Depository Services A depository 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. It is a physical certificate which allows investor to hold shares in equity of other countries. American Depository Receipt (ADR) is one of commonly used depository receipt. DRs have spread to other parts of the globe in the form of global depositary receipts (GDRs) European DRs and International DRs. ADRs are typically traded on a U.S. national stock exchange, such as the New York Stock Exchange (NYSE), while GDRs are commonly listed on European stock exchanges such as the London Stock Exchange. Generally ADRs and GDRs are denominated in US dollars. How does the DR work? If a foreign company wants to get its publicly traded shares on foreign stock exchange, they will have to take the route of Depository receipts. Indian companies like Infosys, ICICI bank have their ADRs traded in US market. For example, an Indian company wants to list its publicly traded shares on NYSE in the form of ADRs. First it has to satisfy all the requirements set by NYSE for listing as ADRs. Before the Indian company‟s share are traded freely on the exchange, a US broker through an international office or a local brokerage house in India, would purchase the domestic shares from the Indian market and then have them delivered to the local (Indian) custodian bank of the depository bank. The depository bank is the American institution which will issue the ADRs. Let‟s assume in this case depository bank is Bank of America. Bank of America after confirmation from the custodian bank in India that it has received the shares, issues shares in United States. Bank of America issues ADRs to the US broker who purchased it initially. Each ADRs equivalent share is determined by the ADR ratio which can be anything. ADRs can be traded like any normal shares in the US market. All ADR transactions of the Indian company takes place in US dollars and settled in US dollars. Holder ADRs also have right to dividends and voting rights. The price of ADRs is governed by the underlying share in the domestic market. If there is price difference between ADR and domestic share, it leads to arbitrage opportunity which ultimately brings both ADRs and domestic shares at the same price equivalent. From a company‟s point of view depository receipt provides a mechanism to raise capital in the foreign market if they to opt to raise DR. It increases prestige of the local company in the foreign country. Often local companies find it difficult to get into foreign market due to restrictions and barriers posed by the foreign country. DRs provide a way to encourage investment from abroad without having to worry about barriers to entry that a foreign investor may face. From investors points of view, investing in DRs provide them an opportunity to diversify their portfolio exposed to global risk not only to local risk. Often investors find it difficult to invest in foreign country market due to changing regulatory procedures. With the help of DRs they can directly buy these shares from their own markets. For example, if a US national wants to invest in shares of Infosys, he cannot directly buy them from Indian market. But with the help of Infosys ADRs trading in US market, he can directly buy them from US market. Hence DRs give opportunity for foreign investment while bypassing the unnecessary risks of investing outside your own borders. Depository System in India India has adopted the Depository System for securities trading in which book entry is done electronically and no paper is involved. The physical form of securities is extinguished and shares or securities are held in an electronic form. Before the introduction of the depository system through the Depository Act, 1996, the process of sale, purchase and transfer of securities was a huge problem, and there was no safety at all. Key Features of the Depository System in India

