30 - 60 days)
● Loss of Share Certificates
● Forgeries and Frauds
● Frequent Litigations
● Unreliable
 Objective of the Law
● 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 any
investor to choose between holding securities as at present or hold securities in a
dematerialised form in a Depository.
● Making the securities fungible
● Making the securities of a public limited company freely transferable, and
● Exempting all transfers of shares within a depository from stamp duty
 Development of Depositories in India
Depositories Ordinance, 1995 September 1995

NSDL incorporation December 1995

SEBI Regulation on Depository May 1996

Depositories Act, 1996 August 1996

Demat Trading December 1996

CDSL incorporation August 1998

Depositories Act, 1996
 Certificate of Depository (S. 3)
● obtains a certificate of commencement of business from SEBI.
● A certificate granted shall be in such form as may be specified by the regulations.
● SEBI shall not grant a certificate unless it is satisfied that the depository has adequate
systems and safeguards to prevent manipulation of records and transactions:
○ Proviso: reasonable opportunity of being heard.
Registration of Transfer of Securities (S. 7)
● On receipt of intimation from DP, Depository shall register the transfer of security in the
name of the transferee, or in favour of any bank or financial institution or asset
reconstruction company as the case may be.
● If a beneficial owner or a transferee of any security seeks to have custody of such
security the depository shall inform the issuer accordingly.
 Option to receive security certificate or
hold securities with Depository (S. 8)
● Option- either to receive the security certificates or hold securities with a depository.
● Where a person opts to hold a security with a depository, the issuer shall intimate such
depository the details of allotment of the security, and on receipt of such information the
depository shall enter in its records the name of the allottee as the beneficial owner of
that security.
 Rights of Depositories and Beneficial
Owner (S. 10)
● 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.
Pledge or Hypothecation of Securities held
in a Depository (S. 12)
● With the previous approval of depository, Beneficial owner may create a pledge or
hypothecation in respect of a security owned by him through a depository.
● Beneficial owner to give intimation of such pledge of hypothecation to the depository
and such depository shall thereupon make entries in its records accordingly.
● Any entry in the records of a depository shall be evidence of a pledge or hypothecation.
 Information to Issuer (S. 13)
● Depository- furnish information about transfer of securities to the issuer.
● Issuer- make available copies of relevant records to the depository.

Option of Opt- out (S. 14)

● Beneficial owner to have option to opt-out of depository- inform depository.
● On receipt of intimation, Depository make appropriate entries and inform the issuer.
● Every issuer shall, within 30 days of the receipt of intimation and on fulfilment of such
conditions and on payment of such fees as may be specified by the regulations, issue
certificate of securities to the beneficial owner.
 Depository to indemnify Loss (S. 16)
● Any loss caused to the beneficial owner due to the negligence of the depository or DP,
the depository shall indemnify such beneficial owner.
● Where the loss due to the negligence of DP is indemnified by the depository, the
depository shall have the right to recover the same from such DP.
 Offences & Punishment (S. 20)
● Person, who- contravenes, attempts or abets the contravention, shall be punishable
with imprisonment for a term which may extend to 10 years, or with fine, which may
extend to 25 crore rupees, or with both.
● Person, who fails to pay penalty shall be punishable with imprisonment for a term which
shall not be less than 1 month but which may extend to 10 years, or with fine, which
may extend to 25 crore rupees, or with both.
 Establishment of Special Court (S. 22C)
● CG for the purpose of providing speedy trial of offences, may, establish or designate as
many Special Courts as may be necessary.
● A Special Court shall consist of a single judge who shall be appointed by CG with the
concurrence of CJ of HC.
● Qualification of Judge-
○ holding the office of a Sessions Judge; or
○ an Additional Sessions Judge.
Power of Depositories to make bye-laws
(S. 26)
● Eligibility criteria for admission and removal of securities in depository;
● Conditions subject to which the securities shall be dealt with;
● Eligibility criteria for admission of any person as DP;
● Manner and procedure for dematerialisation of securities;
● Procedure for transactions within the depository;
● Manner in which securities shall be dealt with or withdrawn from a depository;
● Procedure for ensuring safeguards to protect the interests of DP and beneficial owners;
● Conditions of admission into and withdrawal from DP by a beneficial owner;
● Procedure for conveying information to DP and beneficial owners on dividend
declaration, shareholder meetings and other matters;
● Manner of distribution of dividends, interest and monetary benefits received from the
company among beneficial owners;
● Manner of creating pledge or hypothecation of securities held with a depository;
● Inter se rights and obligations among the depository, issuer, DP and beneficial owners;
● Manner and periodicity of furnishing information to SEBI, issuer and other persons;
● Procedure for resolving disputes involving depository, issuer, company or a beneficial
owner;
● Procedure for proceeding against DP committing breach of regulations and provisions
for suspension and expulsion of DP from depository and cancellation of agreements
entered with the depository;
● Internal control standards including procedure for auditing, reviewing and monitoring.