This is a significant step in the direction of achieving a completely paper-free securities market. There is no need to fill a transfer form for transfer of shares and affix share transfer stamps. all equity shares in the class of fully paid up shares are interchangeable. Disadvantages/Problems of the Depository System     . Dematerialization is a process by which physical certificates of an investor are converted into electronic form and credited to the account of the depository participant. Thus all securities in the same class are identical and interchangeable. on dematerialization. represented by dematerialized share certificates are fungible and. For the securities dematerialized. The threat of loss of certificates or fraudulent interception of certificates in transit that causes anxiety to the investors. The shares. benefits and liabilities in respect of the securities held by the depository remain with the beneficial owner. There is saving in time and cost on account of elimination of posting of certificates. in case of transfer in dematerialized form. It enables processing of share trading and transfers electronically without involving share certificates and transfer deeds. Advantages and disadvantages of the Depository System The advantages of dematerialization of securities are as follows:    Share certificates. Presently. therefore. The investor is also relieved of problems like bad delivery. Dematerialisation: The model adopted in India provides for dematerialisation of securities. All the rights. According to the Depositories Act. There can be various entities providing depository services. are eliminated. „Registered Owner‟ means a depository whose name is entered as such in the register of the issuer. are cancelled and the same will not be sent back to the investor. the ownership of securities dematerialized is bifurcated between Registered Owner and Beneficial Owner. A „Beneficial Owner‟ means a person whose name is recorded as such with the depository. Free Transferability of shares: Transfer of shares held in dematerialized form takes place freely through electronic book-entry system. duties and liabilities underlying the security are on the beneficial owner of the security. 3. Registered Owner/ Beneficial Owner: In the depository system. shares under litigation. but ownership rights and liabilities rest with Beneficial Owner. signature difference of transferor and the like. beneficial ownership will be transferred as soon as the shares are transferred from one account to another. Once shares get dematerialized. thus eliminating the paper work involved in scrip-based trading and share transfer system. Transfer of dematerialized securities is immediate and unlike in the case of physical transfer where the change of ownership has to be informed to the company in order to be registered as such. These agents are appointed subject to the conditions prescribed under Securities and Exchange Board of India (Depositories and Participants) Regulations. Multi-Depository System: The depository model adopted in India provides for a competitive multidepository system. the rights. 4. there are two depositories registered with SEBI. NSDL/CDSL is the Registered Owner in the books of the issuer. certificate numbers and distinctive numbers are cancelled and become non-operative. fake certificates. Fungibility: The securities held in dematerialized form do not bear any notable feature like distinctive number. folio number or certificate number. 1996 and other applicable conditions. 1992. they lose their identity in terms of share certificate distinctive numbers and folio numbers. 6. For example.1. Depository services through depository participants: The depositories can provide their services to investors through their agents called depository participants. and Central Depository Service Limited (CDSL) 2. Though the securities are registered in the name of the depository actually holding them. A depository should be a company formed under the Company Act. namely:   National Securities Depository Limited (NSDL). 5. 1956 and should have been granted a certificate of registration under the Securities and Exchange Board of India Act.

the depository system was given the go-ahead. But since the advantages outweighed the shortcomings of dematerialisation. 1995. needs to be supervised as they have the capability of manipulating the market. Promoters of some companies dematerialised shares in excess of the company‟s issued capital. through a participant. Surrender of certificate of security  . agreements are entered at various levels in the process of dematerialization. This is because there is no single body that is in chargeof ensuring full compliance by these companies. (4) “Participant” means a person registered as such under sub-section (1A) of section 12 of the SEBI Act. There is an undue delay in the settlement of complaints by investors against depository participants. may enter into an agreement. 1996 was enacted to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto. Regulations and the various Bye Laws of various depositories. including the Depositories Act. some other problems with the system have been discovered subsequently. The terms used in The Depositories Act. 1992. These may cause anxiety to the investor desirous of simplicity in terms of transactions in dematerialized securities. Additionally. in such form as may be specified by the byelaws. The Depositories Act. Services of depository Any person. with any depository for availing its services. (5) “Registered owner” means a depository whose name is entered as such in the register of the issuer. Certain investors pledged shares with banks and got the same shares reissued as duplicates. formed and registered under the Companies Act. With new regulations people are finding more and more loopholes in the system.1996 are defined as under: (1) “Beneficial owner” means a person whose name is recorded as such with a depository. But investors open multiple demat accounts and make multiple applications to subscribe to IPOs in the hope of getting allotment of shares. 1992. (2) “Depository” means a company. It came into force from 20th September. Besides the above mentioned disadvantages. Complexity of the system: Multiple regulatory frameworks have to be confirmed to. 1956 and which has been granted a certificate of registration under sub-section (1A) of section 12 of the SEBI Act. Need for greater supervision: It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors. Some examples of the malpractices and fraudulent activities that take place are:      Current regulations prohibit multiple bids or applications by a single person.   Lack of control: Trading in securities may become uncontrolled in case of dematerialized securities. 1996 The Depositories Act. Some listed companies had obtained duplicate shares after the originals were pledged with banks and then sold the duplicates in the secondary market to make a profit.Some disadvantages were about the depository system were known beforehand. The role of key market players in case of dematerialized securities. such as stock brokers. (3) “Issuer” means any person making an issue of securities. Agreement between depository and participant A depository shall enter into an agreement in the specified format with one or more participants as its agent.

issue the certificate of securities to the beneficial owner or the transferee. the depository shall have the right to recover the same from such participant. Registration of transfer of securities with depository Every depository shall. Every issuer shall. Securities in depositories to be in fungible form All securities held by a depository shall be dematerialised and shall be in a fungible form. 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. Any entry in the records of a depository under Section 12 (2) shall be evidence of a pledge or hypothecation. as the case may be. The depository shall on receipt of intimation make appropriate entries in its records and shall inform the issuer. The depository as a registered owner shall not have any voting rights or any other rights in respect of securities held by it. 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.Any person who has entered into an agreement with a depository shall surrender the certificate of security. to the issuer in such manner as may be specified by the regulations. for which he seeks to avail the services of a depository. 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. on receipt of intimation from a participant. the depository shall indemnify such beneficial owner. 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. Where a person opts to hold a security with a depository. 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. 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. The issuer. Every issuer shall make available to the depository copies of the relevant records in respect of securities held by such depository. Depository to indemnify loss in certain cases Any loss caused to the beneficial owner due to the negligence of the depository or the participant. register the transfer of security in the name of the transferee. on receipt of information enter the name of the person in its records. the issuer shall intimate such depository the details of allotment of the security. the depository shall inform the issuer accordingly. If a beneficial owner or a transferee of any security seeks to have custody of such security. . Where the loss due to the negligence of the participant is indemnified by the depository. 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. A depository shall. as the beneficial owner. 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. 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. on receipt of certificate of 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.

The other depository is Central Depository Services (CDS). 1899. promoted by Industrial Development Bank of India (IDBI). It is still in the process of linking with the stock exchanges. The investor interacts with the depository through a depository participant of NSDL. d) transfer of beneficial ownership of shares. State Bank of India (SBI) also became a shareholder. such securities dealt with by a depository shall not be liable to duty under Article 62 of Schedule I of the Indian Stamp Act. financial institution. c) transfer of registered ownership of securities from a person to a depository or from a depository to a beneficial owner shall not be liable to any stamp duty. In order to facilitate transfers between investors having accounts in the two existing depositories in the country the Securities and Exchange Board of India has asked all stock exchanges to link up with the depositories. 1899. NSDL is electronically linked to each of these business partners via a satellite link through Very Small Aperture Terminals (VSATs). 1899. Later. It had received a certificate of commencement of business from Sebi on February 8. dealt with by a depository shall not be liable to duty under Article 62 of Schedule I of the Indian Stamp Act.Securities not liable to stamp duty As per Section 8-A of Indian Stamp Act. in respect of such issue. Unit Trust of India (UTI) and National Stock Exchange of India Ltd. on such certificate duty shall be payable as is payable on the issue of duplicate certificate under the Indian Stamp Act. 1899: a) an issuer. A DP can be a bank. b) where an issuer issues certificate of security under sub-section (3) of Section 14 of the Depositories Act. Clearing corporations/ Clearing Houses etc. It has registered around 20 DPs and has signed up with 40 companies. Just as one opens a bank account in order to avail of the services of . Issuing corporates and their Registrars and Transfer Agents. Depositiory Participant NSDL carries out its activities through various functionaries called business partners who include Depository Participants (DPs). e) transfer of beneficial ownership of units. But transfers arising out of trades on the stock exchanges can take place only amongst account-holders with NSDL‟s DPs. be chargeable with duty on the total amount of security issued by it and such securities need not be stamped. a custodian or a broker. Once connected to both the depositories the stock exchanges have also to ensure that inter-depository transfers take place smoothly. by the issue of securities to one or more depositories shall. The entire integrated system (including the VSAT linkups and the software at NSDL and each business partner‟s end) has been named as the “NEST” [National Electronic Settlement & Transfer] system. (NSE). It also involves the two depositories connecting with each other. 1999. NSDL was set up with an initial capital of US$28mn. NSDL is the first Indian depository. Sebi has also directed the companies‟ registrar and transfer agents to effect change of registered ownership in its books within two hours of receiving a transfer request from the depositories. These depositories have appointed different Depository Participants (DP) for them. 1996. National Securities Depository Limited (NSDL) and Central Depository Services (CDS). This is because only NSDL is linked to the stock exchanges (nine of them including the main ones-National Stock Exchange and Bombay Stock Exchange). Depositories in India At present there are two depositories in India. such units being units of mutual fund including units of the Unit Trust of India. it was inaugurated in November 1996. An investor can open an account with any of the depositories‟ DP. The NSDL and CDS have signed an agreement for inter-depository connectivity.

Pay-in of securities: Clearing Corporation advises depository to debit pool account of custodians/Clearing members and credit its (Clearing Corporation‟s) account and depository does the same. Sundays. Clearing Corporation gives instructions to clearing banks to make funds available by pay-in time. A depository Participant (DP) gets registered with a depository as per SEBI regulations for offering DP services. In the clearing and settlement process when Clearing Corporation (CC) suggests the depository to debit or credit a particular De-mat account. it gives instructions to the concerned DP to do so. clearing banks. Trade Clearing and Settlement in Stock Markets Clearing and settlement is a post trade activity. It takes help of clearing members. Broker houses validate the orders and routes them to the exchange (BSE or NSE depending on the client‟s choice) Order matching at the exchange. It determines fund/security obligations and arranges for pay-in of the same. custodians and depositories to settle the trades. An investor can open a dematerialized account with a Depository Participant of his choice. Clearing Agencies ensure trading members meet their fund/security obligations. an investor opens a depository account with a depository participant in order to avail of depository facilities. Clearing Corporation notifies the trade details to clearing Members/Custodians who confirm back. Bank and Exchange Trading Holidays). This process is called novation. will be settled by exchange of money and securities on the second business day (excluding Saturday.a bank. Similarly when he sells out securities they will automatically be debited from his dematerialized account. Clearing Corporation gives instructions to depositories to make securities available by pay-in-time. Depositories maintain the data of security holders across all depository participants. When he buys securities they will get credited to his account electronically. Trade + 2 days. It collects and maintains margins. Pay-in and Pay-out for securities settlement is done on a T+2 basis. Trade details are sent to Clearing Corporation from the Exchange. Download of obligation and pay-in advice of funds/securities by Clearing Corporation. processes for shortages in funds and securities. It acts as a legal counter party to all trades and guarantees settlement for all members. The original trade between the two parties is cancelled and clearing corporation acts as counter party to both the parties. Based on the confirmation.           Investors place orders from their trading terminals. Trade confirmation to the investors through the brokers. Clearing Corporation determines obligations. . The settlement cycle in India is T+2 days i.e. The following is the summary of trading and settlement process in India. T+2 means the transactions done on the Trade day. A depository issues instructions to DPs as per the inputs from CC and DPs act as specified by their depositories on securities pay-in/pay-out day. thus manages risk and guarantees settlement to both the parties. Functions of Depository Participants (DPs) The entities which act as intermediaries in clearing and settlement process between investors and Depositories are called Depository Participants (DPs).

The money will be credited to the client‟s account. Payout of securities: Clearing Corporation advises depository to credit pool accounts of custodians/Clearing members and debit its account and depository does the same. Even if the clients don‟t meet their obligations clearing members are required to meet their obligations to the clearing corporations. Please note that a clearing member is the brokerage firm which acts as a trading member and clearing member of clearing agency where as custodians are only clearing members. In case of sell order by normal investors Clearing members instruct his DP to debit the client‟s account and credit its account. Depository informs custodians/Clearing members through Depository Participants about pay-in and pay-out of securities. Note: Clearing members for buy order and sell order are different and Clearing Corporation acts as a link here. Payout of funds: Clearing Corporation advises Clearing Banks to credit account of custodians/ Clearing members and debit its account and clearing bank does the same. In case of buy order by normal investors Clearing members instruct his DP to credit the client‟s account and debit its account.       Pay-in of funds: Clearing Corporation advises Clearing Banks to debit account of Custodians/Clearing members and credit its account and clearing bank does the same. In case of trades by mutual fund houses the custodians act as clearing members. The money will be debited (Total settled amount – margins paid at the time of trade) from the client‟s account. Clearing Banks inform custodians/Clearing members about pay-in and pay-out of funds. .

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